(Archived Content)
The Committee convened in closed session at the Hay Adams Hotel at 11:45 a.m. All members were present. Counselor to the Secretary Antonio Weiss, Acting Assistant Secretary for Financial Markets Seth Carpenter, Deputy Assistant Secretary for Federal Finance James G. Clark, and Director of the Office of Debt Management Fred Pietrangeli welcomed the Committee, including three new members, John Shay, Isaac Chang, and Daniel Dufresne. Other members of Treasury staff present were Deputy Assistant Secretary for Capital Markets Monique Rollins, Deputy Director Allen Zhang, Deputy Director John Dolan, Meaghan Muldoon, Michael Puglia, Gabe Mann, Tom Katzenbach, Chris Cameron, and Tillman Elser. Federal Reserve Bank of New York staff members Lorie Logan and Nathaniel Wuerffel were also present.
Deputy Assistant Secretary Clark began by noting that Treasury has started to return Treasury’s cash balance to a level generally sufficient to cover one week of outflows subject to a minimum balance of roughly $150 billion. DAS Clark explained that increasing the size of bill auctions would help to accomplish this goal and that Treasury forecasts a $147 billion net increase in bill issuance during the first quarter of FY 2016. He noted that Treasury bill auctions would likely remain at elevated levels through the end of the calendar year.
Additionally, DAS Clark reiterated Treasury’s commitment to increasing the supply of bills outstanding over the coming fiscal year. He noted that Treasury would only need to increase net issuance by $68 billion in FY2016 if coupon auction sizes remained constant and if the Federal Reserve chose to fully reinvest its maturing Treasury securities. Thus, DAS Clark highlighted that adjustments to Treasury’s coupon auction sizes may prove necessary to support a meaningful increase in the supply of bills over that same timeframe.
DAS Clark noted that significant reductions to bill auction sizes over the last fiscal quarter, in response to the debt limit constraints, had resulted in a corresponding rise in bid-to-cover (BTC) ratios for those securities. Specifically, he observed that BTC ratios for the four-week bill auction reached a historical high. DAS Clark noted that the reduction in foreign awards at auction during the month of September was also a by-product of the smaller bill issuance sizes during that time.
Next, Acting Assistant Secretary Seth Carpenter delivered a presentation to the Committee on the potential benefits and drawbacks of issuing a two-month Treasury bill maturity. Carpenter reminded the Committee of its request at the May 2015 meeting that Treasury study the potential for a two-month bill auction program.
Carpenter noted that market participants generally agree that demand for Treasury bills will continue to increase as some large prime money market mutual funds convert to government-only money market mutual funds (MMFs). Additionally, changes to the way that some large banks classify certain types of deposits may also lead to increased demand for short-term high quality government assets. He also noted that many market participants view bills as a close substitute to repo; thus, declines in dealer repo capacity may also increase the demand for bills.
Carpenter explained that government-only MMF data from January 2012 to July 2015, excluding FRNs, indicate that 40 percent of these funds’ Treasury holdings mature within one month, while 76 percent of their Treasury holdings mature within three months. Carpenter also noted that these same data indicate that the WAM of these funds’ Treasury holdings has oscillated between 60 and 80 days. Accordingly, these data indicate that MMFs have a need for short-dated Treasury issuance.
Carpenter highlighted Treasury’s analysis that showed the potential benefits of a two-month bill maturity. Specifically, he noted that, by as early as 2017, the average one- and three-month auction sizes could exceed the maximum auction sizes recommended in the most recent primary dealer auction survey. Carpenter showed how the addition of a two-month bill would help Treasury increase bill issuance without increasing auction sizes beyond the primary dealer recommended maximums.
Carpenter also noted that previous experience shows a two-month bill auction maturity could have some potential drawbacks, particularly Treasury’s previous issuance of 56-day cash management bills (CMBs) under the Supplementary Financing Program (SFP). Specifically, he observed that the 56-day CMB was, on average, almost as expensive as three-month bill issuance during that time period. Carpenter noted, however, that SFP CMBs were not formally introduced as a permanent addition to Treasury’s suite of securities and were introduced at a time in which Treasury’s funding needs were at historical highs.
Carpenter concluded by presenting a series of questions about the potential size, frequency, operational considerations, and settlement cycle for a two-month bill program.
