U.S. Treasury starts thinking like a company
WASHINGTON/NEW YORK May 2 (Reuters Breakingviews) - Kudos to the U.S. Treasury for starting to think about Uncle Sam's funding needs like a major company would. The nation's borrower is showing more interest in switching some of its funding to floating-rate debt. That's a smart idea - it may be all it can sell as interest rates rise. But Treasury needs to tread carefully.
Like corporations before it, Treasury's overreliance on short-term paper now leaves it having to refinance some $5 trillion - half its overall public indebtedness - over the next three years. An interest-rate shock could make rolling that over a painful process. Even if the global economy recovers in a more stable manner, investors willing to accept a little more risk for a little more yield could forgo Treasuries.
Selling floating-rate notes could help, first by reducing reliance on ultra-short-term notes that need rolling over every few months in place of securities that last up to five years. The extra interest payments, at present at least, would be minimal and would add some funding security by reducing refinancing risk in the event rates do spike.
Over time, the Treasury could even expand its variable-rate issuance when rates rise. That could help the government sidestep more expensive interest payments years after rates fall. But Treasury Secretary Timothy Geithner and his successors shouldn't get too taken with the idea.
Unsurprisingly, buyers of sovereign debt are likely to be extremely keen to snap up floaters over the next couple of years, as it would allow them to stem the bleeding on money-losing traditional bonds when rates rise. While all borrowers should bear their lenders' needs in mind, Treasury's primary duty is to the taxpayer and to keeping costs down.
That suggests ensuring any floating-rate debt program is limited to protecting the nation from both rising rates and being unable to refinance its debt. The more savvy move, though - as private-sector firms know, too - would be to tap into investors who need long-term debt. Treasury has already made some efforts here, lengthening its massive borrowing's weighted average life by half a month since September.
Neither that nor selling floaters can solve the far larger problem of the nation's rising indebtedness - it has doubled to $10 trillion in just four years. Tweaking the funding tools in Treasury's arsenal can help limit the pain, but if Washington cannot slash the deficit, it won't fool credit-risk-wary investors.
(The authors are Reuters Breakingviews columnists. The opinions expressed are their own.)
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