The recent announcement that the Treasury would be issuing floating rate notes in an effort to feed the appetite for those investors not satisfied by the TIPS markets makes us wonder about whether the Fed and the Treasury are still on speaking terms. We are sure that the Treasury appreciates the Fed’s help, and by help we mean taking down 70% of all new issuance. But the issuance of floaters, juxtaposed with a Central Bank that aspires to create inflation, would seem to represent a situation where the two parties are at cross purposes. While it is true that the issuance is small ($10-15 Bln), and that interest rate movements are not necessarily correlated only with inflation, the fact that the Treasury would structure part of its issuance in direct opposition to what the Fed is trying to explicitly accomplish seems odd. The fact that all Central Banks( for the most part) are currently inflation wannabes, as evidenced by the ECB rate cut today and comments by Mario Draghi, might give potential buyers of said notes cause for concern. If Central Banks do indeed get their way, floating rate notes will most likely provide some protection from the collateral damage of higher inflation, but a better bet would be a position in hard assets. Continue to sell paper and buy stuff.
From Alan Greenspan’s new book: ” It is easy to contemplate price acceleration, with today’s Federal Reserve balances unchanged, ranging from 3 percent per annum to double digits over the next five to ten years.”