The Committee convened in closed session at the Hay Adams Hotel at 9:30 a.m. All Committee members were present. Under Secretary for Domestic Finance Mary Miller, Assistant Secretary for Financial Markets Matthew S. Rutherford, Deputy Assistant Secretary for Federal Finance James G. Clark, and Acting Director of the Office of Debt Management Fred Pietrangeli welcomed the Committee. Other members of Treasury staff present were Amar Reganti, John Dolan, Jamie Franco, David Chung, Allen Zhang and Tom Katzenbach. Federal Reserve Bank of New York staff Josh Frost and Sean Savage were also present. The Chair and Vice-Chair, Matt Zames and Ashok Varadhan, noted that Dana Emery and Curtis Arledge would be the new Chair and Vice-Chairs upon the conclusion of this refunding.
Deputy Assistant Secretary (DAS) Clark began by discussing recent trends in receipts. Clark noted that individual non-withheld tax receipts in April have been approximately 40 percent higher on a year-over-year basis. Withheld tax receipts have also been particularly strong this year due in part to an increase in the social security tax. Clark also noted that the expiration of certain tax cuts and an increase in the capital gains tax at the end of 2012 may have accelerated bonus payments and investment sales, thus adding to total tax receipts due for 2012.
Clark noted that tax refund payments, at nearly $280 billion thus far, have been lower versus previous years, although refund payment totals will not be finalized until the end of May. Clark reiterated that the persistence of stronger tax collections is somewhat uncertain for the remainder of the year, and that this uncertainty should be considered when determining Treasury’s near-term Treasury funding strategy.
Clark then showed a chart with the largest outlays in the fiscal year to date. The chart showed that Department of Defense outlays were lower by approximately $20 billion, due to reduced operational needs. He noted that the decline in Treasury outlays could be mostly attributed to a change from accrual to cash accounting for interest on debt calculations. Clark noted that due to a delay in the implementation of sequester related cuts to spending, the full effect of the sequester cuts is only beginning to be felt in outlays.
Clark also noted that net issuance of State and Local Government Series (SLGS) securities was lower during the most recent quarter due to a debt ceiling related suspension of the program at the beginning of the year.
Finally, Clark pointed out that the most recent Primary Dealer deficit estimates for FY13 were approximately $12 billion above CBO’s latest deficit estimate of $845 billion, and about $116 billion below the Administration’s April 2013 estimate of $973 billion. He then noted that upon reviewing dealer estimates, market participants appeared to better understand that Treasury’s net marketable borrowing and deficit figures should be different, with the former metric including borrowing that relates to federal direct lending programs.
After DAS Clark completed his overview, Acting Director Pietrangeli began by briefly reviewing sources of financing in Q2 and Q3 of FY13. He called attention to the projected decrease in financing for Q3 FY13 of $182 billion. Pietrangeli stated that this projected decrease in financing could be managed with a reduction in seasonal bill issuance.
Pietrangeli then provided a brief overview of historical and projected net marketable borrowing for FYQ2 and FYQ3. He noted that FYQ3 tends to be a quarter during which Treasury pays down marketable debt or has reduced borrowing needs relative to other quarters, reflecting tax receipts in April and as well as the June corporate tax date.
Pietrangeli noted that ahead of the February refunding, Treasury estimated net marketable borrowing of $103 billion for FYQ3 but that higher receipts and lower outlays created a substantial change in that estimate. Treasury now expected to pay down $35 billion in marketable debt over the FYQ3. He stated that based on current forecasts, recent reductions in regular bill auction sizes should allow Treasury to shed enough financing to meet the borrowing estimate. He further noted that Treasury estimated net marketable borrowing of $223 billion in Q4, which implied a net marketable borrowing estimate of $834 billion for the entire FY13.
Pietrangeli then reviewed several debt metrics. As of March 29, 2013, the weighted average maturity of the portfolio (WAM) was approximately 64.3 months, down from 64.8 months at the February TBAC meeting. The slight decline in the WAM reflected the increased usage of bills in Q2. Pietrangeli noted that as bill issuance declines, the WAM will continue to increase.
In the chart showing the projections for Treasury’s WAM, Treasury adjusted future note and bond issuance on a pro-rata basis to match projected financing needs. The simulation showed that the WAM continues to extend well above the three decade average of 58.1 months. By 2016, it could reach the upper end of the historical range. He emphasized that the WAM projections and the associated underlying assumptions for future issuance were hypothetical and not meant to convey future debt management policy or a WAM target. He also reiterated that Treasury will remain flexible in the conduct of debt management policy.
Pietrangeli then quickly reviewed the demand characteristics within the primary market for Treasury securities over Q2 FY13. Pietrangeli noted that bid-to-cover ratios remained high relative to historical levels across all securities.
Pietrangeli concluded with a brief review of investor trends in auctions, noting that investment funds increased their portion of short- and long-coupon awards as well as TIPS in Q2 FY13.
Next, the Committee reviewed potential changes in coupon auction sizes given the fiscal outlook over the short, intermediate, and long term. An active discussion took place among the members. Members concluded that it was more prudent to wait and better understand the recent increase in receipts before making a decision to adjust financing. It was the consensus view of the Committee that coupon sizes should remain unchanged and that any residual funding needs could be managed with adjustments to bill issuance. The Committee noted that it would revisit this issue at the August refunding.
