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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 April …

Minutes of the Meeting of the Treasury Borrowing Advisory
Committee of the Securities Industry and Financial Markets
Association April 30
May 1, 2019

The Treasury Borrowing Advisory Committee (TBAC) convened in a closed session at the HayAdams Hotel at 9:30 a.m. All members were present. Counselor to the Secretary Craig Phillips,
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 BandehAhmadi, Chris Cameron, Dave Chung, Travis Daugherty, Courtney Demartini, Tom Katzenbach,
Peter Phelan, Renee Tang, and Brandon Taylor. Federal Reserve Bank of New York sta members
Susan McLaughlin, Jake Schurmeier, and Scott Sherman were also present.
Director Pietrangeli began with an overview of the fiscal situation. Pietrangeli noted that during
the first half of FY2019 receipts were up $10 billion relative to the comparable period last year.
Increases in customs duties, as well as social insurance and excise taxes, were mostly o set by
declines in individual and corporate taxes. A er calendar adjustments, FY2019 year-to-date
outlays were $98 billion higher than the comparable period last year.
Pietrangeli noted that, in response to seasonal borrowing needs during the January-March 2019
quarter, net issuance of Treasury bills increased by $140 billion. Turning to the April-June 2019
quarter, Pietrangeli noted that the current borrowing estimate is $30 billion with an end-of-June
cash balance of $270 billion. These borrowing estimates, combined with the net coupon
issuance at current levels, imply a nearly $240 billion bill pay-down over the quarter. To date,
over the April-June quarter, Treasury has paid down roughly $100 billion in bills.
Next, Pietrangeli turned to the near-term fiscal outlook by referencing the most recent annual
marketable borrowing estimates from the O ice of Management and Budget, the Congressional
Budget O ice, and the primary dealers. He highlighted that Treasury is currently well funded,
but that significant funding gaps are projected starting in FY2021.
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Minutes of the Meeting of the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association April …

Pietrangeli next provided a brief overview of potential implications for Treasury issuance from
the Federal Reserve’s March 2019 updates to its balance sheet normalization plans, which
include ending capped redemptions of the System Open Market Account (SOMA) portfolio at the
end of September 2019. He also provided estimates of the e ect of Agency Debt and MBS
reinvestments into Treasury securities. Finally, he noted that despite potential reductions in
projected privately-held net marketable borrowing needs resulting from these changes, a
meaningful financing gap is still expected by FY 2021. Committee members noted that some
uncertainty remains regard¬ing the Federal Reserve’s balance sheet policy, particularly with
regard to the resumption of balance sheet growth and the composition of the SOMA portfolio;
these factors will be an important consideration for Treasury issuance decisions going forward.
Pietrangeli next reviewed recent trends in foreign holdings of Treasury securities. He noted that
foreign participation in auctions remains in line with historical levels and the amount of foreign
holdings has remained steady or has increased gradually since 2014, even as borrowing needs
have grown substantially. He concluded that domestic buyers have increasingly absorbed the
larger debt issuance since 2014.
Deputy Assistant Secretary Smith then summarized recent feedback from primary dealers.
Primary dealers noted that Treasury is well positioned to meet financing needs for the
remainder of FY2019. Nearly all primary dealers recommended holding nominal coupon
issuance sizes steady at this refunding. For the rest of the calendar year, some primary dealers
suggested coupon sizes should remain constant, while others projected temporary cuts,
especially in 2- and 3-year note sizes. Nevertheless, primary dealers broadly agreed that by 2021
coupon sizes will need to increase given projected deficits.
There was brief discussion by the Committee about several primary dealers’ expectation that
Treasury may reduce coupon sizes in light of the TBAC’s prior recommendation that bills
constitute one-quarter to one-third of issuance. The Committee agreed that their
recommendation was intended to be an average over time, and that Treasury should manage
short-term or unexpected changes in financing needs through bill issuance, rather than changes
to coupon sizes.
Next, Smith summarized primary dealer feedback on the expected timing for the Federal
Reserve to resume growing its balance sheet, the long-run composition of its assets, and the
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Minutes of the Meeting of the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association April …

