The Committee convened in closed session at the Hay-Adams Hotel at 1:25 p.m. All members of the Committee were present. Assistant Secretary for Financial Markets Timothy Bitsberger welcomed the Committee and gave them the charge.
During the course of the meeting, Mr. Bitsberger referred to the series of charts that were released on January 31, 2005 on Treasury's current financing situation, its debt portfolio, risks to financing needs, and Treasury's share of global and domestic markets.
The Committee addressed the first question in the Committee charge (attached) on whether Treasury needs to reevaluate its current issuance pattern in light of a modest increase in expected borrowing needs. Assistant Secretary Bitsberger noted that the modest increase was in reference to OMB deficit estimates from the Mid-Session Review in 2004 and their most recent estimates released last week. He commented that Treasury does not currently see a need to change its issuance pattern at this time.
One Committee member suggested that Treasury should increase issuance of longer-term debt (5-years or greater) given that the average length of maturity of Treasury debt outstanding is projected to continue to decline and that the level of debt outstanding maturing within the next three years is expected to increase. One member observed that the majority of net new issuance is already in longer maturities, including longer-dated TIPS. The Committee then had a general discussion of rollover risk and interest rate risk. This led into a discussion of targets or floors for average maturity of debt.
A Committee member brought up the issue of flexibility and noted that Treasury is in a good position to meet a variety of financing needs because it has created flexibility in its issuance structure. One Committee member pointed out that the Treasury market is having no problem digesting the current levels or mix of debt issuance and reiterated that Treasury has a lot of flexibility. The Committee discussed the need to balance the benefits of flexibility against cost.
The Committee discussed the question of portfolio optimization and how Treasury should look at its optimal debt structure. One Committee member noted that Treasury was clear about increasing reliance on the bill market for issuance because of the lower cost of financing. Assistant Secretary Bitsberger wrapped up the discussion by reminding the Committee that the Treasury has tried to respond to the change in the government's financing position from surplus to deficit in part through increased issuance of longer-dated debt. He also noted the slow pace at which Treasury is able to change measures such as the average maturity of the debt outstanding, given the large size of the Treasury's portfolio. Implicit in the concluding remarks on this topic was the Committee's view that the Treasury's current financing pattern did not need to change to meet changes in deficit projections.
Next the Committee turned to the second question in the charge on whether the high percentage of foreign ownership of Treasuries outstanding creates risks for future Treasury financing, broader risks to the U.S. economy, or, instead, reflects the efficient use of Treasury securities as a financing and investment vehicle. A Committee member presented a series of charts on this topic ( www.treas.gov/offices/domestic-finance/debt-management/adv-com/minutes/ mm-2005-q1.pdf). The conclusions were that having a broader, global investor base was good for the Treasury and that foreign ownership by itself does not present a significant risk to future Treasury funding or the broader U.S. economy. The presenting member did recommend that Treasury encourage foreign official accounts to lend out Treasury securities in the financing market to help maintain market liquidity. The presentation concluded that overall demand for Treasury debt is robust and the capacity to absorb debt issuance is high, and that Treasury is in a good funding position relative to some other G-7 countries.
Several members on the Committee agreed that Treasury should encourage foreign official investors who hold Treasury securities to lend those securities in the Treasury financing market, as the potential for reduced lending is a tangible market risk. Assistant Secretary Bitsberger indicated that Treasury has discussed this issue with several foreign counterparts. Committee members noted that ownership of Treasury securities by foreigners itself may not present a risk, but that concentration of ownership among certain types of accounts or countries could present more of a risk.
The Committee discussed whether or not there are other risks that Treasury should consider and what might cause foreign holders to sell their Treasury holdings or precipitate a crisis that would affect future Treasury financing or pose a broader risk to the U.S. economy. Treasury officials indicated that they would like the Committee to help them better understand the specific risk scenarios. One Committee member noted that a Treasury debt ceiling impasse that leads to default would precipitate a crisis. Another member commented that changes in the tax code affecting foreigner holders of Treasury debt could cause these investors to sell their holdings. Another member commented that foreign purchases of Treasuries have had an impact on the level of interest rates, and in the transmission mechanism of monetary policy.
The Committee then discussed its final borrowing recommendations for the February refunding and the remaining financing for this quarter as well as the April-June quarter. Those charts are attached.
The Committee was then asked if there were any other issues they would like to bring to Treasury's attention. The Committee raised the issue of proposed changes to Social Security and noted how important it is that Treasury fully recognizes the potential impact of these changes on the Treasury market and Treasury's financing needs.
The meeting adjourned at 2:55 p.m.
The Committee reconvened at the Hay-Adams Hotel at 6:00 p.m. All members of the Committee were present. The Chairman presented the Committee report to Assistant Secretary for Financial Markets, Timothy Bitsberger. A brief discussion followed the Chairman's presentation but did not raise significant questions regarding the report's content.
The meeting adjourned at 6:15 p.m.
Office of Debt Management
February 1, 2005
Ian Banwell, Chairman
Treasury Borrowing Advisory Committee
of The Bond Market Association
February 1, 2005
Treasury Borrowing Advisory Committee Quarterly Meeting
Reexamination of Issuance Pattern
Expected borrowing needs have risen modestly since the Committee last met. Does the Committee see any need at this point for Treasury to reevaluate its current issuance pattern?
Foreign ownership of Treasury Securities
While the stock of Treasury debt is well within historical and international norms as a percentage of GDP, questions have been raised about whether the high proportion of total debt held by foreigners creates risks for the Treasury. We would like the Committee's views on whether the high percentage of foreign ownership of total Treasuries outstanding creates risks for future Treasury financing, broader risks to the U.S. economy or, instead, reflects the efficient use of Treasury securities as a financing and investment vehicle.
Financing this Quarter
We would like the Committee's advice on the following:
- The composition of Treasury notes to refund approximately $11.3 billion of privately held notes and bonds maturing on February 15.
- The composition of Treasury marketable financing for the remainder of the January March quarter, including cash management bills.
- The composition of Treasury marketable financing for the April June quarter.
Are there other issues relating to the current state of the Treasury market that the Committee would like to bring to Treasury's attention?