The Committee convened in a closed session at the Department of the Treasury at 10:50 a.m. All members were present. Under Secretary for Domestic Finance Nellie Liang, Fiscal Assistant Secretary David Lebryk, Assistant Secretary for Financial Markets Josh Frost, Deputy Assistant Secretary for Federal Finance Brian Smith, Director of the Office of Debt Management Fred Pietrangeli, and Deputy Director of the Office of Debt Management Nick Steele welcomed the Committee. Other members of Treasury staff present were Shantanu Banerjee, Chris Cameron, Dave Chung, Gabriella Csepe, Alexander Demyanets, Tom Katzenbach, Chris Kubeluis, Kyle Lee, Jeff Rapp, Brett Solimine, Renee Tang, and Brandon Taylor. Federal Reserve Bank of New York staff members Susan McLaughlin, Monica Scheid, Nathaniel Wuerffel, and Patricia Zobel were also present.
Under Secretary Liang opened the meeting by welcoming Chris Leonard, a new member of the Committee, and thanking Brian Sack for his eight years of service on the Committee, including 2 years as the Committee’s Vice Chair. Liang then briefly outlined recent efforts related to strengthening Treasury market resilience and other related priorities.
Next, Director Pietrangeli provided brief highlights of changes in receipts and outlays through Q3 FY2022. Receipts totaled $3.84 trillion, an increase of $779 billion (26%) compared to the same period last year, reflecting the strong economy. Non-withheld and SECA taxes were exceptionally high, up $312 billion (42%), which preliminary analysis indicated may be due to capital gains related flows, among other factors. Outlays totaled $4.35 trillion, a decrease of $944 billion (-18%) compared to the same period last year. The largest decrease in outlays came from the Department of Treasury, which were $447 billion (-32%) lower. The decrease was attributable predominantly to $702 billion lower Economic Impact Payments and Covid-related relief payments, partially offset by $123 billion in higher tax credits and $102 billion in higher interest on the public debt.
Pietrangeli then turned to deficit and privately-held marketable borrowing projections. Primary dealers’ median estimates for privately-held marketable borrowing needs in FY2022 and FY2023 were around $1.7 and $1.6 trillion, respectively, similar to their estimates in May. Looking farther out, the median estimate for FY2024 was around $1.3 trillion, a few hundred billion dollars lower than the estimate in May as a result of lower estimated SOMA redemptions. Pietrangeli noted that these forecasts suggest that Treasury is well financed in FY2022 but moderately underfunded in FY2023 and FY2024, when holding coupon auction sizes stable at July 2022 levels and the level of Treasury bills constant at June 30, 2022 levels.
Next, Deputy Director Steele summarized primary dealers’ outlook for issuance. Primary dealers largely supported additional reductions to nominal coupon auction sizes this quarter, with most recommending cuts applied across the curve in similar size to the previous quarter. Many dealers discussed the current low share of bills as a percentage of total marketable debt outstanding as supporting an additional round of coupon cuts. Most dealers also believed that Treasury would be able to maintain coupon auction sizes at the November refunding, and that any additional financing needs could be met with additional bill issuance. With regards to the 20-year bond, most primary dealers thought Treasury should consider slightly larger reductions in auction sizes relative to other tenors this quarter, with the large majority expecting a $2 billion reduction for the new and reopening issue sizes. They noted these slightly larger reductions would further support 20-year liquidity in the secondary market, which continued to exhibit some signs of supply and demand imbalances. Many primary dealers noted that when considering future adjustments to 20-year bond auction sizes, it was important for Treasury to continue to make announcements in a regular and predictable manner and ensure continued benchmark liquidity.
Next, Debt Manager Lee reviewed primary dealers’ expectations for bill demand. Primary dealers broadly expected demand to remain robust in the near and medium term and pointed to the over $2 trillion participation in the Federal Reserve System’s Overnight Reverse Repo Facility as well as negative spreads to overnight interest rate swaps (OIS), as evidence that the market could easily absorb more bill supply. In addition, macroeconomic and monetary policy uncertainty were cited as likely to continue to support investor demand for bills. Primary dealers also noted the possibility for money market mutual funds’ (MMF) assets under management to increase going forward as banks continue to shed deposits. Furthermore, a few noted that if proposed amendments to MMF rules were adopted, some investors could rotate out of prime MMFs into government MMFs.
