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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 July …

Minutes of the Meeting of the Treasury Borrowing Advisory
Committee of the Securities Industry and Financial Markets
Association July 30, 2019
July 31, 2019

July 31, 2019
The Committee convened in a closed session at the Department of the Treasury at 9:15 a.m. All
members were present. Deputy Secretary Justin Muzinich, Deputy Assistant Secretary for Small
Business, Community Development, and A ordable Housing Policy 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. Other members of Treasury sta present were Ayeh Bandeh-Ahmadi, Chris
Cameron, Dave Chung, Courtney Demartini, Bernadette Goodwin, Brendan Gri iths, Daniel
Harty, Sarah Hirsch, Tom Katzenbach, Tim Khang, Mary Kolesar, Devin O’Malley, Peter Phelan,
Samira Salha, Renee Tang, and Brandon Taylor. Federal Reserve Bank of New York sta
members Nathaniel Wuer el, Susan McLaughlin, and Matt Lieber were also present.
Director Pietrangeli began by providing an overview of the fiscal situation. Pietrangeli noted that
FY2019 year-to-date receipts totaled $2.6 trillion, or $68 billion (3%) higher than the comparable
period last year. The increase reflected gains in withheld and non-withheld taxes, excise taxes
and customs duties, and reduced tax refunds, partially o set by declines in Federal Reserve
earnings and corporate taxes. Meanwhile, year-to-date outlays totaled $3.4 trillion, or $205
billion (7%) higher relative to the comparable period last year.
Next, Pietrangeli discussed borrowing estimates recently released by Treasury. He began by
noting that bill issuance had gradually declined in the April-to-June 2019 quarter in response to
seasonal factors, as well as constraints on marketable borrowing resulting from the recent debt
limit impasse. As a result, bill supply had fallen by nearly $180 billion since the May refunding
announcement.

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

Looking ahead to the July-to-September 2019 quarter, Pietrangeli highlighted the recent
agreement and legislation approved by the House of Representatives to suspend the debt limit
through July 2021. As a result, Treasury increased its cash balance target for the end of
September to $350 billion. Treasury plans to rebuild its cash balance back to levels consistent
with its prudent cash balance policy, primarily through increases in bill issuance. Assuming that
coupon sizes remain unchanged, and given the paydown in bills since the end of June, bill
issuance through the end of September is projected to increase on net by roughly $160 billion.
He noted that this change in bill supply is about half that during Q1 CY2018, when the Treasury
replenished its cash balance following debt ceiling-related negotiations. It was also noted that
while some primary dealers expect redemptions from the System Open Market Account (SOMA)
portfolio to cease in August, sooner than the previously announced cessation in October, such a
change would reduce Treasury’s need to borrow from the private sector by about $28 billion in
Q4 FY2019.
Pietrangeli next reviewed the longer term financing outlook, highlighting the most recent
annual marketable borrowing estimates from the O ice of Management and Budget (OMB), the
Congressional Budget O ice (CBO), and the primary dealers. Pietrangeli also discussed the
potential e ects of the legislation to increase spending caps on the various estimates.
He noted that Treasury is well funded for the remainder of FY2019 and into the first part of
FY2020, but that significant funding gaps are projected starting in FY2021. The substantial
increase in funding needs in FY2021 reflects, in part, large amounts of maturing 2-year and 3year notes that need to be refinanced. Pietrangeli acknowledged the importance of monitoring
the Federal Reserve’s balance sheet policy announcements and their potential implications for
Treasury financing plans. Pietrangeli estimated that reinvestment of maturing MBS proceeds
into Treasuries and potential Federal Reserve balance sheet growth could reduce financing
needs from the public by an additional $100 to $200 billion annually over the next several
years.
Deputy Assistant Secretary Smith then summarized for the Committee the feedback from
primary dealers on Treasury’s financing needs and the outlook for Federal Reserve policy. The
consensus from primary dealers was that Treasury was well funded for the rest of the year, and
primary dealers did not expect any change to coupon sizes this quarter. Some speculated about
the need to increase auction sizes towards the end of FY2020, but there was no consensus on
the timing. The majority of primary dealers expected the Federal Reserve to make a 25 basis
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Minutes of the Meeting of the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association July …

