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3/19/2020

Minutes of the Meeting of the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association Febr…

Minutes of the Meeting of the Treasury Borrowing Advisory
Committee of the Securities Industry and Financial Markets
Association February 4, 2020
February 5, 2020

February 5, 2020
The Committee convened in a closed session at the Department of the Treasury at 8:00 a.m. All
members were present. Principal Deputy Assistant Secretary for Financial Markets Kipp
Kranbuhl, Deputy Assistant Secretary for Federal Finance Brian Smith, Director of the O ice of
Debt Management Fred Pietrangeli, and Deputy Director of the O ice of Debt Management Nick
Steele welcomed the Committee, including the newest members to the Committee, Scott
Freidenrich and Bob Miller. Other members of Treasury sta present were Ayeh BandehAhmadi, Chris Cameron, Dave Chung, Tom Katzenbach, Tim Khang, Peter Phelan, Brett
Solimine, Renee Tang, Brandon Taylor, Drew Teitelbaum, Tom Vannoy, and Paul Wol eich.
Federal Reserve Bank of New York sta members Susan McLaughlin, Kathryn Chen, Rania Perry,
and Kyle Lee were also present. The meeting began with a review of Committee guidelines by
Treasury counsel.
Director Pietrangeli provided brief highlights of Q1 FY2020 changes in receipts and outlays.
Pietrangeli showed that Q1 FY2020 net receipts rose by $48 billion (6%) year-over-year, driven by
increases in individual withheld and corporate taxes. These gains were partially o set by an $11
billion decline in excise taxes, reflecting the e ect of a moratorium on the Health Insurance
Provider fee collection in CY 2019. Q1 FY2020 outlays were up $72 billion (7%) year-over-year,
mainly due to increased Medicare and Medicaid expenditures, higher defense spending, and
larger Treasury and Social Security outlays.
Pietrangeli next noted that a surge in State and Local Government Series (SLGS) issuance
reduced net marketable borrowing needs by $23.5 billion in Q1 FY2020, which was the largest
quarterly net increase in SLGS issuance since 2007.
Pietrangeli then highlighted that marketable borrowing estimates from the O ice of
Management and Budget (OMB), the Congressional Budget O ice (CBO), and the primary
dealers ranged around $1.0 to $1.1 trillion for the next three fiscal years. Pietrangeli explained
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Minutes of the Meeting of the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association Febr…

that Q1 FY2020 actuals and estimates for Q2 and Q3 FY2020 suggest near-term borrowing needs
might be lower than generally expected, though there is still significant uncertainty because of
the upcoming tax season.
Pietrangeli noted estimates for Q2 FY2020 suggest that total bills outstanding will increase from
the end of December 2019 to the end of March 2020 by $131 billion, assuming an end of March
cash balance of $400 billion. However, total bills outstanding, which are currently around $2.4
trillion outstanding, are likely to fall below these levels following the April tax period, when
Treasury seasonally reduces bill issuance. The Federal Reserve’s reserve management
purchases, which primary dealers expect to continue at least through June 2020, combined with
the seasonal contraction in bill issuance, could result in meaningful reductions to privately-held
bill supply in Q3 FY2020 based on Treasury’s current cash balance policy.
A Committee member asked whether Treasury was considering a higher cash balance and
Deputy Assistant Secretary Smith confirmed that it was under consideration, reiterating
Secretary Mnuchin’s recent public statements on the topic. Pietrangeli added that Treasury’s
standard approach for addressing short-term or unexpected changes in financing needs is to
use bills as a “shock absorber,” which supports Treasury’s long-standing “regular and
predictable” issuance paradigm. Finally, Pietrangeli explained that while Federal Reserve
actions modestly help to close the financing gap over time, the gap beginning in FY2021
nevertheless remains sizable.
Deputy Director Steele then reviewed responses from the primary dealers about the new 20year bond, noting that there was a broad consensus that there would be strong demand for
regular and predictable issuance in benchmark size, with new issues in quarterly refunding
months followed by two re-openings in subsequent months. Dealers suggested that Treasury’s
current financing schedule provides flexibility to launch the security later in the first half of
CY2020 with issuance sizes on the smaller end of the expected range, and then gradually
increase these sizes as future financing needs and market demand dictates. However, it was
broadly noted that Treasury should be mindful that an adequate initial o ering size would
support benchmark liquidity in the new product. Based on the dealers’ responses, the
interquartile range of minimum initial auction sizes for the 20-year to ensure benchmark
liquidity was $10-13 billion for the new issue and $8-11 billion for each of the two re-openings,
equivalent to $26-35 billion per CUSIP or $104-140 billion in annual issuance. Accordingly, most
primary dealers did not expect Treasury to cut other coupon issuance sizes when introducing
the 20-year bond.
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Minutes of the Meeting of the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association Febr…

