Rollin’ and Floatin’

The US government has a lot of debt, or so I've heard. As we've argued before, it was the lack of such that germinated the great credit orgy. Few recall the growing concern in the Clinton years that the system was running out of risk free assets. The long bond was eliminated (the futures pit migrated to the 10 year) and supply was accompanied with pay down information.  Monthly auctions morphed into bi and quarterly. The average maturity of the entire bucket of IOUs dropped.

Fast forward to the post financial crisis state of affairs. The Treasury had been extending its Ave Maturity until the Fed jumped into the MEP (maturity extension program) known as Operation Twist. The average maturity of the US debt is now between 5.5 and 6 years. The reason people care is the rollover risk. Rollover risk, as exemplified by European nations, comes in 2 packages: Liquidity, meaning depth and function; and interest rate. A healthy jump in both is called a crisis. The quick analysis has tended to center on issuing long (er) bonds as rates are at an historic low. TBAC releases show this topic was discussed with 20 year and 50 year product ideas. The reality is the T-Bill market presented a bigger challenge.

The explosion in issuance meant a Trillion dollar Bill auction could arise from a cash management standpoint. The "optics" of this issue and the ability to extract a large concession were undesirable. Thus, at the 35 year low for rate structures, the FRN was dusted off. The Treasury is still leaning toward a 2 year  with daily resets tied to the 3 month T Bill rate + .08 9their example). The Street has shown interest in both GCF Index benchmarks and Fed Effective rates. All see the possibility of FRNs replacing 6 month Bill issues up the road.

The operation will take awhile to get to critical mass (not as long as TIPS) but brings the first new Treasury product since 1997 out. The proliferation of new futures strips should ramp up behind the Treasury. FRNs will exhibit increased liquidity risk AND interest rate risk in the short run. As the debt continues to roll out with the Feb. refunding, we are reminded of a bon mot from the 80's: The US refunds, others reschedule..that makes all the difference.

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