Published November 20, 2014
The U.S. Treasury is delaying a decision on whether to start borrowing in an unconventional way to help cover the federal budget deficits: By offering Treasurys with variable interest rates, like those on some home mortgages.
Treasury said Wednesday that it wants more time to study how the system would work.
It's also looking into whether start issuing debt with negative yields. Investors would, in effect, pay the government for the privilege of socking their money in ultra-safe Treasurys.
Many global investors have been shifting money into Treasurys out of fear of riskier securities, especially those linked to Europe's debt crisis. Such demand has helped drive down Treasury yields and made it cheaper for the U.S. government to borrow.
Normally, the longer the maturity on a Treasury security, the higher the yield the government must pay. But the variable-rate Treasury would let the government pay an initially low rate even while borrowing for two years or more.
Offering a variable rate would carry some risk for the government: It would have to pay investors more if rates rose, as many economists predict they will in coming years. Yet the government might consider that risk worth the benefit of attracting more investors drawn to the prospect of potentially higher yields.
The move would also reduce the need for government to hold as many Treasury auctions.
Treasury gave no timetable for its decisions. But officials said any sale of the new securities wouldn't occur before 2013 because of the time needed to prepare Treasury's computer systems.
In February, a Treasury advisory committee urged the government to offer both variable- and negative-yield securities. Mortgage giants Fannie Mae and Freddie Mac have had success selling floating-rate securities. And some foreign governments, including Britain and Italy, have been big issuers of floating-rate debt.
The last time the U.S. government issued a new type of Treasury was in 1997. That's when it introduced Treasury inflation-protected securities, or TIPS. Their yields are linked to inflation: When inflation rises, so do yields on TIPS. When inflation falls, their yields fall.
Treasury plans to auction $72 billion in debt next week in its regular quarterly auction. Those auctions will be part of the government's plan to borrow $182 billion in the April-June quarter. That would be the smallest such figure since the second quarter of 2008. The government borrowed $401 billion in the January-March quarter.
The government typically borrows less in each year's second quarter because that's when it receives the bulk of tax payments. Its lower borrowing needs also reflect a stronger U.S. economy, which has generated more tax revenue.
Still, a fourth straight $1 trillion-plus federal budget deficit is expected this year. Those deficits have raised the nation's annual borrowing needs to record levels.