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The Scramble Begins

As U.S. budget deficits begin another chart-topping fiscal year, the United States Treasury is increasingly being forced to look for new slick ways to issue debt without the alarm bells going off. Normally, Treasury issues bonds that pay the same fixed coupon amount for their entire lives; but Treasury’s new proposal includes floating-rate debt—which starts low at today’s rates, and moves up or down with other interest rate moves. Like resetting mortgages, this strategy could prove dangerous if interest rates rise suddenly, and U.S. taxpayers find themselves more and more burdened all of a sudden.

Right now, interest rates are near all-time lows—a reflection of the Fed’s loose monetary policy and global deleveraging that has slowed markets to a stall. Treasury can borrow at these low rates, but lenders want more than just a U.S. rubber stamp and a flimsy promise—returns drive borrowing and lending—and issuing debt that follows interest rates will likely attract more lenders. The Financial Times says this:

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.

The strategy isn’t just to placate lenders, though. The idea is that debt markets might tighten up as the U.S. borrows more and more to cover its gaping budget deficits and the spiraling national debt. Is this the scrambling beginning or just government gears beginning to process the enormous situation at hand?