For the first time in 17 years, the US treasury will issue a new security, a Floating Rate Note. This will become a program of quarterly auctions. Why are they doing this?
- How does one get longer term funding at low interest rates? How does one attract investors to longer maturity assets with little or no duration?
- How will the US government keep debt service manageable over time despite longer dated liabilities?
- The answer to 1 above is to issue Floating Rate Notes.
- The answer to 2 above is to maintain short term interest rates at close to zero for longer. Given that the first issues will be 2 year maturities and coupons will be benchmarked to the 13 week T bill rate, I expect that the US Fed will not be raising interest rates till 2016 at the earliest.
On a side note, I expect the long bond (that’s the 30 year US treasury) to outperform. While I don’t like duration in general I don’t think the 10 year will fare as badly as the consensus believes. The 30 year, however, is under-issued, and demand from insurance companies and other real money investors with long term liabilities will keep it well supported. I expect the USD curve will form a hump at the 10 year. I’d be a buyer of the 30 year UST.
On another side note:Time to buy some GLD US. Time to buy some equity volatility. Some cracks are beginning to show.