Econintersect: Standard & Poor’s said last summer that the U.S. was such a poor custodian of money that its credit rating had to be downgraded from AAA. The market seems to have a different opinion. Several times since the downgrade U.S. Treasuries have traded in the secondary market at prices that meant the buyer would receive less than all of the purchase price when all interest payments and return of par principal at maturity were totaled. In other words, people will pay to have the government take care of their money. Take that Standard & Poor’s!
If the secondary market has buyers who will pay to have the government hold their money, then why shouldn’t the government collect some of that benefit rather than only market traders. Here is what an article in Reuters had to say today (February 1):
In response to clamor from investors, the Treasury said on Wednesday it was looking closely at allowing negative-yield auctions. This would mean bidders who want the security of U.S. government debt in the face of global insecurity, might have to pay a premium for it.
Doing so would allow the U.S. government to benefit from something that is already occurring on the secondary market, where investors have accepted negative yields in recent months to protect their cash from financial strains.
The Treasury has sold T-bills with 0% interest coupons in recent months. Only accounting practices have prevented the auctions from selling securities for prices higher than the total of face value plus all interest payments. The practice in place only permits selling bills at a discount which could be zero for no interest payment. If new procedures are implemented the auctions would permit bids at a premium to maturity value.
Reuters says that the Treasury is also looking into the issuance of Floating Rate Notes (FRNs). Primary dealers have expressed a strong interest in such instruments which have a variable rate interest based on market conditions. FRNs protect the investor against interest rate risk which reduces the value of debt securities before maturity if market interest rates rise. The Treasury already issues a form of FRN with inflation-linked bonds.
Sources:
U.S. Debt Downgraded (GEI News, 6 August 2011)
Treasury may let investors pay to lend to the U.S. government (Reuters, 1 February 2012, found on Econintersect Americas newspaper page)
Floating rate note (Wikipedia)
Hat tip to Roger Erickson.
