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My Comment To The Treasury On Floating Rate Notes

As I noted here, the U.S. Treasury is considering the sale of floating rate notes ("FRNs") to help meet its funding needs. The Treasury recently requested comments from the public on this topic. I submitted this comment:

One of the reasons given in support of issuing FRNs is that they could help the Treasury achieve one of its goals: to increase the average maturity of its marketable debt.

A longer average maturity would mean that the debt would not need to be refinanced as frequently and so there would be less rollover risk.

Rollover risk for fixed-rate debt includes both liquidity risk and interest rate risk, but rollover risk for floating-rate debt is only liquidity risk. The interest rate risk for floaters is present at every reset date.

Increasing the average maturity with FRNs could create the impression that interest rate risk is being reduced when it is actually being increased.

If the Treasury decides to issue FRNs, it should consider whether it is appropriate to continue to use average maturity as an indicator of interest rate risk. It might want to use a new measure of that risk, as discussed in my article:

https://seekingalpha.com/article/390161-treasury-floaters-muddy-the-waters

The comment period closed on April 18. All of the comments will be published on Regulations.gov after they are reviewed, which may take several weeks.