Floaters: Libor or T Bill Float Better?/

I was asked yesterday whether I prefer a float provision tied to 3 month LIBOR or the 3 month treasury bill.  I would not look at the float provision in isolation from other factors.  For purposes of analysis only, I would assume two securities from the same issuer, with the same priority (senior bonds), with the same maturity, both trading at the same price, with the only difference being one has a float provision of .75% above Libor and the other has .75% over the 3 month T Bill.  If you start to change any of the other components, then the opinion may change.   The entire picture has to be analysed to make a decision, and that adds layers of complexity to the decision making process.   To make the decision after I have narrowed it down to just the float provision as the only factor, then I would just look at historical rates to see which may be better.  I am taking the data below from the Federal Reservefederalreserve.gov, using monthly figures, and the following historical chart on the LIBOR Rates:LIBOR Rates History (Historical)

I just did a random selection of months.

L= 3 Month Libor

T= 3 Month T Bill

9/89=  T=  8.01%; L= 9.125%

4/90=T=8.96; L=8.75%

1/92 = T=3.91%; L =4.188 %

5/95=T=5.85%; L=6.063%

3/98=T=5.14%; L= 5.758%

7/06=T=5.08%; L=5.4889%

4/07=T=5.01%; L = 5.355%

I did not take a reading when I knew the float provision would be less than a likely guarantee.  But now, the Libor rate is above the T bill rate, but both are well below 1%.  

Just based on looking at the two charts, I would go with the Libor float, when all other considerations are exactly equal.  

But, let me give you a real world example of two synthetic floaters, neither has a guarantee.  Both are tied to senior bonds from investment grade issuers.  One is tied to Libor and the other to the 3 month T bill.  And, I will give you the closing prices as of yesterday.  Both have a $25 par value. I have owned and sold both of these securities, and no longer have a position.  Just as a simple exercise, if you had to buy one, which one would you choose:

 Wal Mart: GJO Price  $16.5                  Float:  .50 above 3 month Libor            Maturity: 2030

Proctor & Gamble  GJR Price $16.30   Float: .70% above 3 month T Bill         Maturity: 2034

I would now change one factor, assume that you could buy GJR a few weeks ago at $11 or $12 but GJO would have cost $16.5, what then?

Now to add another layer of complexity, assume you had one other choice, a floater with a guarantee tied to a senior bond of Dominion Resources, GJP, which I have owned and sold:

Dominion GJP Price $18.2                    Float 1.15% above 3 month T Bill        Maturity:2035

                                                                   Minimum Guarantee=3%

Now, if you could only buy one, which one would you buy. 

My discussions of these floaters can be found in these posts:

Bought GJR/ Walgreens/Did Right Brain Call the Bottom?

JNJ Upgrade by UBS/Buy of GJO/Lottery Ticket Purchases

Bought GJP/Sold GPX/Will Increase Exposure to Floaters (Floating Rate Securities) with Minimum Guarantees as Inflation Hedge/

With GJP I introduced into the hypothetical decision making process a difference in the credit rating, and added the additional consideration of a guarantee, a slightly higher price, a different maturity, and a different float provision.  I would choose one of the three, but it is not important what I would do.  What would you do, and why would you do it, if you had to buy one and could buy it at the price at which it closed yesterday?

I have since sold all of these securities. Floaters: Links in One Post