TBAC Unanimously Recommends Start Of Floating Rate Treasury Issuance

Tyler Durden's picture

As we suggested yesterday, the Treasury Borrowing Advisory Committee (basically Goldman Sachs and JP Morgan, and the rest of the buy and sell side) did indeed come out with a unanimous decision, having decided to recommend FRNs. This simply means that Wall Street is either desperate to telegraph a surge in short-term rates, or, even worse, if actually anticipating a surge in short-term rates and is doing all it can to hedge before it happens. Nonetheless, "system limitations would prevent any possible issuance of FRNs until 2013" while those wondering what the reference rate will be will have no answer for a while: "In discussing the best index, the member recommendations were divided, with 4 members voting for Treasury bills, 3 members voting for a general collateral rate, and 6 members voting for the federal funds effective rate." Finally, anyone wondering why the market acted odd yesterday, i.e., experienced a freak sell off in the afternoon, the reason is that Brian Sack was also present at the TBAC meeting, and away from his trusty BBG terminal.

The relevant sections in the minutes from the May 1 TBAC meeting are bolded. From the Treasury:

Minutes of the Meeting of the Treasury Borrowing Advisory Committee Of the Securities Industry and Financial Markets Association May 1, 2012

The Committee convened in closed session at the Hay Adams Hotel at 10:30 a.m.  All Committee members were present.  Under Secretary for Domestic Finance Mary Miller, Acting Assistant Secretary for Financial Markets Matthew S. Rutherford and Director of the Office of Debt Management Colin Kim welcomed the Committee.  Other members of Treasury staff present were Fred Pietrangeli, Jennifer Imler, Amar Reganti, David Chung, Allen Zhang, Daleep Singh, Patricia Kao, Monique Rollins, Tom Mosimann, and Gabriella Csepe.  Federal Reserve Bank of New York members Brian Sack and Josh Frost were also present.

Acting Assistant Secretary Rutherford began with a brief review of the fiscal situation, noting that the economy posted a 2.2 percent growth rate in the first quarter of 2012, the eleventh straight quarter of growth since the recession ended in June 2009.

Commenting on the recent April tax season, Rutherford noted that non-withheld taxes were up slightly year-over-year through April 26th.  Meanwhile, withheld taxes were up 3 percent year-to-date. [ZH: and inflation is up 2.7% Y/Y]  Overall, Rutherford noted that there was modest improvement in revenues and the trend was towards further increases in the receipt base. 

Rutherford then presented a series of charts showing recent trends in outlays.  He noted that the top four outlays on a year-over-year basis were little changed.  Social Security outlays were up because of a 3.6 percent cost-of-living adjustment, while Health and Human Services and Education outlays were lower due to ARRA benefits expiring.  

Next, Rutherford noted that primary dealer deficit estimates for FY12 were in line with CBO’s latest deficit estimate of about $1.1 trillion, but about $200 billion below the Administration’s FY 2013 budget, which was released in February.  Rutherford noted that the Administration’s estimate reflected American Job Act provisions which ultimately were not passed into law.

Acting Assistant Secretary Rutherford next proceeded to discuss Treasury’s marketable debt portfolio.  He noted that recently released Treasury borrowing estimates for Q3 FY 2012 and Q4 FY 2012 suggest that Treasury is adequately financed for the remainder of the year.  Any imminent financing shortfalls are expected to be made up with increased bill issuance.

Next, Director Kim reviewed several debt metrics.  As of March 30th, the average maturity of the portfolio was approximately 62.8 months.  In the chart presentation showing the projections for Treasury’s weighted average maturity, Kim adjusted future note and bond issuance on a pro-rata basis to match projected financing needs. The simulation showed that the average maturity continues to extend well above the 3 decade average of 58.1 months.  By 2015 it could reach the upper end of the historical range.

Kim emphasized that the average maturity projections and the associated underlying assumptions for future issuance were hypothetical and not meant to convey future debt management policy or an average maturity target.  He reiterated that Treasury will remain flexible in the conduct of debt management policy.

