Forex: The US Treasury is considering notes that float

[Ramon Ramirez]

The Treasury of the United States of America is considering issuing a new type of financial instrument: floating rate debt. The Treasury had already considered this idea back in the early ninetees but it never decided to implement it. The move comes at an odd time, given that interest rates have never been so low and that everybody is trying to do the opposite: lock the low rates.

The Wall Street Journal reports that some analysts believe that the move is not odd at all, and that it actually makes sense. The Treasury wishes to reduce its reliance on short-term bills, which is why it has been issuing more long term debt, pushing the weighted average maturity of the U.S. debt to 62.4 months at the end of 2011 from 49 months 3 years earlier. The US federal government can issue a 10 year bond with a yield of 1.92% as opposed to the 0.09% yield for 3 month notes. Although the 10 year yield is at an all-time low, it is still cheaper to borrow at 0.09%. By issuing floating rate debt, the Treasury would be able to borrow for longer periods while benefiting from the low interest rates. It would be actually doing the opposite of locking interest rates by locking the money for longer periods and paying a floating yield on the meantime. But of course, if rates start to go up, so would the rate on this new type of instrument.

The WSJ adds that countries such as Italy and the UK are big issuers of floating rate debt and that it expects strong demand for such products in the US.