When you need more and more money from an ever-larger group of lenders, you can’t let a little thing like the LIBOR scandal stop you. And the Treasury Department (soon to be under new management?) isn’t, insisting that it will offer its first-ever floating-rate bonds within the next year.
But first, it’s got to figure out exactly what they will float on. And none of the options seem like good ones. The first new Treasury product since TIPS is likely to be a big deal, so we can’t have people like those guys on top of the giant Deutsche Bank logo in the North Sea messing around with it. Which leaves us with the two real bad options: Rely on the increasingly unreliable repo rates, or have the Treasury set them itself.
“The main unresolved item continues to be the choice of a floating-rate index,” according to minutes of a Treasury Borrowing Advisory Committee meeting released Wednesday….
The committee, which is composed of executives from some of Wall Street’s largest banks and bond investors, said more than half of the industry preferred using repo rates—derived from swapping high-quality bonds for cash in bank trades. Repurchase, or repo, agreements are a crucial source of short-term funding for many banks.
Others preferred using three-month Treasury bills as the reference index, minutes from the committee meeting show….
Market analysts say recent volatility in the repo rate might be making the decision more difficult.
Long story short, Treasury would probably very much like to set its own floating rates (who wouldn’t?), but might not be able to because of guys like this:
Floating-rate notes linked to a Treasury bill rate “isn’t really offering anything too new or different to investors,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut. “I don’t really think the convenience of not having to roll over the debt is a big deal. So to the extent the Treasury is coalescing around using some sort of bill rate as an index choice, I suspect that is probably being met with some disappointment among the investor community.”
Such hand-wringing, alongside time spent on “hypotheticals” like 20- and 50-year bonds, did not keep the TBAC from issuing a stern scolding to Congress, which will totally solve the debt crisis because Congress has shown it cares deeply about what the Treasury thinks.
“Failure by Congress to pass a timely increase in the debt limit when the temporary suspension expires would require Treasury take certain extraordinary measures in order to provide Congress more time to act and to protect the creditworthiness of the country.”
President Barack Obama on Feb. 4 signed legislation temporarily suspending the $16.4 trillion debt limit through May 18.
After that date, “extraordinary measures will be available to” Treasury, “which will allow us to continue to finance ourselves for a period of time that’s longer than that,” Matthew Rutherford, Treasury’s assistant secretary for financial markets, said in a press conference. “I don’t think I’m prepared to give you an estimate on how long that would last.”
U.S. to Offer Floating-Rate Notes Within a Year [WSJ]
U.S. Treasury Sees Floating-Rate Note Sale Within Next Year [Bloomberg]
Lew confirmation hearing set for Feb. 13 [The Hill On The Money blog]