point cut to the target range for the federal funds rate and to end balance sheet normalization
early.
Debt Manager Katzenbach then summarized Treasury’s cash balance policy and primary
dealers’ views on bill supply following the resolution of the current debt ceiling impasse. He
began by reiterating Treasury’s cash balance policy, which was introduced in May 2015. Under
the policy, Treasury holds a level of cash generally su icient to cover one week of expected
outflows in the Treasury General Account to help protect against a potential interruption in
market access. As part of the policy, Treasury has set a minimum balance of roughly $150 billion
in cases where expected outflows are less than that amount. He noted that over the 12-month
period ending June 30, 2019, the minimum cash balance that would be consistent with this
policy was, on average, about $232 billion, with the top 20% of instances averaging $365 billion.

With this cash management policy in mind, Katzenbach then reviewed feedback from primary
dealers on bill supply. A trimmed mean of primary dealer responses indicated that Treasury is
anticipated to increase the supply of Treasury bills outstanding by $178 billion over the eightweek period following resolution of the current debt ceiling impasse. In comparison, primary
dealers estimated market capacity to digest bill issuance without a significant price adjustment
or deviation from fair value over the same period to be $210 billion. Furthermore, the primary
dealers generally expected Treasury to resume meeting its cash balance policy at some point
between September mid-month, related to the receipt of corporate taxes, and the end of the
month. Committee members discussed the Treasury’s cash management policy, noting both
the policy’s benefits related to risk management as well as the potential market disruptions that
could occur if bill supply were increased too rapidly. Smith emphasized that Treasury carefully
balances these considerations when making its issuance decisions. The Committee generally
agreed that Treasury’s projected measured increases in bill supply balanced these factors well.
Deputy Director Steele then discussed primary dealers’ responses to a quarterly refunding
survey question regarding the appropriate role for the o icial sector in considering increased
central clearing for Treasury securities. Primary dealers broadly acknowledged the risks
associated with bilateral clearing identified by the Treasury Market Practices Group (TMPG) in
their updated best practices document and supported e orts to mitigate these risks. Many
primary dealers expressed support for expanded central clearing in the Treasury market and
suggested the o icial sector consider playing a role in encouraging central clearing. Other
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Minutes of the Meeting of the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association July …

primary dealers expressed concerns about such policies and their costs, including the potential
for higher trading costs, potential di erential e ects on di erent types of Treasury market
participants, and concentration of risk in larger dealers and central counterparties. Steele noted
that Treasury is sensitive to these potential costs and appreciates the wide range of market
participants in the Treasury market. The Committee noted that Treasury should continue to
gather feedback from a range of market participants and evaluate this topic.
Next, Steele led a discussion on the ongoing enhancements to the Treasury Inflation Protected
Securities (TIPS) issuance calendar, noting that feedback from market participants continued to
be positive. He then reviewed primary dealers’ views on TIPS auction sizes noting that dealer
recommendations were consistent with previous Committee recommendations for a gradual
increase of $20-30 billion in the annual TIPS issuance calendar in CY2019. A er discussion, the
Committee recommended a $7 billion August 30-year reopening in order to partially o set the
decrease in overall 30-year TIPS issuance this year. The Committee viewed a $12 billion 10-year
TIPS September reopening as consistent with the July 10-year new issue size of $14 billion.
Lastly, a $17 billion 5-year TIPS new issue in October was viewed as prudent for the inaugural
October 5-year maturity, keeping it the same size as the April new 5-year TIPS issue. The
Committee viewed these sizes as maintaining su icient flexibility to continue to assess the
supply and demand dynamics into FY2020.
The Committee then turned to a presentation on the potential introduction of a 1-year final
maturity floating rate note (FRN). The presenting member considered demand, pricing, and
secondary market liquidity for a hypothetical 1-year FRN indexed to the Secured Overnight
Finance Rate (SOFR), a 1-year FRN indexed to the 3-month Treasury bill, and an increase in 1year Treasury bill issuance. Treasury’s FRN program has been a success, and growth in money
market funds and other cash balances has generated increased demand for both FRN and
Treasury bill issuance in recent years. The presenting member’s analysis of expected investor
demand argued for adding a 1-year FRN issuance point. Furthermore, the analysis suggested
that demand is expected to be highest for a 1-year FRN indexed to SOFR relative to a 1-year FRN
indexed to the 3-month Treasury bill or a 1-year Treasury bill. This analysis identified securities
lending participants and investors looking for a repo alternative as potential sources of new
demand.
The presenting member argued that a 1-year SOFR FRN should price similarly to a 1-year
Treasury bill FRN and may diversify the Treasury’s funding costs. While the mission of lowest
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Minutes of the Meeting of the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association July …