Director Kim then turned to recent and future composition of Treasury issuance, noting that bills as a percentage of the overall portfolio continue to decline.  The behavior of this metric is consistent with Treasury’s desire to gradually extend the average maturity of debt outstanding.  [ZH: with the Fed buying everything with a maturity beyond 2022]

Director Kim then quickly reviewed the demand characteristics within the primary market for Treasury securities over Q2 FY12.  He noted that bid-to-cover ratios for bills, while still high by historical standards, had declined from Q1 FY12, when year-end dynamics created unprecedented demand for short-dated debt.  Director Kim also noted that bid-to-cover ratios remained high relative to historical levels across most nominal and real maturity points.

The Committee next turned to the charge question on financing.

The Committee unanimously agreed that, based on current borrowing needs projections, the current auction schedule was adequate and no changes to the auction schedule were necessary for the next couple of quarters.

One member asked about the status of negative bidding and awards in Treasury bill auctions. Acting Assistant Secretary Rutherford briefly stated that there were several operational challenges that are currently being addressed.  He noted that more information on this topic would likely be shared in the coming months.

Next, the discussion turned to Floating Rate Notes (FRNs).  Director Kim presented key takeaways of Treasury’s request for information (RFI) on FRNs, stating that most respondents thought this product would be a useful debt management tool.  There was a consensus that the product should initially have a maturity of 2 years and under.  However, there was a lack of consensus on the reference index, with respondents divided between Treasury bills, the federal funds effective rate, and a Treasury general collateral rate.

After Director Kim’s synopsis of key takeaways, Acting Assistant Secretary Rutherford mentioned that Treasury planned to continue to study the benefits and optimal terms of FRNs.  Moreover, he noted that system limitations would prevent any possible issuance of FRNs until 2013.

The Committee again unanimously recommended that Treasury pursue an FRN program, citing the merits of expanding the investor base and providing a cost effective means of extending the average maturity.  In discussing the best index, the member recommendations were divided, with 4 members voting for Treasury bills, 3 members voting for a general collateral rate, and 6 members voting for the federal funds effective rate.

The Committee next turned to the question in the charge regarding market structure and how fixed income markets have changed over the last few years.

The presenting member enumerated five key changes to fixed income markets that have occurred over the last few years.  These included a decline in liquidity in spread products, in part driven by investor risk aversion and the implications of regulatory reform.  In addition, the participant noted that increased volatility, driven by a “risk on/risk off” dynamic, now pervades fixed-income markets.  The presenting member also cited the changing role of government, noting that central banks globally have taken extraordinary action in response to the financial crisis.  In addition, since the crisis, investors are increasingly focused on capital preservation.  Finally, the presenter highlighted the increasing role of electronic trading in the Treasury markets.

To conclude, the presenting member felt there were additional areas that warranted further analysis, including potential systemic risks in clearinghouses and the implications posed by reduced banking sector profitability.

The meeting adjourned at 12:00 p.m.

The Committee reconvened at the Department of the Treasury at 5:45 p.m.  All Committee members present. The Chairman presented the Committee report to Deputy Secretary Wolin.

A brief discussion followed the Chairman's presentation but did not raise significant questions regarding the report's content.

The Committee then reviewed the financing for the remainder of the January through March quarter (see attached).

The meeting adjourned at 6:15 p.m.

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LawsofPhysics's picture

Let me pay you to lose my money, please.  WTF? LOL!

So long as the fraud gets more brazen and remains unprosecuted, I am long black markets and all things physical.

GetZeeGold's picture



Sans dissenters.....make it so.


hedgeless_horseman's picture



This simply means that Wall Street is either desperate to telegraph a surge in short-term rates, or, even worse, if actually anticipating a surge in short-term rates and is doing all it can to hedge before it happens.

If I could teach the sheep only one thing about bonds, it would be this:

Corn1945's picture

A lot of people went into bonds after (correctly) swearing off stocks.

Now they are going to get screwed again in a different asset class if rates actually rise. 

I may get flamed for saying this, but always fade the majority's investment behavior. 

