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5/5/2020 Report to the Secretary of the Treasury from the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets … U.S. DEPARTMENT OF THE TREASURY Press Center Report to the Secretary of the Treasury from the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association 11/4/2015 November 3, 2015 Le er to the Secretary Dear Mr. Secretary: Since the Commi ee last met in early August, the economy has con nued to expand at a moderate pace. Although the real GDP growth rate slowed from 3.9% in the second quarter to 1.5% in the third quarter, most of that decrease was due to a transitory downshi of inventory accumula on. Final demand expanded at a more-robust 3.0% rate, underpinned by con nued solid growth in consumer spending. The pace of hiring slowed in August and September, par cularly among export-oriented industries. Following a period of heightened vola lity beginning in mid-August---due to concerns around growth in China, the devalua on of the renminbi, and broader stress in emerging economies---financial markets have rebounded of late. Fiscal policy has gained some certainty, as Congress recently reached a two-year budget deal and suspended the debt ceiling through March 2017. In its October statement, the Federal Reserve signaled that it is considering raising interest rates in December, should economic data over the next few weeks suggest the outlook is conducive to the a ainment of its targets. Consumer spending has been the locomo ve for the economy in recent quarters, supported by an accelera on of disposable personal income aided in large part by falling gasoline prices. Real consump on increased 3.2% in the third quarter and has increased at over a 3% annual rate in five out of the last six quarters. Even so, over the past five quarters the savings rate has remained above 4.6% and even increased a touch above that during the third quarter. A notable area of strong consumer spending growth has been in health care, which has seen a 4.7% increase in real outlays over the past year. Consumer confidence remains close to post-crisis highs. Business fixed investment spending increased at a modest 2.1% annualized rate last quarter; outside of the energy sector, investment outlays grew at a more respectable 5.1% rate. Weekly data on oil rigs indicate the oil and gas industry will present less of a drag on overall capital spending growth in the current quarter. Business inventory investment was unsustainably robust in the first half of the year, as firms found themselves overstocked a er disappoin ng demand growth in the first quarter. The decelera on in inventory accumula on last quarter subtracted 1.4 percentage points from GDP growth. It appears that this realignment of produc on and demand is nearing comple on, and manufacturing surveys have recently shown some green shoots a er a slow start to the year. Overall, business fixed investment is expected to remain strong over the next few quarters. Housing indicators have generally been strengthening. Most house price measures show steady growth at around a 5% annual rate and con nue to reach post-crisis highs. In addi on, the most recent homebuilders sen ment index stands at a 10-year high. Housing starts have increased substan ally, driven by mul -family construc on growth, while single-family construc on growth is posi ve but modera ng. Rising household forma ons and strong affordability measures are expected to support future growth. The forward-looking pending home sales index, however, has indicated some modera on in housing demand. Real government spending expanded at a 1.7% annualized rate during the third quarter, primarily due to state and local government spending, and contras ng with the contrac on that prevailed from 2010 to 2014. Looking ahead, Congress and the White House recently agreed to a budget that modestly increases federal spending over the next two years. Equally important, the debt ceiling was suspended through March 2017, removing a source of uncertainty lingering over the outlook. A er a large drag in the first quarter, foreign trade has been basically neutral for growth in the second and third quarters. While concerns about Chinese growth con nue to cloud the global outlook, export and industrial produc on data from several other Asian emerging market economies suggest a turn in the technology product cycle is suppor ng somewhat firmer global growth. In tradeweighted terms, the dollar has been rela vely stable over the past three months, providing some respite for US manufacturers. A er averaging 245,000 job gains per month over the prior twelve months, employers increased headcount by only 139,000 per month, on average, in August and September. Much of the slowing occurred in manufacturing and other export-oriented industries. Even with the downshi in job crea on, labor market slack con nues to narrow, as the unemployment rate fell from 5.3% in July to 5.1% in September. Compensa on growth remains subdued; the Employment Cost Index rose 2.0% in the year ending in the third quarter, and most other wage measures show a similarly tepid pace of gains. With moderate wage gains and import prices con nuing to decline, underlying infla on pressures remain muted. Headline infla on measures were depressed