(Archived Content)
The Committee convened in a closed session at the Hay Adams Hotel at 9:00 a.m. All members, with the exception of Christine Hurtsellers, were present. Counselor to the Secretary Craig Phillips, Fiscal Assistant Secretary David Lebryk, Acting Assistant Secretary for Financial Markets Monique Rollins, Director of the Office of Debt Management Fred Pietrangeli and Deputy Director of the Office of Debt Management John Dolan welcomed the Committee. Other members of Treasury staff present were Dave Chung, Ken Phelan, Jared Roscoe, Tom Katzenbach, Chris Cameron, Mike Puglia and Kanna Nakamura. Federal Reserve Bank of New York staff members Nathaniel Wuerffel, Frank Keane, Ellen Correia-Golay, and Nick Steele were also present.
Director Pietrangeli began with a discussion on receipts and outlays. Pietrangeli noted
fiscal year-to-date through March, corporate receipts are lower than the same period of the previous year, due largely to a statutory change in the due date for certain corporate taxes, from mid-March to mid-April. Pietrangeli next noted that in FY 2017 Q2, outlays were higher due to increased Medicare and Medicaid payments, increased inflation adjustments on TIPS, and an increase in Social Security program enrollment. The decline in SLGS issuance reflected the debt limit related closing of SLGS window. In FY 2017 Q3 bill issuance is expected to decline, reflective of April tax receipts and operating using extraordinary measures to address the debt limit.
Pietrangeli continued by noting that the net marketable borrowing needs based on dealer estimates are higher than recent CBO estimates, with wide ranges, due to the remaining uncertainty regarding the timing and pace of fiscal policy ahead of the administration’s full budget expected by market participants sometime in May. Uncertainty in the estimates is also driven by the range of expectations around the pace and timing of the “normalization” of the Fed SOMA portfolio. If the Fed begins redeeming its Treasury portfolio, this will increase the net marketable borrowing required, which could further be increased by an upside surprise in fiscal spending.
Finally, Pietrangeli provided an overview of Treasury’s cash management framework, which was first implemented in May 2015. He noted that, since the announcement, Treasury could have withstood a loss of market access for an average of 7 days and would have been protected against losing market access for 5 days approximately 79 percent of the time. The debt limit impasse of 2015 was noted as the predominant reason for Treasury missing its 5-day liquidity target 21 percent of the time. The Committee noted that the cash management framework remained prudent, noting that a larger liquidity buffer would likely serve Treasury well. Several members noted that periodic debt ceiling constraints, which forced Treasury to reduce the cash balance, were counterproductive.
Next, the Committee turned to a presentation on potential issuance strategies in the event that the Federal Reserve normalizes the SOMA portfolio and begins to redeem its Treasury holdings. The Committee commented on the potential timing and pace of the normalization process as well as any pricing impacts on fixed income markets. The Committee believes that the financing gap will likely need to be addressed by additional issuance that could begin in short-maturity coupons and bills. However, over a longer-period, it would likely be preferable to spread the increase in issuance across the curve in order to better stay below the estimated maximum issuance sizes, according to the semi-annual survey of primary dealers.
In terms of market impact, studies of the impact of large scale asset purchases were viewed as setting an upper bound for yield increases. The market expected resumption of secondary market purchases once the desired balance sheet is achieved was also viewed as potentially mitigating the market impact. Therefore, any slowdown in the pace of Treasury redemptions could ease the market impact, as it would limit the speed at which the funding would need to be replaced by marketable borrowing.
Lastly, the Committee commented on the demand for ultra-long debt, noting that the regular and predictable issuance policy should remain the central consideration to minimize Treasury’s funding cost over time. While an ultra-long is most likely to be demanded by those with longer-dated liabilities, the Committee does not see evidence of strong or sustainable demand for maturities beyond 30-years. The Committee recommended that further work be done to study these demand dynamics to get a better sense of where an ultra-long bond might price, which could be above or below the longest maturity debt issuance based on the pricing of domestic ultra-long derivatives, ultra-long bonds abroad, and theoretical models.
The Committee suggested that other ways that Treasury might tap potential demand from long-duration investors. To that end, the Committee recommended that Treasury consider issuing a zero coupon 50-year bond, and coupon maturities between 10- and 30-years, preferably the reintroduction of the 20-year. Finally, the Committee recommended against issuing a 100-year bond due to limited pension or insurance cash flows beyond 50-years and the preferable attributes of stripped 30-year bonds to meet a similar duration as a 100-year coupon bond.
The Committee adjourned at 12:30 p.m. for lunch.
The Committee reconvened at the Department of the Treasury at 5:00 p.m. All Committee members, with the exception of Christine Hurtsellers, were present. The Chair presented the Committee report to Secretary Mnuchin.
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 the 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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Fred Pietrangeli
Director of the Office of Debt Management
United States Department of the Treasury
May 2, 2017
Certified by:
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Jason Cummins, Chairman
Treasury Borrowing Advisory Committee
Of The Securities Industry and Financial Markets Association
May 2, 2017
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Stuart Spodek, Vice Chairman
Treasury Borrowing Advisory Committee
Of The Securities Industry and Financial Markets Association
May 2, 2017
Treasury Borrowing Advisory Committee Quarterly Meeting
Committee Charge – May 2, 2017
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?
Normalization of the Federal Reserve SOMA Portfolio
Consistent with the discussion at February 2017 TBAC meeting, in the event that the Federal Reserve normalizes the SOMA portfolio and begins to redeem its Treasury holdings, Treasury would like the Committee’s views on funding these redemptions. Please comment on the potential timing and pace of the normalization process as well as any pricing impacts on fixed income markets.
Estimated Demand for Potential Ultra-Long Treasury Issuance
Treasury would like the Committee to comment on the demand for ultra-long debt (e.g. 50-year and/or 100-year maturities)? What factors would Treasury need to consider when structuring ultra-long issuance (e.g. settlement date, issuance frequency, issuance sizes), who would be the end user of such issuance, and what is the anticipated level of demand from this constituency both at present and over the coming years? If Treasury were to issue an ultra-long security to meet this projected market demand, at what price relative to its current 30-year bond offering could Treasury reasonably expect the ultra-long to price?
Financing this Quarter
We would like the Committee’s advice on the following:
- The composition of Treasury notes and bonds to refund approximately $49.7 billion of privately-held notes maturing on May 15, 2017.
- The composition of Treasury marketable financing for the remainder of the April-June 2017 quarter, including cash management bills.
- The composition of Treasury marketable financing for the July-September 2017 quarter, including cash management bills.