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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 Octo…

Minutes of the Meeting of the Treasury Borrowing Advisory
Committee of the Securities Industry and Financial Markets
Association October 30
October 31, 2018

The Committee convened in a closed session at the Hay-Adams Hotel at 9:00 a.m. All members,
with the exception of Terrence Belton and Irene Tse, 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
Bandeh-Ahmadi, Chris Cameron, Dave Chung, Tom Katzenbach, Devin O’Malley, Peter Phelan,
Renee Tang, and Brandon Taylor. Federal Reserve Bank of New York sta members Lorie Logan,
Nathaniel Wuer el, Susan McLaughlin and Jake Schurmeier were also present.
Director Pietrangeli opened the meeting with an overview of the fiscal situation. Pietrangeli
noted that FY2018 receipts were little changed year-over-year, rising just $14 billion. Nonwithheld income and SECA taxes increased by $89 billion in FY2018, with the bulk of the
increase occurring in April for CY2017 tax liabilities. Withheld income and FICA taxes rose by $23
billion, reflecting growth in both employment and wages. The gains were largely o set by a $76
billion decrease in corporate taxes, a 22 percent decline year-over-year. Corporate refunds also
increased by $17 billion, a 39 percent increase year-over-year. Outlays totaled $4,108 billion over
the same timeframe, an increase of five percent. Notable increases include $83 billion for
Treasury related to interest on the public debt and a decline in receipts from GovernmentSponsored Enterprises, $43 billion for increased enrollment and increased average benefit
payments for Social Security, $41 billion for Health and Human Services due mostly to increases
in Medicare, $36 billion due to increased Defense expenditures, and $18 billion for the
Department of Homeland Security including increased payments for disaster relief.
Pietrangeli then turned to the near-term fiscal outlook, highlighting the most recent annual
marketable borrowing estimates from the O ice of Management and Budget, the Congressional
Budget O ice, and the primary dealers. All of the forecasts indicate a substantial funding gap in
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Minutes of the Meeting of the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association Octo…

FY2019 and subsequent years. Estimates regarding the timing of the end of SOMA Treasury
portfolio redemptions is a key factor for primary dealers in forecasting borrowing amounts over
the next three fiscal years. Turning to the prior quarter, Pietrangeli noted that in the July- toSeptember quarter, Treasury was able to address its significant funding needs, some of which
was seasonal, through coupon auction increases announced in FY2018, as well as through net
bill issuance of $82 billion. Looking ahead, the recently announced privately-held net
marketable borrowing estimates of $425 billion for the October-to-December 2018 quarter and
assuming an end-of-December cash balance of $410 billion, indicates net bill issuance of $116
billion assuming coupon sizes are held constant at August 2018 levels.
Next, Deputy Assistant Secretary Smith discussed the introduction of the new benchmark twomonth bill. Smith noted that the auctions have been well received, with above average bid-tocover ratios and stop-out rates in line with the yield curve.
Smith then summarized for the Committee the feedback from primary dealers in response to
the recent quarterly refunding agenda discussion topics. On the topic of the Treasury Market
Practices Group’s (TMPG) White Paper on Clearing and Settlement, primary dealers generally
agreed that the paper represented a thorough study of the topic and outlined a number of
potential risks to the clearing and settlement process. Primary dealers focused on the volume of
bilaterally cleared trading and intraday credit extension. Primary dealers suggested a number of
policy recommendations for consideration, including expanding the use of central clearing,
evaluating margins for bilateral trading, changing settlement timing, and increasing
transparency regarding counterparties’ clearing and settlement practices. Smith strongly
endorsed the TMPG’s work in this area and reiterated Treasury’s commitment to supporting the
robustness of clearing and settlement practices in the Treasury market.
Next, Smith summarized primary dealer feedback on the likely timing for the end of SOMA’s
balance sheet normalization and the composition of Treasury securities in the SOMA portfolio
a er normalization. Primary dealers provided a range of estimates for the most likely timing of
the end of normalization, while relaying that their estimates were subject to a substantial
amount of uncertainty. Once normalization ends, dealers expect the Federal Reserve will
reinvest SOMA mortgage-backed security principal payments into Treasury securities along with
the purchases of Treasury securities necessary to o set currency growth. Finally, many dealers
indicated the Federal Reserve would likely pursue a roughly market-weighted portfolio
composition a er normalization, though the balance of risks was seen as skewed toward a
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Minutes of the Meeting of the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association Octo…