There was broad consensus among dealers that the 20-year bond auction schedule should be
similar to that of TIPS, where the auction occurs in the third week of the month, settles at the
end of the month, and is dated and matures mid-month. This view is consistent with the prior
Committee recommendation. This structure would maintain STRIPS fungibility with the 10- and
30-year nominal coupon securities, while more evenly spreading the supply of duration
throughout each month. Although some noted the longer when-issued (WI) period resulting
from this schedule, dealers agreed that TIPS have worked well under this structure and that the
benefits outweigh any perceived risks related to an extended WI period. The Committee briefly
discussed these results and suggested introducing the 20-year in May with an auction schedule
similar to the current TIPS and initial auction sizes at the low end of the dealer ranges.
Next, Debt Manager Katzenbach provided the Committee with an overview of the current state
of the Treasury bill market. Katzenbach began by summarizing the recent purchases of bills by
the Federal Reserve Bank of New York, noting that purchases have skewed toward longer-dated
bills with maturities of more than 3-months. Since reserve management purchases were
announced, the spread between bills and matched-maturity overnight indexed swaps has
narrowed, representing a richening of bills, though the spread remains within the one-year
range. In addition, trading volumes from the Trade Reporting and Compliance Engine (provided
to Treasury by the Financial Industry Regulatory Authority) suggest that liquidity in bills has
remained robust. Average daily trading volumes of $86 billion since mid-October 2019 are
comparable to the prior 1-year average. Furthermore, Katzenbach noted that most primary
dealers agree there has been no material change to market liquidity since the introduction of
reserve management purchases.
Looking ahead, the pace of Federal Reserve bill purchases expected by dealers through June
2020 could result in the supply of privately-held bills declining to the mid-$1.8 trillion range,
which would be the lowest absolute level since October 2017. Katzenbach noted that this level
is within the range of estimates for the minimum privately-held supply that would be necessary
to maintain benchmark liquidity as implied from primary dealer feedback, but below some
dealers’ estimates. The Committee briefly discussed the bills market and agreed that Treasury
should continue to monitor the implications of reserve management purchases on liquidity
conditions and the level of privately-held bills outstanding.
Following the discussion, the Committee turned to its overall financing recommendation for the
upcoming quarter. The Committee agreed that Treasury is well suited to meet its financing
needs in FY2020 given its current financing schedule and the expected rollover of Treasury
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Minutes of the Meeting of the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association Febr…

