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Minutes of the Meeting of the Treasury Borrowing Advisory Committee Of the Securities Industry and Financial Markets Association July 30th, 2013

(Archived Content)

The Committee convened in closed session at the Hay Adams Hotel at 9:00 a.m.  All members were present, except Matt Zames.  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 Director of the Office of Debt Management Fred Pietrangeli welcomed the Committee.  Other members of Treasury staff present were Deputy Director Amar Reganti, Deputy Director Allen Zhang, John Dolan, David Chung, Jamie Franco, Tom Katzenbach, and Sundar Swaminathan.  Federal Reserve Bank of New York staff member Josh Frost was also present. 
Deputy Assistant Secretary (DAS) Clark began by discussing recent trends in receipts.  Clark noted that individual non-withheld tax receipts continued to have a strong year-on-year performance, rising 34 percent over the comparable quarter last year, one of the strongest results since 2006.  Similarly, withheld taxes continued to post strong gains, rising 10.6 percent, one of the fastest year-over-year gains in the last decade.  Clark noted that much of the change was due to the large increase in April’s receipts, which may partially be attributed to income shifting by taxpayers ahead of anticipated increases to tax rates at the beginning of 2013. 
Clark then showed a chart with the eleven largest outlays in the fiscal year to date.   The decline in Treasury outlays was attributed in part to a one-time payment of $51 billion by Fannie Mae.  Further declines in Treasury outlays were driven by a $30 billion decrease in interest on debt and a $12 billion downward subsidy re-estimate for TARP programs.  For the HHS category, Clark noted that outlays were $14 billion, or 2 percent, higher when compared to the same period last year.  The increase was due to the normal growth in Medicare.  SSA outlays were $32 billion, or 5 percent, higher compared to the first three quarters of last year. 
Clark also noted that net issuance of State and Local Government Series (SLGS) securities was lower during the most recent quarter as the SLGS window had been closed since May of this year as part of extraordinary measures.
Clark then reviewed budget deficit data, illustrating that the lower cumulative budget deficit in June relative to the prior month was primarily due to the large payment by Fannie Mae to Treasury.  On the next slide, he noted that the primary dealer net marketable borrowing estimates were $28 billion higher than the CBO, and $197 billion lower than OMB’s FY 2014 estimate.  He noted that net marketable borrowing was greater than the deficit, reflecting funding required for federal direct lending programs, such as student loans.
After DAS Clark completed his overview, Director Pietrangeli began by briefly reviewing sources of financing in Q3 and Q4 of FY 2013.  He noted that the April-to-June quarter is typically characterized by a seasonal reduction in borrowing needs, by virtue of the fact that April tax payments are during that time.  Treasury typically addresses seasonal changes in borrowing needs with corresponding changes to bill financing.  In reaction to the sizable increase in April payments, Treasury reduced net bill issuance by $221 billion while keeping coupon issuance steady; $210 billion was raised in coupons.  Pietrangeli noted that the level of bills outstanding at the end of June was $1.57 trillion, approximately $80 billion below the average level of bills outstanding over the last 4 years.
He called attention to the projected implied decrease in financing for Q4 FY 2013 of $18 billion. He noted that these projections assumed the debt issuance pattern that was in effect at the end of June 2013, which incorporated a very low level of bill issuance.
Pietrangeli then reviewed the component forecast of Treasury’s borrowing needs. He noted that the chart showed borrowing needs related to the primary deficit, net interest payments, and direct lending programs.  He noted that going forward, the largest component of borrowing needs would be for interest payments.
Pietrangeli  next reviewed Treasury’s projected borrowing capacity relative to the  projected net marketable borrowing forecast provided in the Mid-Session Review (MSR) and CBO’s estimate of the President’s Budget.  Pietrangeli noted that there was some divergence between the CBO estimate and the MSR and that recent estimates from primary dealers were closer in magnitude to the CBO forecast.  He also added that Treasury’s estimate for borrowing capacity did not incorporate any estimates for FRN issuance. 
Next, Pietrangeli reviewed several debt metrics.  As of June 28, 2013, the weighted average maturity (WAM) of the portfolio was approximately 66 months.  In the chart showing the projections for Treasury’s WAM, Pietrangeli had adjusted future note and bond issuance on a pro-rata basis to match projected financing needs. The simulation showed that the WAM continued to extend well above the three decade average of 58.1 months.  By 2016, the WAM could reach the upper end of the historical range.
He emphasized that the average maturity projections and the associated underlying assumptions for future issuance were hypothetical and not meant to convey future debt management policy or an average maturity target.  He also reiterated that Treasury would remain flexible in the conduct of debt management policy.
Pietrangeli then quickly reviewed the demand characteristics within the primary market for Treasury securities over Q3 FY 2013.  Pietrangeli noted that bid-to-cover ratios remained high relative to historical levels across all securities, though there had been a decline in all non-bill categories.  He also noted that while several categories of investors had exhibited more restrained demand during this period, investment funds in particular had increased their participation in longer-dated coupon securities.
