I am in favor of extending maturities. The Treasury has extended the average maturity of the federal debt to about 63 months over the past three years. However, this weighted average maturity is no different than the average maturity in the 1990s -- when interest rates were much higher. It is best to extend maturity with fixed rate bonds -- not floating rate bonds.

Bottom Line

To me, the potential benefits to issuing FRNs are minor. However, the costs could be severe. In a different time, when the federal debt was a much smaller fraction of GDP, one could make the case to experiment with FRNs. However, today we face much greater risks.

You don't need to look far to see the risks created by relying on short-term funding. One of the major reasons that so many financial institutions needed to be bailed out during the crisis was that they were using short term funding. They faced rollover risk as well as very high interest service costs. The same thing happened in peripheral countries in Europe. If they had locked in long term funding at fixed rates a few years ago, the crisis would have been mitigated. Instead, we are facing a 1.5 trillion euro rollover in 2012 at uncertain costs.

For the Treasury's plan, there is no rollover risk. However, there is interest service risk. Overall, the costs outweigh the benefits.
Campbell R. Harvey is the J. Paul Sticht Professor of International Business at the Fuqua School of Business at Duke University and a research associate of the National Bureau of Economic Research in Cambridge, Mass. He is editor of The Journal of Finance. Professor Harvey also runs a blog.

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