US Treasury considers new debt securitySubmitted by cactus1010 on Mon, 10/24/2011 - 00:41
US Treasury considers new debt security
By Michael Mackenzie in New York and Robin Harding in Washington
The US Treasury and Wall Street dealers are set to discuss whether to introduce a new debt security to help finance the country’s mounting budget deficit in the coming years.
Topping the agenda of a meeting on Friday between Treasury officials and dealers, who underwrite US government debt sales, is the possible introduction of floating-rate notes.
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In contrast to normal fixed-rate Treasuries, which pay the same coupon throughout their lifespan, the payment to investors from floating-rate notes would go up or down as the Federal Reserve changed short-term interest rates. That could make them attractive to investors who think that Treasury yields have hit a floor and are set to rise in the coming years.
“We think the case for diversifying the Treasury’s funding sources by introducing [floating rate notes] is very strong in light of the prospect of persistently large budget deficits in the years ahead,” said Lou Crandall, economist at Wrightson Icap. “They would give the Treasury an additional tool for meeting unexpected increases in borrowing needs that would neither place upward pressure on long-term rates nor add to the government’s near-term rollover needs.”