DAS Clark then presented Treasury’s view on the potential structure of the Floating Rate Note (FRN) program. He stated that Treasury believed that the first FRN will be auctioned in either Q4 13 or Q1 14 and that it would have a final maturity of 2-years. Clark then stated that Treasury had decided to use the weekly High Rate (auction clearing rate) of 13-week Treasury bill auctions as the index for Treasury FRNs. He noted that this decision came after reviewing submissions to the Advance Notice for Proposed Rulemaking, engaging in dialogue with market participants, and internal analysis. Clark then reviewed a draft of the FRN term sheet, which he cautioned was indicative and subject to change. He stated that this draft term sheet would be included in the quarterly refunding documents that would be published on Treasury’s website.
Assistant Secretary Rutherford noted that Treasury remains open to studying alternative indices in the future, should an obvious benchmark emerge. Furthermore, he stated that additional structures and maturities would, in part, depend upon the track record of the initial FRN program.
The Committee indicated support of the proposed FRN term sheet.
A member asked about the potential size and frequency of FRN auctions. DAS Clark replied that Treasury was tentatively considering $10-15 billion per month. Treasury would solicit more market opinions regarding size as the first FRN auction approached. Finally, Clark noted that in keeping with Treasury’s continued goal of extending its WAM, the FRN program would initially serve as a replacement for some bills issuance.
The Committee then turned its attention to the charge concerning the availability of high quality collateral. The presenting member began by reviewing the market definition for high quality collateral. The member noted that historically five asset classes had been considered high quality collateral (HQC). These included cash and assets that have the following characteristics: high liquidity, low duration, low credit risk, acceptable to central banks, non-depreciating, and with low haircuts.
Next, the presenting member turned to a discussion of the supply and demand for HQC.
On the demand side, the member noted three drivers for HQC demand: prudential financial market regulation, expanded margin regulations and “flight to quality” (FTQ) demand. The member noted that these factors could converge in a pro-cyclical fashion. Investors most affected by a surge in demand for HQC would include liability-driven investors and credit funds. The member estimated that in “normal” times, demand for HQC could range from $2.6 trillion to $5.7 trillion. During times of market stress, demand could increase significantly, ranging from $4.6 trillion to $11.2 trillion, excluding FTQ demand.
With regard to HQC supply, the presenting member noted that the creation of collateral by AAA and AA sovereigns was estimated to be about $2 trillion annually; however, rehypothecation restrictions would reduce the velocity of that supply. Another member stated that LCR provisions would allow some rehypothecation by banks, which may provide a degree of relief for collateral shortages.
The member concluded that by 2020 in non-stressed market environments, it is unlikely that there would be a shortage of HQC, even after accounting for the impact of new regulatory requirements. Supply of HQC was estimated to be anywhere from 2 to 3 times demand in normal market conditions. However, pro-cyclical demand for HQC in stressed markets could have market functioning implications. The member concluded that demand in stressed markets could approach $10 trillion.
The Committee then turned its attention to the third charge dealing with the Fed’s exit strategy and its potential impact on Treasury financing. The charge presenter concluded that the market priced in a gradual tightening by the Federal Reserve. The participant noted that a Federal Reserve exit would likely lead to higher interest rates and that if the Federal Reserve did not roll its maturing stock of Treasury holdings (either due to sales or allowing the holdings to mature), net borrowing from private market participants would increase. The presenter noted that traditional convexity hedging pressures remain relatively muted, though he noted that the last several years of fixed income investment fund inflows had the potential to reverse course in a rising rate environment. The participants then engaged in a discussion about several of the assumptions behind the charge.
The meeting adjourned at 12:00 p.m.
The Committee reconvened at the Department of the Treasury at 5:00 p.m. All Committee members were present. The Chairman presented the Committee report to Secretary Lew.
A brief discussion followed the Chairman's presentation but did not raise significant questions regarding the report's content.
The Committee then reviewed the financing for the remainder of the April through June quarter and the July through September quarter (see attached).
The meeting adjourned at 6:00 p.m.
James G. Clark
Deputy Assistant Secretary for Federal Finance
United States Department of the Treasury
April 30, 2013
Matthew E. Zames, Chairman
Treasury Borrowing Advisory Committee
Of The Securities Industry and Financial Markets Association
April 30, 2013
Ashok Varadhan, Vice Chairman
Treasury Borrowing Advisory Committee
Of The Securities Industry and Financial Markets Association
April 30, 2013
Treasury Borrowing Advisory Committee Quarterly Meeting
Committee Charge – April 30, 2013
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?
Availability of High-Quality Collateral
A variety of market, regulatory, and policy developments have increased, or have the potential to increase, demand for high-quality fixed income securities. Please discuss the impact of these developments on Treasury market functioning, Treasury financing, and interest rates more broadly. Please consider the impact of both domestic and international developments.
Potential Impacts of the Federal Reserve’s Exit Strategy on Treasury Financing
We would like the Committee’s views regarding the expected timing of the Federal Reserve’s “exit strategy,” the steps that are expected to be taken, and any resulting impact on both the Treasury market and Treasury financing.
Financing this Quarter
We would like the Committee’s advice on the following:
- The composition of Treasury notes and bonds to refund approximately $60 billion of privately-held notes maturing on May 15, 2013.
- The composition of Treasury marketable financing for the remainder of the April-June quarter, including cash management bills.
The composition of Treasury marketable financing for the July - September quarter, including cash management bills.