Next, the Committee turned to a presentation on a debt issuance model and the implications of recent developments for the model’s financing recommendations. The presenting member noted that since the start of the pandemic, there have been substantial changes in the macroeconomic and fiscal environments, including an increase in the inflation rate, higher interest rates, a larger debt stock, and an expansion of the Federal Reserve System’s balance sheet. While these developments translated into a higher expected cost of financing for a given level of risk, the model’s principal conclusions have not changed significantly. The updated model continues to suggest a favorable cost/risk tradeoff for more issuance in the short- and intermediate-maturity coupons, TIPS, and FRNs. The presenting member concluded that Treasury should continue to evaluate the model results in the context of Treasury’s broader objective of regular and predictable issuance. The Committee discussed the model and reaffirmed its view that the model continues to provide useful insight into debt management tradeoffs, though different calibrations and models could result in different outcomes, and should continue to be one input among many into the Committee’s recommendations.
Next, the Committee turned to a presentation on the desirability of regular buyback operations as a debt management tool. The presenting member noted that the Committee had previously identified several potential benefits of regular buyback operations, such as smoothing bill issuance, dampening fluctuations in cash balances and reducing maturity peaks in outstanding debt. An examination of the potential impact of such operations on liquidity conditions in the secondary market concluded that conducting buybacks in off-the-run securities while issuing liquid on-the-run securities could allow Treasury to enhance liquidity and lower long-term financing costs. The presenting member then stated that the growth of the Treasury market and regulatory developments in recent years have reduced dealers’ intermediation capacity, resulting in more strained liquidity conditions, and suggested that the potential liquidity benefit of regular buyback operations may have now increased.
The Committee then turned to a discussion of the potential costs and benefits of buyback operations. While a majority of members agreed that regular buybacks could enhance liquidity, some participants emphasized that the operations had to be appropriately designed to help ensure that Treasury could effectively achieve its debt management goals. It was noted that while a Treasury buyback program could have beneficial effects, it would not sufficiently address large shocks to liquidity conditions. The Committee concluded by noting that further analysis of the issue, including potential limitations and design questions, was warranted.
Finally, the Committee discussed its financing recommendation for the upcoming quarters. The Committee recommended that Treasury continue with coupon auction size reductions across the curve for the upcoming refunding quarter, with slightly larger reductions in the 20-year bond, similar to the cuts announced at the May quarterly refunding. The Committee noted that another round of coupon reductions would result in a modest increase in the share of bills outstanding, which is currently at the lower end of the Committee’s recommended range of between 15 and 20%. Regarding the 20-year bond, the Committee discussed its performance in the secondary market and unanimously agreed that Treasury should maintain the 20-year maturity point. The Committee also determined a disproportionately larger cut in the auction size would further bring supply closer in line with longer-term demand. They noted that with the reductions suggested for this quarter, the 20-year bond auction size would be closer to the Committee’s recommended size prior to its re-introduction in May 2020. In addition, the Committee unanimously agreed that Treasury should continue to increase TIPS modestly, consistent with prior increases to stabilize TIPS as a share of total debt outstanding.
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 2, 2022
Certified by:
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Elizabeth Hammack, Chair
Treasury Borrowing Advisory Committee
August 2, 2022
Treasury Borrowing Advisory Committee Quarterly Meeting
Committee Charge – August 2, 2022
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 SOMA investments, the evolution of Treasury holdings by different types of investors, as well as auction calendar construction.
Regular Buyback Operations
Treasury last conducted “non-test” buyback operations between March 2000 and April 2002 to support its debt management goals during a period of budget surpluses. In the last several years, Treasury has conducted regular test buyback operations to maintain operational capabilities. Some have suggested that Treasury conduct buybacks to achieve various objectives, including promoting liquidity of on-the-run securities, improving cash management, and reducing variations in auction sizes (for example, see Garbade and Rutherford, 2007). Should Treasury consider regular buyback operations? If regular buyback operations were conducted, what considerations should inform their design? How might regular buyback operations help Treasury achieve its objectives? What are the key limitations of buyback operations, in particular during periods of market stress?
Update on Debt Issuance Model
Since the start of the pandemic, there have been substantial changes to macroeconomic conditions, fiscal and monetary policy, and Treasury issuance. Given these changes, pursuant to the extensive TBAC work over the last several years on an optimal debt model, please provide an update on the output of the model. How have the model’s results changed and what have been the main drivers of those changes? What insights can the model offer about the current stock of debt and upcoming issuance decisions?
Financing this Quarter
We would like the Committee’s advice on the following:
- The composition of Treasury notes and bonds to refund approximately $54.1 billion of privately- held notes and bonds maturing on August 15, 2022.
- The composition of Treasury marketable financing for the remainder of the July-September 2022 quarter.
- The composition of Treasury marketable financing for the October-December 2022 quarter.