cost of financing was the primary consideration, it was seen as an additional positive that a 1year SOFR FRN would likely support the development of the SOFR issuance market and an
orderly transition away from LIBOR in the market overall. However, it was noted that the
introduction of a 1-year SOFR FRN may a ect existing demand for the 2-year FRN indexed to the
3-month Treasury bill. The Committee recommended that Treasury should consider issuing a 1year FRN indexed to the SOFR, but that the potential e ects on the 3-month Treasury bill FRN
should be studied further.
In the subsequent discussion of the presenting member’s presentation, Smith noted that the
Treasury has not made any decisions regarding such a product and will continue to evaluate this
recommendation.
The Committee adjourned at 12:00 p.m. for lunch.
The Committee reconvened at 1:45 p.m. and briefly discussed several market developments,
including recent changes in relative pricing of Treasuries versus swaps, futures, and other asset
classes. It was suggested by some members of the Committee that Treasury further study the
drivers of these pricing relationships.
The Committee adjourned at 2:15 p.m.
The Committee reconvened at the Department of the Treasury at 4:30 p.m. All Committee
members were present. The Chair presented the Committee report to Deputy Secretary
Muzinich. A brief discussion followed the Chair’s presentation, but did not raise significant
questions regarding the report’s content.
The Committee adjourned at 5:20 p.m.

_____________________________
Brian Smith
Deputy Assistant Secretary for Federal Finance
United States Department of the Treasury
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Minutes of the Meeting of the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association July …

July 30, 2019

Certified by:

_________________________________
Elizabeth Hammack, Chair
Treasury Borrowing Advisory Committee
Of The Securities Industry and Financial Markets Association
July 30, 2019
_________________________________
Daniel Dufresne, Vice Chair
Treasury Borrowing Advisory Committee
Of The Securities Industry and Financial Markets Association
July 30, 2019

TREASURY BORROWING ADVISORY COMMITTEE
QUARTERLY MEETING
COMMITTEE CHARGE – JULY 30, 2019
Fiscal Outlook
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Minutes of the Meeting of the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association July …

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?

Potential 1-Year Final Maturity Treasury FRN
Treasury is actively evaluating the potential introduction of a 1-year final maturity FRN.
Treasury is interested in a comparison of a hypothetical introduction of 1-year SOFR FRN or 1year T-bill FRN, and an increase in 1-year T-bill issuance. Please evaluate how investor demand
might vary across these products. Additionally, because any such change would be undertaken
as part of Treasury’s regular and predictable issuance strategy, please estimate the relative
interest cost and risk to Treasury across the interest rate cycle of these three potential product
choices.

Financing this Quarter
We would like the Committee’s advice on the following:
• The composition of Treasury notes and bonds to refund approximately $57.3 billion of
privately-held notes maturing on August 15, 2019.
• The composition of Treasury marketable financing for the remainder of the July-September
2019 quarter, including cash management bills.
• The composition of Treasury marketable financing for the October-December 2019 quarter,
including cash management bills.

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