Policy Studies Review, 1993.

Strategic Treasury Debt Management in Public Policy

Campbell R. Harvey
Duke University, Durham, NC 27706, USA
National Bureau of Economic Research, Cambridge, MA 02138, USA

I propose that the Treasury supplement its bond offerings with some new adjustable-rate coupon bonds. The adjustable coupon would be linked to the six month Treasury bill auction yield. Given the different magnitude of adjustable and fixed mortgage rates, the interest servicing costs would be dramatically lower for the floating-coupon bonds. This idea is already a proven winner in the corporate bond market. In addition to reducing servicing costs, the strategy will relieve some of the burden on the long-maturity fixed-coupon bonds. Reducing the supply of the fixed-coupon bonds will increase prices and decrease long-term yields. Another one percent reduction in long-term interest rates should help spur spending, construction and capital expenditures.