transition from the current portfolio. Primary dealers provided a range of estimates for the
timing of balance sheet growth, with a median in the third calendar quarter of 2020. Nearly all
primary dealers indicated that the Federal Reserve would likely move towards a SOMA portfolio
that holds primarily Treasury securities in the long run, and that the maturity profile of its
Treasury holdings would be somewhat shorter than it is currently. A little more than half of the
primary dealers expected the SOMA portfolio to roughly match Treasury’s debt profile, while
others expected the SOMA portfolio to be skewed to shorter duration, with some variation on
the expected composition of such a portfolio. Finally, most primary dealers expect any shi in
SOMA holdings to be very gradual.
Next, there was a brief discussion related the Treasury Market Practices Group’s (TMPG) recent
announcement seeking comments on updates to its Best Practices for Treasury, Agency Debt,
and Agency Mortgage-Backed Securities Markets to incorporate recommendations supporting
e icient clearing and settlement in these markets. The presenting member gave a brief
overview of the updates, emphasizing that several clearing and settlement issues are outside
the scope of the TMPG’s best practices and the TMPG believes a further review by public- and
private-sector stakeholders other than the TMPG could be warranted.
Next, Debt Manager Taylor provided a summary of primary dealer feedback related to
secondary market Treasury securities transaction data collected by the Financial Industry
Regulatory Authority (FINRA) through its Trade Reporting and Compliance Engine (TRACE). He
reminded the Committee that the data is currently provided only to the o icial sector, and that
a potential policy for public dissemination is still being evaluated. At this time, Treasury is
seeking further information on the reporting process and the possibility for data enhancements.
Taylor noted that feedback from primary dealers about their experience reporting to TRACE was
broadly positive. When asked about potential data collection improvements to improve o icial
sector understanding, including a reduction in the reporting delay, identification of execution
method (for example whether trades are conducted electronically or through traditional voice
channels), and additional trade-type identifiers based on whether a trade is linked to another
instrument, primary dealers indicated that such enhancements were generally feasible given
su icient implementation time. Taylor concluded by stating that Treasury will further evaluate
the feedback and continue to work with other o icial sector agencies and FINRA to evaluate
ways to improve the TRACE data.

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

Shi ing to a discussion of the Treasury Inflation-Protection Securities (TIPS) program, Deputy
Director Steele began with an overview of the TIPS program, which currently represents around
9 percent of overall Treasury marketable borrowing outstanding. Steele highlighted general
dynamics in the TIPS market, including trading volumes across tenors and auction
participation. Next, he discussed the ongoing implementation of TIPS program enhancements,
including the modification to the TIPS auction calendar to accommodate the new original 5year TIPS in October.
The Committee then reviewed its financing recommendations. The Committee agreed that
Treasury is well-suited to meet its financing needs in FY2019 given its current financing
schedule. As a result, the Committee recommended that Treasury leave nominal coupon
auction sizes unchanged for the coming quarter. In addition, the Committee agreed that
Treasury should continue to increase TIPS sizes in 2019 in conjunction with announced calendar
changes, including a $1 billion increase to the June 5-year TIPS reopening, a $1 billion increase
to the next 10-year TIPS new issue in July, applicable to subsequent reopenings, and a $2 billion
increase to the 30-year TIPS reopening in August.
Next, Debt Manager Katzenbach reviewed preliminary feedback from market participants about
the potential for a new Treasury product indexed to the Secured Overnight Financing Rate
(SOFR). Treasury’s market outreach has focused on how a SOFR-linked product may a ect
Treasury’s funding costs and whether it would diversify Treasury’s investor base. Feedback on
these topics was diverse among the wide range of participants Treasury has spoken to so far.
Market participants noted that Treasury issuance of a SOFR-linked product would likely promote
market adoption and support the transition from LIBOR to SOFR. In addition, a number of
market participants appeared to agree that irrespective of whether the index is Treasury bills or
SOFR, Treasury should explore introducing a floating rate instrument with a one-year final
maturity. Katzenbach noted that Treasury will continue to study these topics and has not
reached any definitive conclusions at this stage.
The Committee followed with a presentation on the potential market pricing of a SOFR FRN. The
presenting member reviewed pricing estimates, which suggest that it would not cost Treasury
more to issue a SOFR FRN than to issue an FRN linked to the 3-month Treasury bill. While
demand from 2a-7 government–only money funds for a SOFR-linked product would likely be
robust, the Committee noted that further study of potential demand and supply dynamics was
warranted. In addition, several Committee members raised questions about the potential
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Minutes of the Meeting of the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association April …

