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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 5/6/2015 May 5, 2015 Le er to the Secretary Dear Mr. Secretary: Since the Commi ee last met in early February, U.S. economic growth has slowed no ceably. Real GDP growth in the fourth quarter of 2014 was revised downward to 2.2% in annualized terms, while growth in the first quarter of 2015 declined to a meager 0.2%. Various factors lie behind this decelera on, some of which are expected to be temporary, including unseasonably harsh winter weather, a sharp contrac on in oil drilling ac vity, and strikes that snarled opera ons at West Coast ports. Consumer spending slowed meaningfully, even as disposable income strengthened. Fixed investment declined, affected by a sharp contrac on in nonresiden al investment, while residen al investment decelerated. Net exports contributed nega vely to growth, but this was par ally offset by rising inventory accumula on. Contrary to what these na onal account measures reflect, survey measures of ac vity remained firm, with confidence measures reaching pre-crisis highs. In turn, job gains remained solid, despite a large disappointment in the March report. Even so, economic ac vity is generally expected to accelerate in the second quarter to a pace at or above trend growth; sen ment measures remain elevated and financial condi ons are broadly accommoda ve. Early April ac vity data such as monthly auto sales and weekly jobless claims are consistent with this benign outlook. These growth dynamics were a result of both domes c and global factors. As in the first quarter of last year, part of the weakness in ac vity can be a ributed to harsh winter condi ons. In turn, the impact from declining oil prices led to a sizeable increase in disposable income, but the stabiliza on and even slight increase of oil prices during the quarter may have curtailed households’ propensity to spend. The decline in oil prices also led to sharp cuts in drilling ac vity and energy investment. Equity markets rose to historic highs, while long-term yields oscillated during the quarter, as markets took signs from policy statements by the Federal Reserve and the expansion of the ECB’s asset purchase program. The upward trend in the dollar con nued, affec ng net exports and certain corporate earnings. Within the main contributors to GDP growth, real consumer spending slowed no ceably, from an annualized rate of 4.4% in the fourth quarter of 2014, to 1.9% in the first quarter of 2015. This contrasted with growth in real disposable income, which accelerated from 3.6% to 6.2% over the same period. As a result, the personal saving rate increased to 5.5% of disposable income, as households scaled back from spending the windfall from the earlier decline in energy prices. Unusually severe weather in the Northeast may have also curtailed spending. However, consumer confidence rose to historic highs during the quarter, buoyed by gains in the labor market. Total fixed investment contracted sharply, from a posi ve growth rate of 4.5% in the 4th quarter 2014 to a nega ve 2.5% in the first quarter. The contrac on came from the nonresiden al side, with a sharp fall in its structures component and almost zero growth in its equipment component. Spending cuts in oil explora on and drilling subtracted 0.5 percentage points from GDP growth. As an cipated early this year, capital spending in the oil and gas sectors was poised to adjust downward in the face of lower energy prices. It is therefore no surprise that the energy sector has become a major drag. As this adjustment unfolds, it is likely that business fixed investment remains subdued, even as residen al investment picks up. The housing market is s ll showing mixed signals. Growth in residen al fixed investment slowed from 3.8% in the previous quarter to 1.3% in the first quarter. Housing starts decelerated from last year’s peak at 1.06 million to about 0.97 million in the first quarter. Sales of new single-family homes reached a post-crisis peak during the quarter, but sales of exis ng homes stalled. Household forma on also decelerated from its recent peak of 2.0 million late last year to 1.5 million in March. Home price indicators con nued to strengthen, at least through the beginning of the quarter. Although mortgage spreads are ght, they are expected to ghten moderately further in the next few quarters. As credit standards remain ght, residen al ac vity is not expected to pick up meaningfully in the near term. On the side of government spending, federal outlays expanded by 0.3%¾a moderate expansion but considerably higher than the 7.3% contrac on in the previous quarter. However, state and local government spending contracted by 1.5% in the first quarter. S ll, the government sector con nues to exhibit steady and posi ve growth rates on a year-to-year basis, with the state and local category having now accelerated for eight consecu ve quarters. From the external accounts perspec ve, exports declined sharply¾by 7.2% in annualized terms during the first quarter, compared to a posi ve increase by 4.5% in the previous quarter. In turn, imports decelerated to 1.8% from 10.4% over the same period. In seasonally-adjusted dollar terms, net exports reached -$538bn in the first quarter, compared to -$549bn in the previous quarter. These figures may have been partly distorted by strikes at West Coast ports. More importantly, these dynamics have and will con nue to reflect the evolu on of the trade-weighted dollar¾whose strengthening has recently moderated but could resume over the next few quarters as growth, infla on and interest rate differen als favor the U.S. In addi on, other advanced economies are facing idiosyncra c challenges, like the Greek debt situa on in the Euro area, the con nua on of Abenomics in Japan, and the electoral process in the U.K. The labor market con nued to make gains during the first quarter, with the unemployment rate declining to 5.5% in March, and the par cipa on rate remaining stable at around 62.8% for the quarter. Non-farm payrolls disappointed in March, but the seasonally-adjusted change s ll averaged 197 thousand per month over the first quarter. The employment cost index rose by 0.7% during the quarter, reflec ng similar increases in its wages and salaries component and its benefits component. Overall, wages con nue to grow slowly, but increases in low-end wages by a few large corpora ons and broader labor market gains should provide some support overt the coming months. On the infla on front, prices weakened even further during the first quarter. Headline personal consump on expenditure (PCE) infla on declined to 0.3% year-over-year, considerably lower than the previous quarter’s 1.1% and the lowest level since 2009. But the decline was mostly due to the fall in energy prices, as the core measure¾which excludes food and energy components¾declined only slightly, to 1.3% compared to 1.4% in