Comay Mierda's picture

whenever the squid and cohorts develop a new product to sell to you SHORT IT.  My guess is that these floaters will be issued and somehow the rates will be driven down further.

Cdad's picture

This is my take, as well.  Rates on the long end will be the target as all of this is quite likely simply an attempt by the TBTF government to rig those rates lower, making our crushing debt levels more sustainable [can meet kick].

Oddly enough, everyone and his brother on Wall Street is pitching the short the bond market trade.  Are they simply not aware of this floating rate issue?  If not, this is a case of massive due dilligence failure.

All this being said...only interconnected zombie bankers know where this thing is going...and more importantly, when.

chdwlch1's picture

Just another way to re-capitalize the Fed and the primary dealer banks.  The way I see it, it's the same old government-Fed mutual back scratching shell game.  The slaves (taxpayers) aren't the AAA collateral that they used to be with the middle class disapearing and deleveraging. The big banks need to assure their future pillaging operation, and since they're the only ones buying US Treasuries anyway, they can reap the rewards offered by the floating rates of return.  They also get the added bonus of forcing the US Govt to pay interest on the creation of new debt to finance the interest payments on the "floaters". Win/win for them if they can pull it off....

EclecticParrot's picture

On a related matter, Rovio just released a game called Angry Turds in which enraged Fed governors launch themselves at jackals disguised as bond traders, who apparently stole both their ammunition and thunder.

In a bit of a role-reversal, Rovio depicts the Hawks as creamy-white, bumbling and slow to react, talons filed off to mere stubs, clownishly dropping “aerial surprises” onto their foes; while the Doves are unusually fleet & svelte, dark & deadly – damn near Hitchcockian -- able to accelerate (and/or inflate) quickly when gamers tap the “Q” and “E’ keys sequentially.

Gully Foyle's picture

Edward: this is a local shop the strangers you would bring would not understand us, our customs, our local ways.

vmromk's picture

Never gonna happen.

CPL's picture

Well, you don't haven't to worry about then.


Just make sure everything you own is paid for and not hold any debt.  To fix this mess, the rate would have to start at 41% because the powers that be waited too long to enforce the rate.  It should have jumped to 14% in 2008, but nobody felt like stopping the free money lending tree.


Banks are now in big trouble holding all that liquidity...that borrowed liquidity.

Manthong's picture

Except if they rig the rates to track nominal inflation but come in at an acceptable level below real inflation.

CPL's picture

True, on paper it works that way.  On the street it turns into empty homes, unsold cars, unsold Apple Products, un-used fields that would grow food, etc.  Current debt to equity for most western folks involve an unsellable house, averaging three credit cards with 140k worth of debt. 


People are going to get it between the eyes.  No any one particular social strata either.  From lower to upper, if you are carrying debt that is x2 your yearly salary, financially it's an infinite pay until you are dead situation.  Like Japan, your kid will inherit your debt.  I'm sure it'll eventually be legal to do so, laws are changing in Canada, so I fully expect the same elsewhere.


It's a forced collapse which is badly needed

anarchitect's picture

Precisely. ZIRP will continue and the CPI will be cooked to show deflation. Pension funds and others will be legislated to hold FRNs, on which the return will be negative. In other words, FRN holders will have to pay interest to the Treasury rather than the other way around.  Some of them won't be allowed to sell, and for those who can, there won't be a market for FRNs anyway.

viahj's picture

Pension funds and others will be legislated to hold FRNs, on which the return will be negative.

and how long will pension funds be able to continue making patouts if they are already woefully underfunded now?



Greater Fool's picture

It would be interesting for sure, particularly when traded in conjunction with Treasury sovereign CDS, since it's so easy to short Treasuries.

CPL's picture

...and here we go.  The end of fiat.  About fucking time.

Village Smithy's picture

 "system limitations would prevent any possible issuance of FRNs until 2013". But a derivitive based on them will be cooked up this afternoon by the wonder kids at the PDs, and be rolled out to the unsuspecting by tomorrow AM. "Oh, you didn't realize that interest rates could rise so quickly. I'm so sorry for your loss".

francis_sawyer's picture

Did they also unanimously agree to continue calling us 'muppets'? (or are they switching to some other name like 'peasants')?