structure of a SOFR-linked product. The Committee also recognized the importance of clear
communication to the market regarding how a potential SOFR FRN would fit into Treasury’s
existing suite of securities. Overall, the Committee was encouraged by preliminary analysis
suggesting that a SOFR FRN may be attractive from a taxpayer perspective and agreed on the
importance of additional study into several remaining questions. Moreover, the Committee
expressed its view that Treasury should play a prominent role in supporting the development of
the SOFR market, on the assumption that doing so would not increase debt service costs.
Next the Committee turned to a presentation on the optimal funding mix of fixed versus floating
rate securities (considered to include both bills and FRNs by the presenting member). The
presenting member began by noting that FRNs are attractive to a broad set of investors and
allow Treasury to diversify its investor base. Next, the presenting member provided an overview
of enhancements to the Committee’s debt optimization model to evaluate FRNs and introduced
a measure of rollover risk. The presenting member’s initial analysis suggests a favorable risk and
return trade-o from reducing the allocation of floating rate debt and increasing the allocation
of short to intermediate term fixed-rate debt, though important assumptions and limitations to
the analysis were noted. In addition, the presenting member showed that the weight given to
bills versus FRNs within the floating rate allocation depends on the tolerance for rollover risk.
The Committee adjourned at 12:30 p.m. for lunch.
The Committee reconvened at 1:45 p.m.
The Committee continued its discussion on the optimal mix of fixed versus floating rate debt,
remarking that the improvements to the debt optimization model are helpful in informing
recommendations. Finally, the presenting member noted the benefits of the rollover risk metric
compared to weighted-average maturity.
The Committee adjourned at 2:45 p.m.

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

_____________________________
Brian Smith
Deputy Assistant Secretary for Federal Finance
United States Department of the Treasury
April 30, 2019

Certified by:

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

TREASURY BORROWING ADVISORY COMMITTEE
QUARTERLY MEETING
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Minutes of the Meeting of the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association April …

COMMITTEE CHARGE – APRIL 30, 2019
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 to Treasury’s
coupon auctions do you recommend at this time, if any?

SOFR-linked Issuance
Treasury continues to evaluate the possibility of issuing floating rate notes tied to SOFR; one
important component of this evaluation pertains to market pricing. How should Treasury
model expected interest costs for potential SOFR-linked issuance? How has existing SOFRlinked issuance by other issuers priced compared to expected ‘fair value’? What factors have
a ected pricing of existing issuance and what factors do you expect to be most important going
forward? Are there any lessons regarding product structure that Treasury can draw from SOFRlinked issuance to-date?

Fixed versus Floating Rate Treasury Securities
Please comment on the optimal funding mix of fixed versus floating rate securities, including
the primary relevant factors for Treasury to consider.

Financing this Quarter
We would like the Committee’s advice on the following:
• The composition of Treasury notes and bonds to refund approximately $55.4 billion of
privately-held notes maturing on May 15, 2019.
• The composition of Treasury marketable financing for the remainder of the April-June 2019
quarter, including cash management bills.
• The composition of Treasury marketable financing for the July-September 2019 quarter,
including cash management bills.

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Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102