US Treasury May Issue Debt With a Floating Interest Rate

Brilliant. Reminds me of Will Rogers. Think of all he’d have said if he’d understood MMT.

US Treasury May Issue Debt With Floating Interest Rate

By Jeff Cox

October 24 (CNBC) — Dealers and traders have been approached recently with plans to issue a floating-rate note that for investors would provide an opportunity to profit should rates go up and for the government a chance to restructure its debt even further.

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18 Responses to US Treasury May Issue Debt With a Floating Interest Rate

  1. Matt Franko says:

    Just a hunch, nothing more: Perhaps it is the Fed that is pushing for these securities as a way to re-build/re-populate a portion of their balance sheet (2T +) in a way that if they eventually decide to raise interest rates, they wouldnt have to go into negative equity position thru mark to market accounting as it doesnt seem these types of bonds would lose value if interest rates went up….

    Fed in negative equity perhaps viewed internally to the Fed as politically unacceptable due to the venom that would come out of the Ron Paul types if this was to occur. Resp,


    beowulf Reply:

    @Matt Franko,
    As I suggested on the Fed reform page, Tsy and the Fed really should to trade places, with Tsy creating the dollars it needs to spend and the Fed issuing the bonds it needs to control interest rates. Here’s how to amend the law to allow this:

    Section 5115 of Title 31, United States Code, is amended by striking (b) and the text which follows, and replacing with, the following: ‘(b) The Secretary may deposit United States currency notes, in paper or electronic form, directly in Treasury General Fund.’
    Section 248, Title 12, United States Code is amended by inserting after subsection (r ), the following: ‘(s) Authority to issue obligations (1) The Board is authorized, with the approval of the Secretary of the Treasury (“Secretary”), to issue publicly and have outstanding obligations of such amount, having such maturities and bearing such rate or rates of interest as may be determined by the Board. Such obligations may be redeemable at the option of the Board before maturity in such manner as may be stipulated therein. So far as is feasible, the debt structure of the Board shall be commensurate with its asset structure. (2) The Board is also authorized to issue its obligations to the Secretary and the Secretary may in his discretion purchase or agree to purchase any such obligations. The Secretary may sell, upon such terms and conditions and at such price or prices as he shall determine, any of the obligations acquired by him under this subsection. (3) Obligations of the Board issued pursuant to this section shall be lawful investments, and may be accepted as security for all fiduciary, trust, and public funds, the investment or deposit of which shall be under the authority or control of the United States, the District of Columbia, the Commonwealth of Puerto Rico, or any territory or possession of the United States, or any agency or instrumentality of any of the foregoing, or any officer or officers thereof.’

    No I didn’t just do that last part freestyle, borrowed language from Federal Financing Bank statute. :o)


  2. John O'Connell says:

    One comment at CNBC that could kill the deal: “America gets an adjustable rate mortgage”.

    Of course, in this case the debtor controls the interest rate, not the lender. Just a small distinction that would be lost on the public.


  3. w says:

    why bother? i thought the next step by the fed was to peg interest rates, that’s the rumor…


  4. beowulf says:

    What possible advantage is there borrowing long-term with a floating rate versus simply borrowing short term with the rate for each period set by market forces (cough, the Fed) at time of auction?


    John O'Connell Reply:


    The advantage for buyers (and for the Fed) is that they don’t have to roll it over as often. Eliminates transaction costs. The advantage for the Treasury is that bond buyers would pay more for such bonds than for shorter-term ones with the same coupon rate.

    Yeah, yeah, I know the Treasury can create all the bonds it wants of any flavor, or not, and pay any rate of interest, and there is no “advantage” to the Treasury in any arrangement over any other. But if there were, the lower rate would be it.



    and a permanent 0 rate policy obviates it all


  5. Jose says:

    Maybe it will be similar to the system we have in Brazil, where the central bank sets the “Selic” rate – and the Treasury issues bonds linked to the Selic rate.


  6. mike norman says:

    It means the Fed sets the rate on the floating rate. Just as it sets the rate on everything else. This is an exercise in monumental ignorance. They don’t understand this???



    fighting the hydra.


  7. Gary says:

    Doesn’t this mean that the Fed will lose control over interest rates?
    Who will set them? Rating agencies?


    Ralph Musgrave Reply:


    If rates are not determined by central banks, they’d be determined by market forces, and good thing too. The optimum price for steel or apples is the market price. Where is the evidence that the optimum price for borrowed money is anything other than market price? And there are further reasons why having central banks determine interest rates is a nonsense.

    1. There is no relationship between central bank rates and rates charged by credit card operators.
    2. Potential investors are concerned about LONG TERM rates. The latter are not much influenced by central banks dropping rates for two years and then raising them again.
    3. Interest rate adjustments are distortionary because they only work via households and firms that are reliant on variable rate loans. Those reliant on equity or fixed rate loans are not affected.
    4. Radcliffe Report on monetary policy in the U.K. published in 1960 concluded that ‘there can be no reliance on interest rate policy as a major short-term stabiliser of demand’.
    5. We have a credit crunch caused by excessive and irresponsible borrowing, and the response? – cut interest rates so as to encourage more borrowing. The lunatics are clearly in charge of the asylum.
    6. Warren claims that low interest rates are deflationary. I’m not sure about that, but it’s certainly DEBATABLE as to whether low interest rates are stimulatory or deflationary.


    Neil Wilson Reply:

    @Ralph Musgrave,

    Just to add to the fun, LIBOR has started to go up again.

    So now we have quantitative easing in play, £133.8bn of excess bank reserves and yet rising spreads on interbank lending.

    Theorise that!



    receive on long bma ratios!



    with floating fx/non conv currency the gov of issue is necessarily price setter for rates as the currency monopolist.
    no such thing as the market setting rates.

    long rates are a function of expected short term rates, plus some technicals

    interest rate changes are disruptive.

    right, demand isn’t a function of rates the way most think, best i can tell, though I do strongly suspect high rates add to demand and low rates reduce it.


    Luigi Reply:


    Warren, have you ever read this document by Alan Parguez? What do you think about the idea of “strong exogeneity of long term interest rates”?


    haven’t read it

    Ralph Musgrave Reply:


    I agree with Warren that govt CAN use its currency monopoly (and the huge volume of Treauries that exist) to manipulate interest rates, but I don’t agree that govt / central bank NECESSARILY has to do this. That is, in my ideal MMT type economy, govt / central bank would spend the maximum amount of new money into the economy per year that is consistent with acceptable inflation. Plus there would be no govt borrowing at all, as indeed Warren advocates near the end of a Huffington article: “Proposals for the banking system”.

    I’d also abolish fractional reserve because I think that gives rise to an artificially low interest rate. But this is all too complicated for a blog comment, so I’ll write an article or paper on this in the next weeks.

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