The Committee convened in a closed session at the Department of the Treasury at 10:45 a.m. All members were present. Under Secretary for Domestic Finance Nellie Liang, Assistant Secretary for Financial Markets Josh Frost, Deputy Assistant Secretary for Federal Finance Brian Smith, and Director of the Office of Debt Management Fred Pietrangeli welcomed the Committee. Other members of Treasury staff present were Dini Ajmani, Sally Au-Yeung, Chris Cameron, Dave Chung, Erik Heitfield, Tom Katzenbach, Chris Kubeluis, Kyle Lee, Kabir Mehta, Hailey Ordal, Jeff Rapp, Renee Tang, and Thomas Teles. Federal Reserve Bank of New York staff members Ellen Correia Golay, Oliver Giannotti, and Kyle Watson were also present.
Under Secretary Liang opened the meeting by thanking Deirdre Dunn and Colin Teichholtz for their willingness to serve as Chair and Vice Chair of the Committee, respectively. She also thanked departing member Yan Huo for his service on the Committee. Liang then provided a brief update on debt management and other Treasury priorities.
Director Pietrangeli then reviewed highlights of changes in receipts and outlays through Q3 FY2023. Receipts totaled $3.413 trillion, a decline of $423 billion (-11%) compared to the same period last year, largely due to lower non-withheld and SECA tax receipts, elevated tax refunds, and lower Federal Reserve remittances. Outlays totaled $4.805 trillion, an increase of $455 billion (10%) compared to the same period last year, which reflects increases in expenditures across several key categories.
Pietrangeli then turned to privately-held net marketable borrowing projections. Primary dealer estimates of privately-held net marketable borrowing increased over the past three months, with a median cumulative estimate through FY2025 approximately $770 billion higher than last quarter. Dealers also noted a range of possible borrowing needs given uncertainty around the economic outlook and the path of redemptions from the Federal Reserve System Open Market Account (SOMA). Pietrangeli noted that all of the estimates of privately-held net marketable borrowing indicate a sizable financing gap based on current bill supply and coupon auction sizes.
Debt Manager Katzenbach then reviewed primary dealers’ expectations for coupon issuance. Importantly, he noted that Treasury staff has received broadly positive feedback from the market regarding how well the rebuild of the Treasury General Account (TGA), and associated increase in bill supply, has been absorbed thus far. Accordingly, many dealers expressed comfort with the Treasury bill share as percentage of total marketable debt outstanding temporarily exceeding the Committee-recommended range of 15 to 20 percent. Looking ahead, nearly all dealers expected Treasury to begin increasing nominal coupon auction sizes in August, with most expecting these increases to continue over three quarters based on their modal borrowing outlook. Dealers were also nearly unanimous in their recommendations that increases should occur across tenors, while also suggesting that Treasury take a more cautious approach with the 7- and 20-year tenors. As for Treasury Inflation-Protected Securities (TIPS), most dealers thought Treasury could consider increases to TIPS auction sizes, with around half suggesting increases could begin with the October 5-year new issue. Dealers noted that it would be important for Treasury to carefully monitor TIPS demand and liquidity conditions as it considers increases in future quarters.
Debt Manager Lee then reviewed primary dealers’ views on how Treasury should design its buyback operations to ensure that securities being purchased would help meet Treasury’s liquidity support and cash management goals. Dealers agreed that Treasury should exclude securities that are cheapest-to-deliver securities against futures contracts and securities that are trading very special in the repo market. Most believed that near off-the-run securities could also be excluded given their robust liquidity, but this may differ by maturity sector. Regarding purchase limits per CUSIP, dealers noted that Treasury may need to take a more conservative approach than the Federal Reserve since Treasury cannot lend out securities that are purchased because buybacks extinguish debt. However, several noted that, given the size of buybacks being considered, it was less likely Treasury would buy back too much of any single CUSIP. In addition, several dealers thought Treasury could have more lenient purchase limits for near-to-maturity securities. A large majority of dealers thought Treasury should evaluate offers based on price deviations from a fitted yield curve, or spline, because it indicates which securities need the most liquidity support. Dealers also thought that evaluating offers relative to market prices could be beneficial, and some noted that various liquidity metrics might help to determine which maturity sectors needed more liquidity support.
