U.S. Floating Rate Notes

The Treasury Department is continuing the discussion of floating rate Treasury notes it intends to begin issuing within the next year. One of the items still open for discussion is the choice of the index to which the coupon rate will be tied. Industry representatives seem to prefer the repo rate, which is calculated using repurchase agreements. Repurchase agreements are the simultaneous sale of a security with the agreement to buy the security back in the future at a higher price. Repos are generally short-term, often overnight. The second choice for the index appears to be three-month Treasury bills. The Treasury bill rate is less volatile and more transparent. Given the recent problems with LIBOR and EURIBOR rates, Treasury bill rates offer less opportunity for similar market manipulation.