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.
As interest rates scrape the bottom of the trough, floating rate securities will be in huge demand by money market funds straining to find high-quality short-term securities. So money market funds will certainly be large customers, as will most banks when their lawyers figure out how to arbitrage the higher yield against term certificates of deposit sold to depositors.
No, I can't recommend any airline stock as a long-term investment. Airline stocks are not investments but rather rank speculations. The airlines have been a death trap for investors — who have lost billions of dollars on TWA, Braniff, Eastern, Pan American and other industry icons that crashed and burned. The mergers of American Airlines with US Airways, Continental with United and Northwest with Delta are mergers of failures, not successes. These mergers combine the weaknesses of each airline and amplify the potential for failure when things get tough again. The airline business has lost and wasted more capital over the past 30 years than any other business I know. How can a business with huge fixed costs, staffed by very strident unions and dependent upon widely swinging fuel prices be a wise investment? Still, idiots and fools continue to add fresh money to the pot. I remember Warren Buffett's comment some years ago: “If a capitalist had been present at Kitty Hawk back in the early 1900s, he should have shot Orville Wright. He would have saved his progeny a lot of money.”
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at email@example.com.