securities held in the Federal Reserve System Open Market Account (SOMA). The Committee
briefly discussed whether introducing the 20-year bond would necessitate reducing issuance in
other coupon securities, but decided that cutting coupon securities sizes this year only to
expand them in subsequent years was not practical or desirable given Treasury’s regular and
predictable approach and the projected financing gaps in FY2021 and FY2022. The Committee
also agreed that, all else equal, the 20-year bond is expected to marginally increase the
weighted-average maturity (WAM) of the debt outstanding but does not represent a significant
change to the Committee’s prior recommendations.
The Committee then reviewed a presentation on the potential long-run composition of the
SOMA portfolio and its implications for Treasury’s financing strategy. For the purposes of this
discussion, a stylized balance sheet was presented to illustrate that the interest paid by Treasury
on securities held by the SOMA portfolio is remitted to the Treasury net of Federal Reserve
liability costs. This can e ectively be thought of as converting fixed-rate Treasury securities to
lower duration floating rate notes, the e ects of which can be evaluated using the Committee’s
debt issuance optimization model. The model shows that SOMA purchases of Treasury
securities generally reduce both Treasury’s interest costs and the variability of its interest costs.
In addition, overall duration of the stylized balance sheet is reduced.
The presenting member then discussed a potential scenario where the maturity structure of the
SOMA portfolio is shortened, noting that Treasury should be indi erent to SOMA’s maturity
structure because each tenor in the stylized framework is similar to a floating rate note and has
the same duration. Moreover, the presenting member suggested that Treasury should adjust
issuance in light of the shi in the SOMA maturity structure with a goal of maintaining an
optimal maturity structure of the privately-held outstanding. However, Treasury should closely
monitor the potential run-o of SOMA holdings if the maturity structure is shortened. The
presenting member remarked that recent redemptions from the SOMA portfolio were
conducted in a manner that reduced risks for Treasury, including advance notice of changes and
capping redemptions each month. The presenting member recommended that Treasury should
not attempt to mitigate run-o risks of shorter duration SOMA holdings by increasing longerduration private issuance because such a strategy would not meaningfully reduce risks but
would add additional costs to Treasury.
Turning to changes in the maturity structure of the SOMA portfolio induced by potential future
quantitative easing (QE), the presenting member concluded that Treasury should not attempt to
o set QE because (1) allowing maturity structure changes to outstanding debt does not appear
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Minutes of the Meeting of the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association Febr…

to increase Treasury’s interest costs or the variability of the deficit, and (2) doing so could
dampen the intended economic benefits of QE. However, it was noted that in a future QE
scenario, Treasury would have to carefully consider the circumstances and debt management
needs when making issuance decisions.
The Committee adjourned at 11:15 a.m.
The Committee reconvened at the Department of the Treasury at 4:30 p.m. All Committee
members except Christine Hurtsellers were present. The Chair summarized key elements of the
Committee report for Secretary Mnuchin, and followed with a brief discussion of recent market
developments.
The Committee adjourned at 5:15 p.m.
_____________________________
Brian Smith
Deputy Assistant Secretary for Federal Finance
United States Department of the Treasury
February 4, 2020
Certified by:
_________________________________
Elizabeth Hammack, Chair
Treasury Borrowing Advisory Committee
Of The Securities Industry and Financial Markets Association
February 4, 2020

TREASURY BORROWING ADVISORY COMMITTEE
QUARTERLY MEETING
COMMITTEE CHARGE – FEBRUARY 4, 2020
Fiscal Outlook

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Minutes of the Meeting of the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association Febr…

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 to Treasury’s
coupon auctions do you recommend at this time, if any? Please also provide feedback on
market expectations for Treasury issuance, the e ects of current SOMA reinvestment policy, the
evolution of Treasury holdings by investor class, as well as auction calendar construction.

Long-run Composition of Treasury Securities in the Federal Reserve
SOMA Portfolio
At its May 2019 meeting, the FOMC discussed two potential options for the long-run
composition of Treasury securities in the Federal Reserve’s SOMA portfolio: (1) a portfolio
roughly proportional to Treasury securities outstanding, and (2) a portfolio focused on shorter
maturity securities, such as Treasury bills and other securities with less than 3 years to
maturity. Recognizing that the FOMC has not yet made a decision on this subject, Treasury
would like the TBAC to begin thinking about how, if at all, these potential paths for the SOMA
portfolio should a ect Treasury’s long-term issuance strategy.

Financing this Quarter
We would like the Committee’s advice on the following:
• The composition of Treasury notes and bonds to refund approximately $70.5 billion of
privately-held notes maturing on February 15, 2020.
• The composition of Treasury marketable financing for the remainder of the January-March
2020 quarter, including cash management bills.
• The composition of Treasury marketable financing for the April-June 2020 quarter, including
cash management bills.

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