tag:blogger.com,1999:blog-582368152716771238.post1125955736665837915..comments2024-03-28T05:14:02.071-05:00Comments on The Grumpy Economist: Floating-rate Treasury debtJohn H. Cochranehttp://www.blogger.com/profile/04842601651429471525noreply@blogger.comBlogger14125tag:blogger.com,1999:blog-582368152716771238.post-73497400186179619942013-05-16T18:36:56.243-05:002013-05-16T18:36:56.243-05:00Thanks!
On second:
When someone shows up and ask...Thanks!<br /><br />On second:<br /><br />When someone shows up and asks the Treasury to bid their paper back at par, the Treasury has to deliver funds that it does not have. Presumably it won't issue 30 year fixed rate every time someone comes to get a bid on a floating rate note so the only place to get the funds from is the Fed. This means that inter-auctions, it's the Fed that effectively commits to lock the market at par on these notes.<br /><br />On first, there are several issues with these Swaps:<br />- They would have to trade in and out of them every time someone bought and sold the notes at par or accept some deviation from the strategy you describe where a fixed amount is left unhedged and the rest is hedged.<br />- There is currently no market for Swaps with that floating rate index. Not that one couldn't be created..<br /><br />On third, yes I think we share that view. Inflate or default..<br /><br />None my objections are show-stoppers, but I think there is a solution to what you're trying to achieve that is simpler from a financial engineering standpoint. If I understand correctly, you're ultimately trying to create a safe money-like asset that doesn't require bank alchemy (turning risky assets into risk-free asset). I'm fully onboard with that, here's the alternative I have in mind:<br /><br />Overnight repo with generous haircuts on Govt bond collateral (or potentially other collateral)<br /><br />For instance, the haircut formula could be something like 5% + 1% per year to maturity. For the borrower to take a loss, on a repo of a 10-year asset, yields would have to widen by more than 150bps in a single day *and* their counterparty would have to go bad.<br /><br />If the Fed were to use such instrument in its assets, even if the government credit deteriorated, it would be insulated as it would ask for more an more collateral everyday. If things got really bad it could ask for a different type of collateral with wider haircuts.<br /><br />Banks could be subject to the same rules, or simple go with full reserve banking which is functionally identical.<br /><br />I don't think we should design a system that assumes government debt is risk-free. Doing so would remove the option to default and only leave the option to inflate.<br /><br />In my little dream world, the Fed couldn't care less about the situation of government credit and the banking system would continue to operate smoothly through a government default.DOBhttp://catalystofgrowth.com/noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-69738838741157820012013-05-16T12:04:48.570-05:002013-05-16T12:04:48.570-05:00Excellent comment.
First, if after converting all ...Excellent comment.<br />First, if after converting all debt under a year to fixed-value floating-rate, there is still demand for more, the Treasury can issue it, and then swap the interestr rate risk.<br />Second, what I'm describing is closer to a money market fund. ARS don't promise fixed value between auctions. But the roll over risk is no different than the current risk, with short-term bonds that really are rolled. <br />Third, you forget that he who prints money need never default!<br />John H. Cochranehttps://www.blogger.com/profile/04842601651429471525noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-61119400311958075312013-05-16T11:37:41.823-05:002013-05-16T11:37:41.823-05:00Pr. Cochrane,
Your cheering of floating rate trea...Pr. Cochrane,<br /><br />Your cheering of floating rate treasuries isn't quite consistent with prior posts where you criticized QE (correctly in my view) for shortening the interest rate risk profile of the consolidated US Govt balance sheet.<br /><br />Furthermore, you say:<br /><br />"I would much rather that the Treasury pegged the value to exactly $100 at all times, buying and selling at that price between auctions, and using direct auctions to reset the rate every month or so."<br /><br />What you're describing here is auction rate securities (ARS). These put an immense amount of pressure on the borrower if it ever faces a credit/liquidity crisis. The only common form of funding that's more toxic than ARSs is rolling short term debt.DOBhttp://catalystofgrowth.com/noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-19423214961045836472013-05-08T13:27:20.545-05:002013-05-08T13:27:20.545-05:00Absalon,
