The U.S. Treasury is getting ready for the day the Fed raises interest rates

11/06/2009 10:30 am EST


Jim Jubak

Founder and Editor,

Oh, those sneaky little dogs at the U.S. Treasury.

Did they really think they could start getting ready for higher interest rates without anyone noticing?

You’ll find it in the details of the Treasury’s upcoming auction of $81 billion in new and rolled-over U.S. debt. In next week’s offering the Treasury will sell $40 billion in three-year notes and $25 billion in 10-year notes and $16 billion in 30-year bonds

Two things you ought to notice about what the Treasury is selling.

First, the package is a very clear effort to extend the maturity of U.S. debt. Right now the average maturity of the U.S. debt as a whole is just 53 months. The Treasury has told bond dealers that it would like to extend the average maturity to 74 to 90 months.

A longer maturity means the Treasury gets to lock in today’s low interest rates for a longer period of time. Extending the average maturity by somewhere between almost two years and about three-and-a-half years is exactly what you’d expect Treasury to do if it was convinced that interest rates were going to start climbing within the next year or so. Time to lock in those low rates, you can hear Treasury Secretary Tim Geithner saying.

Second, those aren’t just any 30-year bonds the Treasury is selling. It’s selling 30-year inflation protected bonds, or TIPS (Treasury Inflation Protected Securities). The Treasury has told dealers that it will replace sales of 20-year TIPS with a 30-year issue.

That’s the kind of move you’d make if you thought that investors might be getting worried about inflation and be looking for really long-term inflation protection. Of course, if investors were worried about that, they might be willing to take a lower interest rate in exchange for the extra 10 years of protection.

Next week’s auction will tell Treasury if it is right. But you’d have to say the folks on 15th Street sure are spending a lot of time thinking about higher interest rates.
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