Uncle Sam’s debt bosses don’t need no stinkin’ Libor. The U.S. Treasury wants to sell floating-rate debt, but the most common benchmark is discredited. Uncle Sam reckons it will use a new one based on government bill auctions.
Nothing is yet set in stone. The government doesn’t plan to start issuing floating-rate notes, or FRNs, until the fourth quarter of this year at the earliest. And it could still opt for a different benchmark if lenders and borrowers begin gravitating toward another non-Libor measure – overnight index swaps, for instance. But it’s more likely that the Treasury, which feeds the deepest and most liquid market on the planet with its debt, will turn out to be the trendsetter.
One alternative that surely isn’t in the frame is Libor, which has been undermined by a manipulation scandal that has sucked in major banks. And the idea of using the sales of 13-week bills to set rates has a certain appeal. The auctions are transparent and yields are based on actual bidding rather than the guesswork that bedevils Libor. The government’s sizable borrowing program also means the gavel comes down regularly – currently roughly weekly – keeping rates reasonably fresh.
And Washington has a long history of creating benchmarks. U.S. dollar borrowers from the government of Rwanda to technology giant Apple already base their fixed-rate borrowing on Treasury yields. Issuing between $10 billion and $15 billion of two-year FRNs every month should develop a market liquid and trustworthy enough that some other borrowers will play copycat and use the same reference rate for their own debt.
Still, no one expects Treasury bill yields to replace Libor completely. With more than $300 trillion worth of loans and derivatives influenced by the traditional rate, it would take a long time to phase out the battered benchmark even if everyone wanted that. But introducing a new yardstick should at least chip away at Libor’s appeal.