Lee then presented Treasury’s current views on the operational design parameters of the regular buyback program. Treasury plans to conduct liquidity support and cash management buybacks in 9 buckets based on maturity sectors across the curve for nominal coupon securities and TIPS. For liquidity support, Treasury anticipates operating in each bucket around one to two times per quarter, while cash management buybacks would occur in the front-end with operations likely occurring around major tax payment dates. Lee noted that Treasury plans to announce a maximum amount it is willing to buy back per quarter in each maturity bucket for liquidity support and cash management. Lee highlighted that Treasury does not plan to establish a fixed minimum amount to buy back in any given operation and that it is possible that Treasury may not buy back any securities during an operation. Lee then discussed what securities would generally be excluded from operations and how purchase limits per CUSIP would be approached. Finally, Lee reviewed how Treasury plans to communicate around buyback operations with regard to announcements and results, and he highlighted outstanding issues that Treasury is still considering.
The Committee then presented on important considerations for Treasury when determining which coupon sectors and tenors to increase. The presenting member discussed a variety of considerations based on the Committee’s Optimal Treasury Debt Structure Model (Model), investor demand, and market functioning and liquidity. The presenting member highlighted that recent bill issuance has been absorbed well and suggested that money market fund demand would provide significant capacity for additional bill issuance. The presenting member outlined several potential issuance scenarios and concluded that Treasury should increase issuance across the curve, given strong demand across all tenors, with marginally smaller increases for the 7- and 20-year tenors. The presenting member also thought the market could absorb modest increases in TIPS auction sizes, which would be helpful for maintaining the TIPS share as a percentage of total marketable debt outstanding.
The Committee then discussed the presentation’s conclusions. There was a robust discussion on the different assumptions used in the model, particularly with regard to term premia, and how those assumptions may influence the Model’s conclusions. It was noted that the Model is one of many useful inputs that Treasury should consider when determining issuance size changes.
Finally, the Committee discussed its financing recommendation for the upcoming quarters. Based on updated borrowing estimates, the Committee recommended that Treasury begin increasing coupon issuance this quarter. The Committee anticipated that increases would likely occur over several quarters, but this would depend on how the borrowing outlook evolves. They recommended that increases occur across tenors, but with smaller increases in the 7- and 20-year tenors. They also recommended increases to FRN and TIPS auction sizes. The Committee expressed comfort with the possibility that the Treasury bill share as percentage of total marketable debt outstanding might temporarily rise above their recommended range, given robust demand for bills.
The Committee adjourned at 3:30 p.m.
The Committee reconvened at 5:00 p.m. The Chair summarized key elements of the Committee report for Secretary Yellen and followed with a brief discussion of recent market developments.
The Committee adjourned at 5:30 p.m.
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Brian Smith
Deputy Assistant Secretary for Federal Finance
United States Department of the Treasury
August 1, 2023
Certified by:
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Deirdre Dunn, Chair
Treasury Borrowing Advisory Committee
August 1, 2023
Treasury Borrowing Advisory Committee Quarterly Meeting
Committee Charge – August 1, 2023
Fiscal Outlook
Taking into consideration Treasury’s short, intermediate, and long-term financing requirements, as well as the variability in financing needs from quarter to quarter, what changes, if any, do you recommend to Treasury issuance? Please also provide perspectives regarding market expectations for Treasury issuance, the effects of changes in SOMA holdings, the evolution of Treasury holdings by different types of investors, as well as auction calendar construction.
Coupon Issuance Adjustments
In the May 2023 quarterly refunding announcement, Treasury indicated it may need to modestly increase auction sizes as early as the August 2023 refunding announcement. If Treasury begins increasing coupon issuance, in which tenors and sectors should Treasury change auction sizes? Do certain tenors or sectors show greater demand or capacity for increased auction sizes than others? How should the outlook for Treasury bill demand affect Treasury’s approach to increasing coupon issuance?
Financing this Quarter
We would like the Committee’s advice on the following:
- The composition of Treasury notes and bonds to refund approximately $84.0 billion of privately-held notes and bonds maturing on August 15, 2023.
- The composition of Treasury marketable financing for the remainder of the July-September 2023 quarter.
- The composition of Treasury marketable financing for the October-December 2023 quarter.