A Quick Comment on Treasury's Decision to Issue Floating Rate Notes

In its quarterly refunding announcement today, the Treasury announced plans to develop floating rate notes ("FRNs").  In the press conference following the announcement, Treasury Under Secretary Mary Miller indicated that there was demand for high quality short-term collateral and that FRNs would both help satisfy that demand while extending the maturity of the public debt.  The tension in this argument is obvious, as I noted here.

Reuters quotes Stephen Stanley of Pierpont Securities saying in this regard:

"Sell-side participants love it because FRNs represent a new product to trade and one that will be much less liquid and thus may exhibit juicy bid-ask spreads. Buy-side participants love FRNs because they are starving for yield at the short end and FRNs will undoubtedly yield noticeably more than comparable conventional securities.

"Of course, those two reasons, among others, are exactly the reasons that Treasury should never have had any interest in this program…"

Mary Miller did not offer any better arguments for issuing floating rate notes.

Since the Treasury does not plan to issue any FRNs for at least a year and since Secretary Geithner plans to leave whatever the result of the November election, the next Treasury Secretary will have to decide whether to call a halt to a program which by next year will have achieved both some interest among major financial market participants and a degree of bureaucratic momentum within Treasury and perhaps the Federal Reserve.

This decision looks like a favor to Wall Street firms and money market mutual funds at taxpayer expense. Treasury has been criticized for being too close to the Street; this decision will serve to reinforce that view.