by a renewed decline in energy prices. The ex-food and energy core personal consump on expenditure (PCE) deflator rose 1.3% during the year ending in September, consistent with the year-over-year growth rates of the past several months. A waning of the transitory restraints of lower energy and import prices should put some upward pressure on core infla on in coming months. However, infla on expecta ons – based on market and survey measures – remain low. A er sending a very dovish message at the September FOMC mee ng, the FOMC turned more hawkish in its October statement. The Commi ee dropped the reference to global economic and financial developments restraining domes c growth and infla on. Moreover, the statement indicated that the FOMC will consider a target federal funds rate rise at its next mee ng in December, should economic condi ons con nue to move in the direc on of the Fed’s labor and infla on targets. A er the statement, the federal funds’ futures markets priced in an increased probability of a December rate increase, though incoming data will figure prominently in shi ing market expecta ons. Against this economic backdrop, the Commi ee’s first charge was to review Treasury’s November 2015 Quarterly Refunding Presenta on to the TBAC. As indicated in the a ached presenta on, Treasury, due to the debt ceiling, is currently opera ng below the recommended $150 billion minimum daily cash balance that was established in May 2015. Treasury plans to increase Tbill issuance significantly, by increasing the size of the 4-week, 3-month and 6-month auc ons and through cash management bill issuance. Based on the current auc on schedule, Treasury is projected to increase new bill issuance by $186 billion by the end of December 2015 and to increase its forecasted end-of-quarter cash balance to $344 billion. Given the high demand for Tbills due to money market reform and regulatory changes, the Commi ee believes increased Tbill issuance will both enhance market func oning and help the Treasury achieve low cost funding. In addi on, the Commi ee discussed Treasury’s 2016 financing projec ons. Assuming the Federal Reserve reinvests its SOMA por olio, Treasury will be underfunded by $68 billion if it maintains its current auc on schedule. The Commi ee discussed the benefits of increased Tbill issuance to enhance short-term market func oning, recommending an increase above the projected shor all. Therefore, the Commi ee recommended that the Treasury consider a moderate reduc on in coupon issuance in coming quarters, assuming revenues and outlays remain as projected. https://www.treasury.gov/press-center/press-releases/Pages/jl0248.aspx 1/2 5/5/2020 Report to the Secretary of the Treasury from the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets … As a follow-up to the Commi ee’s May request and in light of the expected shi of assets from prime to Treasury money market funds, Treasury provided an ini al assessment of poten al introduc on of 2- month bills to distribute Tbill issuance across more maturi es and to address increased projected demand for Tbills due to market structure changes and money market reform. Treasury staff asked for the Commi ee’s feedback regarding se lements, opera onal considera ons, issuance frequency, size, and maturity cycle. The Commi ee agreed that the 2-month Tbill was worth exploring further, par cularly with money market fund managers. One member noted that money market demand has displayed seasonal pa erns and that demand may be more centered in maturi es of one month and shorter. The Commi ee recommended that Treasury also consider the poten al benefit of 2-week Tbills. The Commi ee’s next charge was to consider the prac cality and poten al considera ons of applying an asset-liability management framework (“ALM”) to Treasury’s debt issuance strategy. If deemed prac cal, the Commi ee was tasked to consider approaches to minimize cost and op mize net new issuance to finance various assets, including student loans. ALM is the prac ce of managing an organiza on such that decisions with respect to assets and liabili es are coordinated in an effort to achieve its financial objec ves within its given risk tolerance. The US sovereign presents a unique set of ALM modeling challenges given the complexity of balance sheet components and the interconnec on but independence of fiscal, monetary and debt management func ons. One member noted that a large-scale applica on of ALM would require some agreement on the importance of mi ga ng roll-over risk. One member suggested that one set of assets that may be appropriate for an ALM debt issuance framework is Treasury’s $1.2 trillion student loan por olio. However, given the inherent cash flow uncertainty, future policy risk, and the rela vely small size of the student loan debt, the Commi ee recommended that Treasury con nue to monitor this por olio, rather than employ a specific asset-liability framework to one set of assets. Respec ully, _______________________________ Dana M. Emery Chairman ________________________________ Cur s Y. Arledge Vice Chairman TBAC Recommended Financing Table Q4 2015 and TBAC Recommended Financing Table Q1 2016 https://www.treasury.gov/press-center/press-releases/Pages/jl0248.aspx 2/2
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