Taking stock: New U.S. Treasury security will offer floating rate

Malcolm Berko: Stay away from airline stocks.
BY MALCOLM BERKO Published: July 28, 2013
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Dear Mr. Berko: I heard from a friend who works for the U.S. Department of the Treasury. He said that the Treasury is coming out with a new type of bond next year and that the interest rates will change to respond to market conditions. This bond is supposed to have a higher yield than other Treasury bonds but will be available only to banks' money market funds. What can you tell me about this, and do you think the public will ever be able to buy this type of bond? Also, could you recommend an airline stock as a long-term investment for my individual retirement account? Do you think the airline mergers in the past couple of years have strengthened the industry?

BD, Syracuse, N.Y.

Dear BD: Well, Polly wolly doodle all the day, and yep, you heard right, but you heard wrong, too. Here's the straight skinny. We hope the U.S. Treasury expects to issue that new type of security, called a floating rate note. The most recent time the Treasury introduced a new product was in 1997, when Treasury inflation-protected securities were a hit. This was the same year in which Dolly became the world's first cloned sheep, and the Dow Jones industrial average was trading at 6,700 or so.

So after nearly 14 months of serious objections by lobbyists of the banking industry, the Treasury hopes to issue its first floating rate tranche late this year or early in 2014. The specifics aren't published yet and probably won't be until a couple of weeks before the issue. The first tranche will have a two-year maturity, and interest payments will be made quarterly rather than every six months. The interest rate will be tied to the yield on the three-month Treasury bills and will change weekly to reflect the higher or lower T-bill auction rate. The interest on the floating rate securities will equal the T-bill yield plus an extra 5 to 10 basis points, depending on demand.

The Treasury will auction these floating rate securities quarterly, and we pilgrims will be able to purchase them through the TreasuryDirect program with a $100 minimum investment. However, I must warn you that you will need to be as drunk as a cross-eyed stoat and have a Ph.D. from MIT in order to navigate the TreasuryDirect website. Several years ago, a Microsoft guy I know tried to purchase some U.S. Savings Bonds for his kids by using TreasuryDirect. After two hours of futzing, he gave up, and he said he had sweat rings the size of saddlebags under his arms. So if you decided to own these notes, it'd probably be best to pay your broker a $100 commission.

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