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Minutes of the Meeting of the Treasury Borrowing Advisory Committee Of the Securities Industry and Financial Markets Association February 4th, 2014

(Archived Content)

The Committee convened in closed session at the Hay Adams Hotel at 11:30 a.m.  All members were present.  Acting Deputy Secretary and Under Secretary 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, John Dolan, Won Chung and Tom Katzenbach.  Federal Reserve Bank of New York staff members Josh Frost, Nathaniel Wuerffel, and Ezechiel Copic were also present. 
Deputy Assistant Secretary (DAS) Clark began by discussing recent trends in receipts.  Clark noted that corporate taxes had been particularly strong in Q1 FY2014.  He commented that this could be due to the expiry of accelerated depreciation.   
Clark then showed a chart with the eleven largest outlays in the fiscal year to date.  He noted that the largest change was a decline in the Treasury category, reflecting a GSE deferred tax asset payment that was received in December.  DAS Clark also noted that Social Security-related expenses were higher, primarily as a result of cost-of-living adjustments and higher enrollment.  It was further noted that Department of Defense expense levels were lower due to the lingering effects of sequester.
Clark then reviewed budget deficit data and stated that the numbers remained broadly unchanged from the last refunding as the market awaited new publications from the OMB.  He noted that the CBO data on the presentation was dated and new estimates from CBO had just been released that morning.  CBO estimated that net marketable borrowing for FY 2014 would be $735 billion, composed of a $515 billion deficit and $220 billion of other means of financing.  He noted that if Treasury were to leave coupon issuance at current levels and bill issuance at a level equal to its average over CY 2013, Treasury would raise $903 billion in FY 2014.  As such, CBO’s estimate suggests that Treasury would be overfunded by $168 billion. 
Director Pietrangeli then stated that Treasury’s net borrowing need for Q2 FY 2014 was estimated to be $284 billion.  Based on December 31, 2013 issuance levels for coupons and TIPS, while assuming regular bill issuance of CY2013 averages, Treasury would issue $260 billion in net new financing, consisting of $58 billion in bills and $202 billion of coupons.  He noted that the majority of the $24 billion of underfinancing could be met through adjusting bill issuance.
Pietrangeli then reviewed the forecast of Treasury’s borrowing needs.  He noted that in the coming years, the largest portion of borrowing needs would be for interest payments.  Pietrangeli also showed the projected path of debt-to-GDP and debt-to-GDP net of financial assets, with the difference in the former and latter numbers reflecting the stock of financial assets and direct loans on the federal balance sheet.
Director Pietrangeli then turned to the borrowing needs relative to current capacity.  He noted Treasury’s borrowing capacity versus borrowing estimates from the CBO, the OMB, and the primary dealer community indicated that Treasury was over-financed for FY 2014 and FY 2015.  Depending on the source of the estimates, that overfunding could range from $320 billion to $350 billion.   Pietrangeli noted that longer-term financing needs were partly dependent on whether the Federal Reserve reinvested or redeemed the SOMA Treasury portfolio. 
Pietrangeli then quickly reviewed the demand characteristics within the primary market for Treasury securities over Q4 FY 2013.  He noted that bill bid-to-cover ratios still remain elevated relative to historical levels.  However, there had been some sharp moves down in the 4th quarter, in particular in the 4-, 13- and the 26- week bills.  Much of the decline reflected the concerns of some investors of holding Treasury securities either maturing or being auctioned near the time when the U.S. was expected to exhaust borrowing authority.  Finally he noted that despite the challenging environment for TIPS in the first half of last year, coverage ratios for TIPS remained elevated. 
Next, Pietrangeli reviewed several debt metrics.  As of December 30, 2013, the weighted average maturity (WAM) of the portfolio was approximately 66.7 months.  By 2023, this number would reach 80 months, if the relative proportions for coupon issuance remained constant to meet projected borrowing needs.  He also noted that by 2017, WAM would be at its highest levels since the 1950s.
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.
Next, the Committee turned to the question of whether Treasury’s issuance schedule remained appropriate given the required financing needs.  After a brief discussion of the fiscal outlook, the Committee unanimously recommended that Treasury consider reductions in auction sizes for its 2- and 3-year coupon securities at its May refunding, while continuing to monitor fiscal developments.
The meeting adjourned at 12:45pm and reconvened at 4:30pm at the Hay Adams Hotel.
The Committee then turned its attention to the charge related to the primary dealership model.  The presenting members gave a detailed analysis of the evolution and current status of primary dealerships.  Both presenters detailed the benefits and obligations associated with being a primary dealer in the United States.  They both noted that several developments had impacted the primary dealer model over recent years.  Specifically, the advent of direct bidding, rapid technological change, and new regulations had changed how market participants viewed their primary dealership models. 
A Treasury official noted that Treasury considered the primary dealer model to be valuable, particularly given the requirement that primary dealers bid for their pro rata share of each auction.   One of the presenters noted that unlike many other countries, the primary dealer system for the United States is managed by the Federal Reserve, rather than the Treasury.  The presenter noted that it may be beneficial for Treasury to have a more active role in the management of the primary dealer system. 
A robust discussion ensued among the participants.  Committee members discussed the value of the primary dealership to capital markets and the Treasury, options to improve it, and regularly used institutional practices of other sovereign debt management offices (DMOs).
The Committee then reviewed the financing for remainder of the January through March quarter and the April through June quarter (see attached).
The Committee also briefly discussed the concept of engaging with academics on longer-term debt issuance topics.  Members provided an update on ongoing discussions with academic researchers on topics that were of interest to the Treasury and the Committee.
The meeting adjourned at 5:30 p.m.

James G. Clark
Deputy Assistant Secretary for Federal Finance
United States Department of the Treasury
February 4th, 2014
Certified by:
Dana Emery, Chairman
Treasury Borrowing Advisory Committee
Of The Securities Industry and Financial Markets Association
February 4th, 2014
Curtis Arledge, Vice Chairman
Treasury Borrowing Advisory Committee
Of The Securities Industry and Financial Markets Association
February 4th, 2014

Treasury Borrowing Advisory Committee Quarterly Meeting
Committee Charge – February 4th, 2014
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?    
The U.S. Primary Dealer Debt Distribution Model:  Benefits and Challenges
Treasury has used the Primary Dealer model for auctioning and distributing debt for several decades. This highly efficient system has been a key feature for the effective functioning of Treasury auctions. Given the evolution of the financial services industry, market structure, regulation and technology over recent years, does the current structure for distributing Treasury securities remain optimal? Are there any modifications that could result in a lower cost of funding for Treasury and/or enhance secondary market liquidity?