shorter-duration portfolio. The Committee agreed that the outlook is uncertain and that
Treasury should continue to monitor expectations for the end of SOMA portfolio normalization
closely to assess the potential impact to the financing outlook.
Counselor Phillips then provided an update on Treasury’s e orts regarding secondary market
transaction data for Treasury securities collected through FINRA’s TRACE. Phillips noted that the
initial outreach phase with market participants had concluded and that Treasury was
continuing to analyze the data to inform the policy decision-making process. Phillips noted that
no decision has been made at this time and that Treasury plans to provide further details on this
topic at the 4th Annual Conference on the Evolving Structure of the U.S. Treasury Market on
December 3rd.
Next, the Committee turned to a presentation updating the TBAC debt issuance model to
incorporate Treasury Inflation-Protected Securities (TIPS). The presenting member emphasized
that the modeling results do not constitute a specific recommendation but rather provide an
approach to analyze cost and risk trade-o s under various assumptions. According to the
model, debt service costs for TIPS are typically lower but more volatile than that of equivalent
maturity nominal securities. Furthermore, similar to the nominal model, five-year TIPS o er a
cost advantage over longer-maturity issuance. The Committee followed the presentation with a
discussion, generally agreeing that the conclusions were in line with their previous
recommendations to gradually increase TIPS issuance to maintain the current proportion of
TIPS relative to nominals, focusing increases in the 5-year maturity.
Deputy Director Steele then discussed primary dealers’ expectations for issuance over the next
quarter. Dealers broadly expected an increase in coupons similar to those announced in August,
with a risk towards slightly smaller increases. Most dealers also expected Treasury to announce
the new October 5-year TIPS maturity and remove the October 30-year TIPS reopening in the
2019 issuance calendar, while maintaining the overall share of TIPS issuance near its recent
levels through gradual increases in auction sizes. The Committee concurred that increased TIPS
issuance would be well received and estimated that a range of $20 to $30 billion in additional
TIPS issuance in 2019 would maintain TIPS share of outstanding debt around current levels. The
Committee also agreed that additional issuance should be focused at the 5-year maturity,
facilitated by the introduction of a new October 5-year TIPS in line with option 1 presented in
the July primary dealer agenda
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Minutes of the Meeting of the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association Octo…

Following the TIPS discussion, the Committee turned to a discussion around financing for the
upcoming quarter. The Committee agreed that the same pattern of coupon issuance as
announced by Treasury at the August quarterly refunding would be appropriate. However, the
Committee noted that the pace of future coupon increases is expected to slow notably over the
remainder of FY2019.
The Committee then turned to a charge regarding the transition away from LIBOR and toward
the Secured Overnight Financing Rate (SOFR). The presenting member described the significant
progress already made and the steps to follow in the market’s transition. The presenting
member then outlined the risks and benefits of transitioning to SOFR-linked instruments,
focusing on the asset-liability implications of the two rates.
Next, the Chair presented the Committee report to Secretary Mnuchin. A brief discussion
followed the Chair’s presentation, but did not raise significant questions regarding the report’s
content.
The Committee adjourned at 12:30 p.m. for lunch.
The Committee reconvened at 1:30 p.m. to continue the discussion about the transition from
LIBOR to SOFR. Members noted that transition plans were already underway at most firms but
that the timeline could still prove challenging. The Committee noted the importance that the
burgeoning market for SOFR linked issuance plays in the transition and concluded that Treasury
should further study this market.
The Committee adjourned at 2:30 p.m.
The Committee reconvened at the Department of the Treasury at 4:30 p.m. All Committee
members, with the exception of Terrence Belton, Irene Tse, Mike Lillard and Christine
Hurtsellers, were present. The Chair presented the Committee report to senior Treasury
o icials. 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.

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

_____________________________
Brian Smith
Deputy Assistant Secretary for Federal Finance
United States Department of the Treasury
October 30, 2018

Certified by:

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

Elizabeth Hammack, Chairman
Treasury Borrowing Advisory Committee
Of The Securities Industry and Financial Markets Association
October 30, 2018
_________________________________
Daniel Dufresne, Vice Chairman
Treasury Borrowing Advisory Committee
Of The Securities Industry and Financial Markets Association
October 30, 2018

Treasury Borrowing Advisory Committee Quarterly
Meeting
Committee Charge – October 30, 2018
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Minutes of the Meeting of the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association Octo…

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?

AN UPDATE ON THE TBAC ISSUANCE MODEL –
INCORPORATING TIPS
Please provide an update on e orts the Committee is making with regard to the development of
issuance models, including any updated analysis or results and any revisions to or extensions of
the modeling work that was presented in October 2017, particularly the incorporation of TIPS
into the model. Comment on the degree to which the updated modeling e orts can be used by
Treasury as one input to help to inform potential its decisions regarding nominal coupon and
TIPS issuance.

TRANSITION FROM LIBOR TOWARD THE SECURED
OVERNIGHT FINANCING RATE (SOFR)
Please comment on developments regarding the transition away from LIBOR and toward the
Secured Overnight Financing Rate (SOFR). How should market participants evaluate the risks of
continued use of financial instruments linked to LIBOR? Summarize developments in SOFR
derivative markets, the introduction of SOFR-linked issuance, and your expectations going
forward.

FINANCING THIS QUARTER
We would like the Committee’s advice on the following:
• The composition of Treasury notes and bonds to refund approximately $54.3 billion of
privately-held notes maturing on November 15, 2018.
• The composition of Treasury marketable financing for the remainder of the October-December
2018 quarter, including cash management bills.
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Minutes of the Meeting of the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association Octo…

• The composition of Treasury marketable financing for the January-March 2019 quarter,
including cash management bills.

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