the previous quarter. Going forward, the narrowing of economic slack and the eventual fading of the impact from lower energy prices are likely to put upward pressure on prices, even as a resump on of the strengthening of the dollar would point in the opposite direc on. Since the Commi ee last met in early February, there have been two FOMC mee ngs. The March mee ng confirmed a rela vely dovish stance. Although the FOMC removed the “pa ent” element in its forward guidance, it stated that it would hike interest rates “when it has seen further improvement in the labor market and is reasonably confident that infla on will move back to its 2 percent objec ve over the medium term.” In addi on, the median projec ons for the federal funds rate fell 50bp to 0.625% at end-2015, consistent with two rather than three 25bp hikes occurring in 2015. The statement from the April mee ng did not include any meaningful policy changes. Instead, a en on centered on its acknowledgment that economic growth had decelerated, partly reflec ng what the Commi ee characterized as “transitory factors.” https://www.treasury.gov/press-center/press-releases/Pages/jl10044.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 … Against this economic backdrop, the Commi ee’s first charge was to clarify and reaffirm the Treasury’s mul ple objec ves and to discuss the general framework used to determine the Treasury’s op mal debt issuance strategy over me. To aid in this discussion, Treasury staff presented the a ached report en tled “Treasury Debt Management Strategy” to the Commi ee. Since 2009, given the historically low level of rates and significant debt financing needs, Treasury issued a larger propor on of longer maturity debt and extended the weighted-average maturity (WAM) of the debt from 48 months to 69 months. However, op mal debt management includes a range of priori es that go beyond a simple WAM measure. Indeed, as the TBAC discussed at its February mee ng, WAM is too blunt a metric to be used alone. Other priori es for debt issuance include funding at the least expected cost to the taxpayer over me, suppor ng smooth market func oning, minimizing exposure to shi s in interest expense, providing a risk-free benchmark rate across a full range of maturi es and lowering rollover risk by issuing longer term debt. In addi on, given the significant amount of debt that must be issued to finance the deficit and to roll maturing debt, the Commi ee reaffirmed the need to be regular and predictable in debt issuance and to make gradual changes to debt issuance pa erns as warranted by the above stated objec ves. A March survey of primary dealers regarding their assessment of how quickly, and to what degree, the Treasury could adjust auc on sizes without incurring significant pricing concessions indicated that there is room to adjust auc on sizes gradually and s ll maintain market liquidity. Please see the below link to the dealer survey on the Treasury website. In addi on, the Commi ee affirmed that smooth market func oning is crucial to minimizing the cost of debt issuance over me. To that end, the Commi ee discussed the merits of increasing the amount of Treasury bills (Tbills) outstanding to aid the proper func oning of the short-term debt markets given increasing demand for high-quality liquid collateral. One member indicated that the interest rate risk associated with increased issuance may theore cally be hedged given higher short-term rates are generally associated with stronger economic results and improved tax receipts. The Commi ee recommended that Treasury increase the stock of outstanding Tbills in order to support market func on and to raise the opera onal cash balance. As such, this change should not be viewed as a change in the Commi ee’s recommenda on to con nue to issue longer-term debt. The Commi ee encouraged Treasury staff to conduct further detailed analysis of the expected cost of issuance across a range of maturi es and report back at a future mee ng. The Commi ee strongly agreed that ongoing cost/benefit analysis in the construct of an analy cal framework should con nue to be an important factor in determining the op mal debt issuance strategy. The Commi ee’s next charge was to discuss the appropriate amount of Tbills outstanding, both in terms of the absolute amount and as a percentage of outstanding debt, in rela on to the poten al demand for high quality, short-dated securi es. Tbill supply as a percentage of the total Treasury debt outstanding is currently about 11 percent, a mul -decade low. At the same me, with $1.4 trillion in Treasury bills outstanding, the total volume of Tbills remains near historically high levels. The Commi ee discussed the drivers of poten al demand for high quality, short-dated securi es and, given these and other considera ons, whether Treasury should adjust Tbill issuance in the coming year. Current developments in market structure, regula ons, and policy have the poten al to change significantly the supply and demand in the market for short-end, high-quality assets. US Treasury bills are centric to the ecosystem as they are the closest subs tute to cash given their strong liquidity, lack of credit risk and minimal dura on risk. While the availability of short-end, high-quality asset supply has stayed stable since 2012, US Treasury bills outstanding have decreased by 25% from the 2009 peak. At the same me, Treasury bill demand has been increasing and is projected to con nue to increase further, poten ally significantly in a stressed scenario. Key drivers of demand include changes to bank capital rules including the liquidity coverage ra o and the net stable funding ra o, more favorable treatment of Tbills under Dodd-Frank for margin collateral pos ng, and money fund 2a-7 reform which may drive demand from prime funds to government funds. The Commi ee also discussed other considera ons such as uncertainty about the size and availability of the Federal Reserve’s reverse repurchase agreement facility. A er considerable discussion, the Commi ee recommended that the Treasury increase the level of Tbills outstanding over the coming year through an increase in the size of one- and three-month bill auc ons but should also maintain its current pa ern of coupon issuance. The Commi ee also recommended that the Treasury study the introduc on of regular two-month auc ons. This strategy would boost the amount of structural cash, thereby providing for smooth market func on in normal and stressed environments. H p://www.treasury.gov/resource-center/data-chart-center/quarterly-refunding/Pages/dealer-agenda-survey.aspx Respec ully, _______________________________ Dana M. Emery Chairman ________________________________ Cur s Y. Arledge Vice Chairman TBAC Recommended Financing Table Q2 2015 and TBAC Recommended Financing Table Q3 2015 https://www.treasury.gov/press-center/press-releases/Pages/jl10044.aspx 2/2
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