CPL's picture

The term useless eater probably comes up more often I suspect.

fuu's picture

Does FRN stand for anything good?

CPL's picture



Gold, Silver, Oil and MRE's.

hedgeless_horseman's picture



Does FRN stand for anything good?

I am not sure, but TBAC sounds like the same committee that on one hand recommended US citizens subsidize tobacco use, and on the other hand recommended we subsidize healthcare.

The smartest guys in the room nation?

Funding cancer research, while subsidizing tobacco use, is exactly the brilliance typically of central planning.

Cigarette smoking causes about 90% of lung cancers.

Tobacco Subsidies in the United States totaled $1.1 billion from 1995-2010.

blunderdog's picture

Well, duh.  Where are you going to get data on treating cancer if there aren't plenty of people to do research on?

fuu's picture

Does the CDC factor in nuclear testing fallout in lung cancer rates, or cancer rates in general?

CPL's picture

If you've taken a stats class you know the answer.  It's what provides the best optics.

francis_sawyer's picture

I don't know because my confetti cannon is broken...

Village Smithy's picture

Yes, if you are a Wall St. bank that was informed of the Fed's QE plans way back in 2009 and bought equities at really low prices and are now fading them at huge profit. Then you could use the proceeds to buy the FDRs wholesale from the Treasury. Do this before the fact that the floating rate characteristic is going to be incredibly valuable is widely realized, and you can turn around and sell them at another huge profit. 

hedgeless_horseman's picture



...if you are a Wall St. bank...


...the floating rate characteristic is going to be incredibly valuable...

Ummm, you don't need to be a bank, all you need is money and balls. 

Village Smithy's picture

Oh sorry, I guess the memo that Ben sent me just before Jackson Hole must have ended up in my junk email folder.

agent default's picture

Does anybody realize what the they are setting themselves up for with this floating rate thing?  Am I the only one here lost for words with this latest piece of dumbfuckery?

blunderdog's picture

It's just another trick/trap.

Yes, it certainly LOOKS LIKE a ridiculously bad idea, so you have to assume that they've got an angle to manipulate some given metric in order to create arb opportunities.

I've got a very simpleminded view here, and it seems to serve well.  After the "crisis" in '07, pretty much everything you've seen done has been a conspiracy between Fed officials and the big PDs to give the insolvent banks opportunities to rip off the "investor class."  They're the only ones with any money left to extend the life of the fiat system.

francis_sawyer's picture

Isn't that the same hotel where Spitzer was bangin' da hoes?

buzzsaw99's picture

Meet the new scam, same as the old scam...


[/won't get fooled again]

MFL8240's picture

This is precisely why the stock casino is down today.  The crime ring in NY and DC need to force money into the junk paper being issued so that the Fed doesnt have to buy 100% of the confetti.  People better wake up to who this Obama man and his buddy's Geithner and Bernanke are before there is no turning back.

Kokulakai's picture

FRN's are not a new instrument, they were issued after WWII.

One problem is their affect on current bonds.

The 1951 accord offered to swap outstanding long-term debt for new long-term debt with higher coupons.

Increased interest payments across the spectrum of US debt?

xela2200's picture

Most borrowers live to regret variable rates. Rate increase tend to come at the worst time for them.

youngman's picture

So everyone is buying our treasuries right now....or so we are told....big huge demand....so why do they have to add a bene to the treasuries like a moving rate.....it seems to me that there is not as much demand as we are being told.....lied to....or they are very stupid because when interest rates hit 15%..it will cost the USA a lot more money to cover this crap...

hedgeless_horseman's picture



...or they are very stupid because when interest rates hit 15%..it will cost the USA a lot more money to cover this crap...

Not so stupid.  It would indeed cost the US citizens, but it would benefit the lenders.


Tod E. Tosspot's picture

It seems to me that buying Treasury floaters because you expect rates to spike is kind of like buying a CDS on company ABC...with ABC as your counterparty.