The Committee engaged in a detailed discussion regarding the potential addition of another bill maturity and most members agreed that there would be benefits given the demand for bills, particularly from the MMF community. While some members agreed that a two-month bill would be a good addition to Treasury’s existing suite of maturities, some members noted that a shorter-dated maturity, such as a two-week bill, may be better suited for MMFs that need short-term assets as a substitute for declining repo capacity by the dealer community.
One member cited the potential for a cleared repo facility as one way that market participants’ demand for repo could be met and that the likelihood of such a facility should be considered when determining the maturity of a new Treasury bill. The Committee concluded that Treasury staff should engage with market participants about a new bill maturity and prepare a follow-up presentation for the Committee at a future meeting.
The Committee then turned to the second charge regarding the application of an asset and liability management (ALM) framework to Treasury’s debt issuance strategy.
The presenting member began by describing the concepts underlying enterprise risk management (ERM) and how it is used for assessing the risk and return trade-offs faced by both private entities and sovereign governments. The presenting member described ALM as a particular application of ERM used by both individual investors and financial institutions.
The presenting member described ALM in more detail, noting that ALM can be used to address interest rate risk, liquidity and rollover risk, capital sufficiency and inter-temporal consumption tradeoffs that exist on the balance sheets of both corporations and sovereign governments. The presenting member noted, however, that sovereign governments present a unique set of challenges when considering an ALM framework for risk management.
The Committee then discussed the nature of the risks faced by Treasury in pursuing its objective of least cost over time. In particular, the Committee members discussed interest rate risk, the volatility of tax receipts over the business cycle, the concept of sovereign credit risk, and how these issues fit into the larger concept of rollover risk. Several Committee members noted that the United States, as a large sovereign government that issues a global reserve currency, is not subject to the same form of rollover risk that private sector borrowers face and that Treasury should consider this carefully when pursuing its objectives.
The presenting member raised the idea of applying ALM to the student loan assets of the federal government for the purpose of addressing the interest rate, cash flow timing, and credit risks in the portfolio. It was noted that many of the risks in the portfolio are either not hedge-able or should not be hedged. Student loan pass-throughs were offered as another potential policy tool for managing the portfolio, but it was noted that market imperfections and diversity of the underlying student loans likely made the issuance of these securities uneconomical.
The Committee members then briefly discussed some details of the student loan program as well as government accounting for the program. It was noted that segregating the student loan portfolio and implementing a matched issuance program may allow policymakers to better evaluate the costs and benefits of the student loan program. However, with regard to implementing ALM holistically across the entire balance sheet of the federal government, most expressed concern that the policy was not feasible.
The Committee adjourned at 2:50 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 Secretary Lew.
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 October through December quarter and the January through March quarter (see attached).
The meeting adjourned at 6:00 p.m.
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James G. Clark
Deputy Assistant Secretary for Federal Finance
United States Department of the Treasury
November 3, 2015
Certified by:
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Dana Emery, Chairman
Treasury Borrowing Advisory Committee
Of The Securities Industry and Financial Markets Association
November 3, 2015
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Curtis Arledge, Vice Chairman
Treasury Borrowing Advisory Committee
Of The Securities Industry and Financial Markets Association
November 3, 2015
Treasury Borrowing Advisory Committee Quarterly Meeting
Committee Charge – November 3, 2015
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?
2-Month Treasury Bill Program
Given the persistent demand for high quality liquid assets by market participants, particularly in the short-end of the bill curve, Treasury would like the Committee to comment on the need for a 2–month Treasury bill. Please comment of the supply and demand dynamic for such a maturity point as well as operational considerations associated with introducing a new bill maturity point (e.g. auction timing, settlement, etc.)?
Asset Liability Management Framework
As prudent debt managers, Treasury regularly considers ways to manage its debt portfolio effectively. We would like the Committee’s views on the practicality of and potential considerations of applying an asset- liability management framework to Treasury’s debt issuance strategy. What approaches could Treasury consider to minimize cost and optimize the composition of net new issuance to finance various assets and liabilities, such as student loans or entitlement benefits?
Financing this Quarter
We would like the Committee’s advice on the following:
· The composition of Treasury notes and bonds to refund approximately $60.4 billion of privately-held notes maturing on November 15, 2015.
· The composition of Treasury marketable financing for the remainder of the October-December 2015 quarter, including cash management bills.
· The composition of Treasury marketable financing for the January – March 2016 quarter, including cash management bills.
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