(Archived Content)
The Committee convened in a closed session at the Hay Adams Hotel at 10:00 a.m. All members were present. Fiscal Assistant Secretary David Lebryk, Acting Assistant Secretary for Financial Markets Monique Rollins, Director of the Office of Debt Management Fred Pietrangeli and Deputy Director of the Office of Debt Management John Dolan welcomed the Committee. Other members of Treasury staff present were Dave Chung, Ken Phelan, Jared Roscoe, Tom Katzenbach, Chris Cameron, and Kanna Nakamura. Federal Reserve Bank of New York staff members Nathaniel Wuerffel, Justin Meyer, Nick Steele, and Jonathan Hill were also present.
Pietrangeli began with a discussion on receipts and outlays. Pietrangeli noted that withheld taxes were slightly higher over the October-December quarter, non-withheld and corporate taxes declined, reflecting reduced tax liabilities for certain taxpayers as a result of the PATH Act. Pietrangeli next noted that in FY 2017 Q1, outlays were lower in most categories than in the same period of the previous year, but that after adjusting for calendar effects, outlays were actually 3 percent higher.
Pietrangeli continued by noting that Treasury’s FY 2017 Q2 borrowing estimates implied a net paydown of $44 billion in bills over the quarter, assuming a $100 billion cash balance at the end of March 2017. This estimated paydown reflects reductions in bill supply ahead of the March 15, 2017 expiration of the debt limit suspension period. Pietrangeli further noted that FY 2017 Q3 borrowing estimates assumed a $200 billion cash balance at the end of June, which also reflected an assumption that debt limit-related constraints would remain in effect.
Next, Pietrangeli noted that recent primary dealer net marketable borrowing estimates for FY 2017 through FY 2019 were significantly higher than recent CBO “current law” estimates. These primary dealer estimates reflect a substantial range of market expectations around fiscal policy, particularly with regard to the timing and size of various stimulus and tax proposals.
Pietrangeli then discussed the effect on Treasury’s net borrowing over the coming years resulting from potential changes in the Federal Reserve’s reinvestment policy for its SOMA portfolio. Pietrangeli noted that the December 2016 Survey of Primary Dealers indicated that SOMA reinvestments were expected to continue until June 2018. He indicated that if the Federal Reserve ceases reinvestments at that time, Treasury would likely need to increase the amount of borrowing from the public in order to fund the SOMA redemptions.
Several Committee members noted that, in some SOMA redemption scenarios, increasing bill issuance in order to meet borrowing needs would need to be augmented by additional coupon issuance. The Committee suggested that Treasury study potential issuance strategies and discuss these with the Committee at a future meeting.
Finally, Pietrangeli noted that Treasury’s cash management framework was first implemented in May 2015 and proposed re-examining this policy at the May 2017 meeting to ensure that it is fully achieving Treasury’s risk mitigation goals.
Next, the Committee turned to a presentation on considerations for, and use of, debt issuance models. It was emphasized that the preliminary modeling discussions and exercises presented do not constitute a recommendation. Rather, the ultimate use of models is to aid in analyzing the sensitivity of trade-offs such as cost and risk under various input assumptions.
The presenting member began with a historical review of counterfactual issuance strategies in historical rate environments, noting that longer-term debt strategies would have performed better as rates generally increased while shorter dated issuance strategies performed better in declining rate environments. This was followed by a review of debt models developed by other sovereigns. The presenting member described some common features to these models, such as assumptions regarding interest rates, inflation, and deficits, as well as objectives such as minimizing expected-cost or cost-variability. The member also noted that these models often apply risk or other constraints consistent with their respective debt management policies.
The presenter noted that the Quantitative Strategies Group within the Office of Debt Management has an existing modeling infrastructure for tracking and analyzing debt characteristics, performing constrained optimization and size calculations, and stochastically simulating issuance strategies. It was stated that the modeling work stream from this Committee is intended to complement the existing Quantitative Strategies Group issuance model.
Finally, the presenting member provided sample metrics generated from a prototype model illustrating the projected results of strategies concentrated on a single tenor and for various tenors. The output metrics showed the tradeoffs between risk and cost. The Committee agreed to continue its efforts on modeling debt management in future meetings.
The Committee adjourned at 12:00 p.m. for lunch.
The Committee reconvened at the Department of the Treasury at 5:00 p.m. All Committee members were present. The Chair presented the Committee report to Acting Deputy Secretary Baukol.
A brief discussion followed the Chair’s presentation, but did not raise significant questions regarding the report’s content.
The Committee then reviewed the financing for the remainder of the January through March quarter and the April through June quarter (see attached).
The meeting adjourned at 6:00 p.m.
_____________________________
Fred Pietrangeli
Acting Deputy Assistant Secretary for Federal Finance
United States Department of the Treasury
January 31, 2017
Certified by:
_________________________________
Jason Cummins, Chairman
Treasury Borrowing Advisory Committee
Of The Securities Industry and Financial Markets Association
January 31, 2017
_________________________________
Stuart Spodek, Vice Chairman
Treasury Borrowing Advisory Committee
Of The Securities Industry and Financial Markets Association
January 31, 2017
Treasury Borrowing Advisory Committee Quarterly Meeting
Committee Charge – January 31, 2017
Fiscal Outlook
Taking into consideration Treasury’s short, intermediate, and long-term financing requirements, as well as uncertainties about the economy and revenue outlook for the next few quarters, what changes to Treasury’s coupon auctions do you recommend at this time, if any?
Considerations For and Use of Quantitative Models to Assist in the Evaluation of Alternative Financing Strategies
The primary objective of Treasury’s debt management strategy is to finance the government’s borrowing needs at the lowest risk-adjusted cost over time. To accomplish this, Treasury strives to issue debt in a regular and predictable pattern, but that approach leaves open a wide range of potential outcomes for the maturity structure of the debt. The interest expense associated with any issuance strategy will depend on a variety of factors that are not under the control of the debt manager, including the behavior of interest rates, the business cycle, and the federal government’s fiscal policy. A number of countries including the United States have developed quantitative models that can assist in the evaluation of alternative financing strategies in the face of inherent uncertainty about the future. Treasury requests the Committee’s input on the appropriate considerations for and use of these types of models, consistent with their ability to calculate interest expense associated with alternative issuance scenarios and to help debt managers better understand the implications of various financing choices.
Financing this Quarter
We would like the Committee’s advice on the following:
- The composition of Treasury notes and bonds to refund approximately $45.0 billion of privately-held notes maturing on February 15, 2017.
- The composition of Treasury marketable financing for the remainder of the January-March 2017 quarter, including cash management bills.
- The composition of Treasury marketable financing for the April-June 2017 quarter, including cash management bills.
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