Treasury Sells Floating Rate Notes

I don’t think I’ve ever used the word “screwed” in print before, much less in a headline (although I’ve been tempted on many occasions). But today the other options just don’t have enough invective to get the point across.

Yes, the U.S. governrnment has done what it could to take your funds and redistribute them.

Yes, the Federal Reserve has pursued policies that continue to drive your income lower, artificially holding down interest rates in the face of inflation.

Now here comes a group you’ve probably never heard of – the Treasury Borrowing Advisory Committee (TBAC) – to make things worse.

The TBAC advises the U.S. Treasury on its borrowing activities… in other words, what structure of debt it should sell. Should the Treasury sell bonds that mature in just a few years or bonds that mature decades from now?

These might sound like mundane items, but they can have a dramatic effect on how much interest the U.S. governrnment owes.

In light of recent financing events in Europe, the TBAC has been contemplating a new item – should the U.S. governrnment sell bonds that charge interest, not pay it.

That’s right… the question is should the U.S. governrnment charge buyers a fee to own bonds?

And its answer is…



Additionally, the TBAC recommends the Treasury sell floating rate notes.

Both actions will take even more money out of your pocket. Here’s how…

To charge the buyer interest, the Treasury must auction the bonds off at a negative interest rate. Buyers would put in bids that represent a loss to themselves.

For example, a bank might bid to buy a 2-year bond at $100.50, where the bond matures in 2-years at $100 and does not pay any interest in between.

Why would a bank do this?

Because, just as in Europe, the current dislocations in the credit markets have large investors (those investing hundreds of millions of dollars) more worried about the returnrn OF their money than the returnrn ON their money. Locking up large chunks of cash for two years at a slight loss, and being able to arguably count on getting it back, is a good deal.

The issuance of floating rate notes takes this whole negative interest joke one step further. Floating rate notes are exactly that: floating. That is, their interest rate will go up and down based on some index.

You can be sure this index will be a composite of short U.S. Treasury bonds, like the ones expected to have negative yields, instead of being based on anything even remotely related to general market investments or even inflation.

Where Does That Leave Us?

Where does it leave investors of all stripes, who rely on fixed income to pay a decent rate for the use of their money while enjoying some level of safety?

The answer is, “It leaves us in a really bad spot.”

As more U.S. Treasury issuance goes out the door at low or even negative interest rates, it will force fixed income investors to buy whatever they can that pays any yield at all. This will drive interest rates even further down.

Keep in mind this has nothing – NOTHING – to do with the cost of living, inflation or the free market calculation of a reasonable returnrn on lent money. This is just the continuation of a manipulated marketplace that allows the U.S. governrnment to borrow at artificially low rates.

Policymakers of all types should be ashamed.




Ahead of the Curve with Adam O’Dell

What Negative Rate German Bond Yields Say About the Euro

If investors in the U.S. want a lesson on negative rate governrnment bonds they need to look no further than Germany over the past three months.