I think John addressed that by saying th...Absalon,<br /><br />I think John addressed that by saying that the floating rate securities should be perpetual (similar to British Consuls). In that case, there is no rollover risk.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-46704747203578854632013-05-08T12:51:23.044-05:002013-05-08T12:51:23.044-05:00I was responding to Professor Cochrane's sugge...I was responding to Professor Cochrane's suggestion that "the Treasury pegged the value to exactly $100 at all times, buying and selling at that price between auctions".<br /><br />An "obligation" to buy back is built in to Cochrane's suggestion.Absalonhttps://www.blogger.com/profile/09131268683451462949noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-18838445677172819102013-05-06T13:01:56.913-05:002013-05-06T13:01:56.913-05:00so you are saying that if there were a run on gove...so you are saying that if there were a run on government debt, they would just dump all the debt back on the government for cash?<br /><br />would the government be obligated to buy it back though?LALhttps://www.blogger.com/profile/08196675112184615614noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-56952920099367801302013-05-06T11:10:36.570-05:002013-05-06T11:10:36.570-05:00One question. Suppose the government has $15 trill...One question. Suppose the government has $15 trillion in short-term (say one-day) debt. Every day debt holders receive cash from the government and place bids for the next day. If it is known that the government is auctioning off $15T in new debt (to cash holders), then what incentive is there to bid a low rate / high price? In this situation the Treasury will have to limit the amount of debt. Perhaps it could say: we will auction off $10T to the highest bidders, and the remaining $5T will receive interest on reserves of 50% of the auction rate.Gideon Magnusnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-86521962771865369112013-05-05T15:38:55.776-05:002013-05-05T15:38:55.776-05:00Setting the value at exactly $100.00 and standing ...Setting the value at exactly $100.00 and standing ready to buy for cash at any time at that price makes the instrument callable for all practical intents and purposes and that brings back the problems of roll over risk and runs.Absalonhttps://www.blogger.com/profile/09131268683451462949noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-51204332806210931682013-05-05T13:56:35.476-05:002013-05-05T13:56:35.476-05:00Here is the problem in a nutshell:
Congress sets ...Here is the problem in a nutshell:<br /><br />Congress sets the amount of debt to be borrowed (non-market process)<br />Congress sets the amount of tax revenue to be collected for a given amount of economic activity (non-market process)<br />Federal reserve and others set interest rate (market process)<br /><br />Something has to give. Either interest expense must be a non-market process set by Congress, debt auctions must be allowed to fail via market process, tax revenue must be set by a market process, or another arrangement must be reached.<br /><br />Standard and Poors understood this when they downgraded U. S. government debt.<br /><br />"Right now, the Treasury rolls over a lot of debt. For example, about one and a half trillion dollars is in the form of Treasury bills, which mature in less than a year. So, every year, the Treasury sells one and a half trillion dollars of new bills, which it uses to pay off one and a half trillion dollars of old bills."<br /><br />Treasury rolls over the principle on the debt. The interest payments are made from tax revenue.<br /><br />FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-74937391336883412982013-05-05T11:27:11.354-05:002013-05-05T11:27:11.354-05:00Better, if we are going to all floating rate secur...Better, if we are going to all floating rate securities then just have Congress budget how much interest it wants to pay on its securities. <br /><br />Take total interest expenditures authorized by Congress divided by total debt outstanding and that is the interest paid. Why bother with all the rigamarole of auctions?<br /><br />FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-67466817199857028412013-05-05T10:50:00.550-05:002013-05-05T10:50:00.550-05:00Would like to see your take on the UST issuing 100...Would like to see your take on the UST issuing 100 year debt, 50 year debt, 30 year debt; increasing the duration of the portfolio today at lower rates than historical rates.www.pointsandfigures.comhttps://www.blogger.com/profile/05266351192714997692noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-73574506549747149212013-05-04T21:52:12.710-05:002013-05-04T21:52:12.710-05:00Treasury needs to set the amount that they're ...Treasury needs to set the amount that they're paying periodically ... you could back it out from the trading price, but the formal rate-setting mechanism would still be an auction. Plus, that adds a bit of integrity to the process.Jason DaCruzhttps://www.blogger.com/profile/15586277884128262631noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-88981260886087653442013-05-04T17:32:51.398-05:002013-05-04T17:32:51.398-05:00"I would much rather that the Treasury pegged..."I would much rather that the Treasury pegged the value to exactly $100 at all times, buying and selling at that price between auctions, and using direct auctions to reset the rate every month or so."<br /><br />Why do you need an auction to set the rate? The peg automatically determines the rate. (If the rate is too low/high, the treasury would be forced to buy/sell).<br />Maxnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-15039043731046517092013-05-04T16:16:37.036-05:002013-05-04T16:16:37.036-05:00"I think the Treasury should also make them p..."I think the Treasury should also make them perpetual."<br /><br />The fed has already done that by turning Treasury securities into zero coupon perpetuals. Now that they have done that, why fuss any more.Fat Manhttps://www.blogger.com/profile/09554029467445000453noreply@blogger.com