Pietrangeli concluded by drawing attention to a data issue when reviewing the Total Foreign Awards chart.  He noted that several securities that were auctioned in June did not settle until July, and therefore were not reflected in the current chart.  He noted that on slides 38 and 39, foreign demand has been very stable over the last two years.
DAS Clark then presented Treasury’s finalized term sheet for the Floating Rate Note (FRN).  He stated that the first auction would likely take place at the end of January and that interested parties could find the final term sheet and the final rule related to the FRN on the Treasury Direct website.  Clark noted that changes to the final term sheet were minor relative to last quarter’s indicative term sheet.
Next, the Committee turned to the question of whether Treasury’s issuance schedule remained appropriate given required financing needs.  A TBAC presenter reviewed several guiding principles for Treasury’s debt issuance strategy, underscoring the notion that Treasury should continue to extend the weighted-average maturity of the portfolio.  The presenter then noted that due to a reduction in near-term funding needs, it appeared that Treasury could consider reducing coupon issuance.  A member noted there was some uncertainty over medium-term funding requirements and that a reduction in coupon issuance should therefore be relatively modest.  Another member noted that cutting shorter-dated coupons would enhance Treasury’s goal of increasing the WAM of the portfolio, while maintaining the integrity the bills market.  A member also observed that the introduction of FRNs in January would further support the stability and functioning of the market for short duration, high quality securities.
A discussion ensued among the Committee members.  The Committee then recommended that Treasury moderately reduce its 2-year and 3-year coupon issuance while continuing to monitor fiscal developments. 
The Committee then discussed whether the TBAC should foster greater engagement with the academic community in order to undertake longer-term analytical projects.  It was decided that the Committee would examine a proposal the next quarterly meeting.
The Committee then turned its attention to the charge dealing with liquidity conditions in fixed income markets.  The presenting member denoted the four dimensions of liquidity:  tightness between bid and offer, depth of absorbable transaction size, speed, and resiliency.  The member noted that issues in liquidity were mainly reflected in the secondary, not primary, fixed income markets.  The member then noted that while the level of turnover had increased, it had not kept pace with the outstanding stock of securities.  The presenting member continued to review trends in fixed income liquidity, the potential impact of new regulations, and the effects of policy and market structure.
A discussion then followed on current market liquidity conditions.
The Committee then turned its attention to the charge dealing with debt management tools of other sovereigns.  The committee concluded that Treasury’s current suite of tools were appropriate.  While new techniques may not provide significant benefits to Treasury at the current time, a member noted that they could become relevant at some future date. 
The meeting adjourned at 11:30 a.m.
The Committee reconvened at the Department of the Treasury at 5:00 p.m.  All Committee members, excluding Matt Zames 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 July through September quarter and the October through December 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
July 30, 2013
Certified by:
Dana Emery, Chairman
Treasury Borrowing Advisory Committee
Of The Securities Industry and Financial Markets Association
July 30, 2013
Curtis Arledge, Vice Chairman
Treasury Borrowing Advisory Committee
Of The Securities Industry and Financial Markets Association
July 30, 2013

Treasury Borrowing Advisory Committee Quarterly Meeting
Committee Charge – July 30, 2013
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?    
Liquidity in Fixed Income Markets
Since the 2008 financial crisis, there have been a number of developments in financial markets, such as new regulations, changes in market structure, and technological advancements.
To varying degrees, these developments have had an impact on the landscape and structure of the global financial marketplace. We would like the Committee to comment on the extent to which these changes could impact liquidity in fixed-income markets.
What is the outlook for fixed-income liquidity over the longer-term?
Survey of Debt Management Tools and Techniques
Treasury continually seeks ways to minimize borrowing costs, better manage its liability profile, enhance market liquidity, and expand the investor base in Treasury securities. In light of these objectives, we would like the Committee to comment on the need, if any, for Treasury to implement other types of debt management tools. In answering the question, please review the tools employed by debt management authorities around the world.
Financing this Quarter
We would like the Committee’s advice on the following:
  • The composition of Treasury notes and bonds to refund approximately $69.6 billion of privately-held notes maturing on August 15th, 2013
  • The composition of Treasury marketable financing for the remainder of the July-September quarter, including cash management bills.
  • The composition of Treasury marketable financing for the October - December quarter, including cash management bills.