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The Committee convened in closed session at the Hay Adams Hotel at 11:35 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. Other members of Treasury staff present were Chief Risk Officer Ken Phelan, Deputy Assistant Secretary for Capital Markets Monique Rollins, Deputy Director Allen Zhang, Deputy Director John Dolan, Laura Lipscomb, Dave Chung, Chris Cameron, Tom Katzenbach, Michael Puglia, Kanna Nakamura, Sundar Swaminathan, Adam Hodge, and Lepi Jha. Federal Reserve Bank of New York staff members Simon Potter, Lorie Logan, and Nathaniel Wuerffel were also present.
Deputy Assistant Secretary Clark began by discussing recent trends in receipts. Clark noted that quarterly tax receipts have strengthened on a year-over-year basis and this was reflective of continued economic growth, which Clark also noted was evident in April tax receipts.
Clark also explained the potential impact of the Federal Reserve’s reinvestment policy in Treasury securities on Treasury’s financing needs, indicating that if the Fed chooses to redeem its Treasury portfolio starting in 2016, Treasury would be underfunded by $530 to $850 billion over 2016-2018, depending on the forecast.
Clark next discussed the recently released Treasury borrowing estimates, highlighting the fact that Treasury expects to have an end-of-June cash balance of $260 billion, which is $110 billion higher than forecasted in February. Clark noted that after an internal review of its cash management framework and the Committee’s recommendation that Treasury maintain a higher cash balance to mitigate risks associated with the temporary loss of market access, Treasury has decided to increase the level of cash that it holds on a day-to-day basis. Clark explained that starting in May, Treasury will hold an amount of cash necessary to withstand a loss of market access for approximately one week and that Treasury will not let the daily cash balance fall below approximately $150 billion. Clark reiterated that maintaining a higher cash balance does not increase the debt limit or alter the length of time that Treasury can continue to pay the nation’s bills, and also noted that Treasury will regularly review its cash balance framework going forward.
Next, the Committee turned to the presentation on Treasury’s debt management strategy. Pursuant to the Committee’s recommendation that Treasury review its use of WAM as a portfolio metric, as well as the overall communication of its debt management strategy, Acting Assistant Secretary Carpenter began by noting that Treasury’s long-standing debt issuance principles have been to fund at the least expected cost to the taxpayer over time and to maintain a regular and predictable issuance pattern in order to support market liquidity for Treasury securities.
In discussing issuance costs, Carpenter cited the benefits of considering term-premium models to help inform issuance decisions.
In discussing “regular and predictable,” Carpenter cited a March 19, 2015 primary dealer survey, noting that there appeared to be some flexibility around Treasury’s ability to change auction sizes across the curve, while still being perceived as being a “regular and predictable” issuer.
Carpenter then noted several additional objectives that Treasury must balance, including: supporting market functioning, avoiding sharp swings in interest expense, and maintaining a manageable debt maturity pattern. Carpenter explained that a liquid and efficient market for Treasury securities is central to the financial system. A minimum level of issuance helps to maintain a liquid market at all points on the curve, which contributes to an overall lower cost of funding, and is important given that other issuers use Treasury securities as a benchmark for their own issuance.
Carpenter highlighted that increasing bill issuance could improve market functioning and lower interest costs for the taxpayer. Carpenter also noted that issuing longer-term debt could be seen as insuring against higher interest rates in the future. Carpenter concluded that a cost-benefit analysis should inform Treasury’s issuance decisions and that the benefits of the strategy can be communicated in the context of the aforementioned objectives.
The Committee engaged in a spirited discussion on the dynamics of Treasury market liquidity and how issuance sizes could affect Treasury market liquidity. Committee members also discussed the use of financial models in assessing term premiums, interest cost variability, and other factors that can inform Treasury’s issuance decisions. The Committee concluded that Treasury should continue to study this issue further and provide updates at future meetings.
The Committee then turned to the charge on the supply and demand dynamics in the Treasury bill market. The presenting member noted that bills are considered to be the safest short-term asset available to a wide variety of investor types and that demand for bills is expected to increase in the near-term as a result of changes to market structure and regulations, particularly those changes impacting money market mutual funds.
The Committee adjourned at 1:00 p.m. for lunch. The Committee reconvened after lunch at 2:00 p.m. to review the remaining portion of the charge regarding the Treasury bill market.
The presenting member also noted that Treasury bill supply as a percentage of total Treasury debt outstanding is at approximately 11 percent, a multi-decade low. The presenter noted that, given the forecasted trajectory of the deficit, Treasury could fund much of this need through the issuance of more bills. The presenter also stated that Treasury could inexpensively fund a higher cash balance framework by increasing bill issuance by a modest amount.
The presenting member concluded that Treasury should maintain at least the current level of bills outstanding over the next year and consider increasing the level of bills outstanding in order to avoid potential dislocations in this market. The Committee unanimously agreed that Treasury should issue additional bills to support a higher cash balance framework and to meet increased market demand for short-dated high quality assets. They also observed that increasing Treasury bills would be consistent with Treasury’s goal of funding the government at the lowest cost over time and that this recommendation should not be viewed as a change to the strategy of extending the weighted average maturity of the debt. Finally, the Committee suggested that Treasury focus this additional bill issuance in the one- and three-month maturities, and study the potential for a two-month bill auction program.
The meeting adjourned at 2:40 p.m.
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 remainder of the April through June quarter and the July through September 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
May 5, 2015
Certified by:
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Dana Emery, Chairman
Treasury Borrowing Advisory Committee
Of The Securities Industry and Financial Markets Association
May 5, 2015
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Curtis Arledge, Vice Chairman
Treasury Borrowing Advisory Committee
Of The Securities Industry and Financial Markets Association
May 5, 2015
Treasury Borrowing Advisory Committee Quarterly Meeting
Committee Charge – May 5, 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?
Treasury’s Strategic Debt Issuance Framework
We would like the Committee to comment on Treasury’s strategic debt issuance framework.
The Demand for Treasury Bills
Treasury bill supply as a percentage of the total Treasury debt outstanding is currently about 11 percent, a multi-decade low. At the same time, with $1.4 trillion in Treasury bills outstanding, the total volume of Treasury bills outstanding remains near historically high levels. What are the drivers of potential demand for high quality, short-dated securities? Given these considerations, should Treasury either increase or decrease Treasury bill issuance in the coming year?
Financing this Quarter
We would like the Committee’s advice on the following:
- The composition of Treasury notes and bonds to refund approximately $67.0 billion of privately-held notes maturing on May 15, 2015.
- The composition of Treasury marketable financing for the remainder of the April-June 2015 quarter, including cash management bills.
- The composition of Treasury marketable financing for the July – September 2015 quarter, including cash management bills.
TBAC Recommended Financing Table Q2 2015 and TBAC Recommended Financing Table Q3 2015
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