This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

U.S. Could Be Pushed Into Debt Overload by the Treasury

DURHAM, N.C. ( TheStreet) -- Testifying before Congress in 1993, when interest rates were 7.5%, I advocated shifting some of the federal debt to floating rate debt. If the Treasury had shifted half of the debt to floating rate at that time, the U.S. would have saved $2 trillion to date.

Today, however, interest rates are at, or near, historic lows. It is the wrong time to issue floating rate debt. This type of debt introduces unneeded funding risk.

Treasury Announcement

Traditional Treasury bonds have a fixed maturity, say 10 years, and a fixed coupon rate, say 2%. When you issue such a bond, you know exactly what the cash flow liabilities are: 1% every six months until maturity. Floating rate notes (FRNs) have a fixed maturity but variable coupon. An example is a bond that has 10 years to maturity but with a coupon that resets every six months to reflect the rate on a short-term Treasury bill. When FRNs are issued, the liability is uncertain because interest rates could rise or fall.

Many expected the Treasury to push forward with floating rate notes (FRNs) yesterday. They were originally proposed in February. See the original report. While the Treasury still sees benefits in the issuance of floating-rate notes, a decision appears to have been deferred because of "a significant amount of feedback". See the Policy Statement.

The initiative appears to be coming from an industry group called the Treasury Borrowing Advisory Committee (TBAC). It stated:

"The Committee reiterated that its main goals in unanimously supporting FRNs were continued diversification of the investor base and average maturity extension through issuing floaters in lieu of shorter dated issuance. Furthermore, FRNs should lead to a reduction of term premium expense over time. While initial issuance should have final maturities of one to two years, eventually the Committee anticipates FRNs of longer final maturities." Read the TBAC report.

This committee is populated with representives from JPMorgan Chase, Goldman Sachs, Morgan Stanley, Bank of America and other banks.

The Case Against Floaters

When I made my testimony to the House Ways and Means Committee in 1993, floating rate issuance made a lot of sense. Interest rates were relatively high (7.5%). Indeed, if the Treasury had funded half of its needs with FRNs, $1.9 trillion would have been saved ($2.3 trillion taking the time value of money into account).

1 of 4

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 18,053.71 +23.50 0.13%
S&P 500 2,088.77 +6.89 0.33%
NASDAQ 4,806.8590 +33.3870 0.70%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs