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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 2/4/2015 February 3, 2015 Le er to the Secretary Dear Mr. Secretary: Since the Commi ee last met in early November, the economy has con nued to expand at a solid pace. Real GDP growth in the third quarter of last year was revised up to a 5.0% annualized pace, and the economy expanded at a slower, but s ll above-trend, 2.6% pace in the fourth quarter. A steep decline in energy prices boosted household purchasing power, contribu ng to fourth quarter consumer spending growth at the fastest pace since 2006. A no ceable improvement in consumer sen ment augurs well for further gains in household outlays. The global economy con nues to loom large for the domes c economic outlook. Global growth concerns rela ve to the dynamism of the US economy, and the corresponding divergence of monetary policy biases, have supported a strengthening of the US dollar with respect to most other currencies. In a context of s ll largely accommoda ve monetary policy by the Federal Reserve, these factors have put downward pressure on US interest rates, especially on the long-end of the yield curve. The strong dollar poses a headwind for domes c manufacturers and other exporters, although most forecasters expect strong consumer spending and generally accommoda ve financial condi ons to support con nued above-trend growth in 2015. Real consumer spending advanced at a very strong 4.3% pace last quarter, following an upwardly-revised 3.2% rate in the third quarter. The decline in retail gasoline prices has freed up considerable funds for spending on non-energy goods and services, and this factor should remain suppor ve of consump on in the first quarter as well. The rise in consumer sen ment gauges is likely influenced by this decline in gas prices, while consumer a tudes toward the health of the labor market and prospects for labor income growth have also turned up recently as well. A er expanding solidly in the middle two quarters of the year, real business fixed investment spending growth cooled to a 1.9% pace in the fourth quarter. Capital equipment outlays contracted modestly last quarter, while business spending on intellectual property products remained robust, expanding at a 7.2% pace. Looking ahead, capital spending in the oil and gas sector is a natural source of concern, and anecdotes as well as weekly data on oil rigs indicate an adjustment is already underway. Away from the oil and gas sector, the capital spending fundamentals appear consistent with con nued moderate growth in business investment spending. Housing market condi ons remain mixed. Residen al investment rose at a moderate pace of 4.1% in the fourth quarter, albeit somewhat faster than in the third quarter. The most recent data on new and pending home sales have sent conflic ng messages on the state of housing demand. Household forma on increased by over 1.6 million in the fourth quarter, primarily among renter households. However, the surge in renter households pushed down the homeownership rate to 64%, the lowest level since 1994. The slowdown in first- me home buyers con nues to depress residen al investment. At the same me, the decline in mortgage rates should provide some support in the near term. Home price changes have been sending a rela vely more consistent message, with most measures indica ng growth in the mid-single digits. Real government spending contracted at a 2.2% pace last quarter, a decline that was en rely due to a decline in defense spending that retraced an upward spike in the prior quarter. Away from defense spending, the government sector has been exhibi ng steadier and more-favorable growth trends in recent quarters. In par cular, year-on-year growth in spending has now been posi ve for seven consecu ve quarters in the state and local sector. Net exports subtracted a sizable 1.0 percentage point from growth last quarter, mostly due to a strong 8.9% growth in imports and a decelera on in export growth. Import growth may have contributed to the large inventory increase last quarter, which added 0.8 percentage point to GDP growth. Looking ahead, decelera ng inventory accumula on should subtract from growth, but the impact on the domes c economy may be buffered by a concomitant slowing in import growth. Labor market ac vity has remained strong. Net employment crea on exceeded 2.9 million jobs last year, and monthly job growth averaged 289,000 in the fourth quarter. The unemployment rate declined further to 5.6% in December, falling 1.1 percentage points over the course of 2014. Wage measures have sent conflic ng signals recently. Average hourly earnings posted a rare decline in December, while the Employment Cost Index accelerated in the last three quarters of the year. Over 2014, wages and salaries expanded by a 2.1%, firming from a previously weaker pace. Consumer price infla on con nues to run very weak, held down no ceably by declining energy prices. Headline personal consump on expenditure (PCE) infla on declined to 1.2% year-over-year in November. In turn, the ex-food and energy core PCE measure advanced at a modest 1.4% year-over-year rate in November. Looking ahead, some pass-through from lower energy prices and a stronger dollar should limit core infla on increases in the near term, before gradually giving way to upward pressure from narrowing economic slack. In recent statements, the FOMC has indicated that it can be pa ent before raising the federal funds rate. A er its late –January mee ng, the FOMC upgraded its assessment of domes c economic condi ons, but also noted that interna onal developments will be factored in when considering the date of the first interest rate increase. In public speeches, some FOMC members have signaled that mid-year 2015 could be a reasonable me for such a move, should growth and infla on dynamics evolve favorably over the coming months. But a large degree of uncertainty remains on this front, while commentators and market pricing increasingly point toward a later date. Against this improved economic backdrop, the Commi ee’s first charge was to examine whether adjustments to the Treasury’s debt issuance schedule were warranted in light of current and projected funding needs. To inform this discussion, Treasury staff provided the Commi ee with the a ached presenta on on the fiscal outlook, receipts and outlays, financing projec ons and auc on demand. Assuming the improved fiscal outlook as projected in CBO forecasts, the Treasury would be slightly overfunded in FY 2015 if auc on sizes were to remain at constant levels. However, funding requirements are projected to increase again in FY2016. Another complica ng factor is the debt ceiling requirement. On March 15, the debt ceiling will automa cally be increased to include the amount of borrowing that occurred during the suspension period (February 8, 2014 to March 15, 2015) but Treasury is expected to reduce its the cash balance essen ally to the level it was on February 8, 2014, approximately $30 billion. Cash at the beginning of January 2015 was over $200 billion but will naturally decline due to the tax refund season. As the March 15 date approaches, the Commi ee recommends that the Treasury absorb excess cash above the required amount through reduced Treasury bill issuance. The Commi ee also considered further reduc ons of 2- and 3-year note auc on sizes to address the projected overfunding in FY2015 but ul mately recommended that Nominal Coupon, TIPS and FRN auc on sizes remain at current levels in an cipa on of increased funding needs in FY2016. The Commi ee reiterated its recommenda on that the Treasury increase its structural cash, on the order of $500 billion, to ensure that Treasury obliga ons could be met were the Treasury to lose market access for opera onal reasons. The Commi ee’s second charge was to examine the use of the weighted-average maturity (WAM) of the outstanding Treasury debt por olio as a simple proxy for its structure, cost, and risk. Since the 2008/09 financial crisis, Treasury has extended the WAM from 49 months to 68 months, and the WAM is now approaching a mul -decade high. Treasury asked for the Commi ee’s views on the use of https://www.treasury.gov/press-center/press-releases/Pages/jl9761.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 … WAM as a metric for measuring the debt por olio and whether Treasury should monitor and publish other metrics with respect to the por olio. The Commi ee noted that the posi ves of the use of WAM were that it is a simple summary indicator and is very easy to communicate publically. The challenges of this weighted-average measure is that it may overstate or understate refinancing risk, it does not adequately capture the distribu on of outstanding debt, it does not sufficiently capture the ex-ante cost of issuing debt and it does not capture the “completeness” of the market, as maturi es are uneven due to past issuance pa erns. Another discussion point was whether the Treasury por olio characteris cs should be considered net of financial assets, primarily direct student loans. The Commi ee reviewed several alterna ve metrics and base case forecasts that could enhance Treasury’s debt management tools and provide greater transparency in their public communica ons, while no ng the importance of maintaining flexibility. A er a robust conversa on, the Commi ee agreed that WAM is best used in conjunc on with other measures. Regardless of the metrics used, the Commi ee underscored the importance of clearly ar cula ng Treasury’s debt management strategy and objec ves and the factors that impact issuance pa erns. The Commi ee’s third charge was to comment on the use of buybacks during a me of budgetary deficits and whether such a tool could be used to assist Treasury in managing the maturity structure of debt por olios, secondary market liquidity, and cash balance. In the 2000 to 2002 period, Treasury conducted buybacks through reverse-auc on opera ons in response to shrinking financing needs and the desire to maintain new debt issuance sizes to ensure market liquidity of those issues. Without the buyback opera ons, any varia on in funding needs must be met by changing gross debt issuance, a process that could be at odds with the Treasury’s goal of being regular and predictable in issuance pa erns. It was noted that buybacks could enhance the liquidity of new and off-the-run coupon Treasury issues, smooth the debt issuance pa ern during mes of overfunding, dampen the seasonal varia on in Treasury bill issuance or cash balance, reduce the maturity peaks in the outstanding debt, and allow for more efficient adjustments to the Treasury debt profile. The Commi ee discussed certain issues in conduc ng debt buybacks such as the cost of opera ng on both sides of the market, the poten al consequences of interfering with market func on, and the accoun ng issues with purchasing premium priced securi es as the premiums count as current expenditures and would increase the reported budget deficit, albeit at no true economic impact. In addi on, premium debt buybacks would interact with the debt limit as the limit is measured on par debt. Other factors considered were the implementa on process and the poten al capacity of a Treasury buyback program. It was also noted that most other countries conduct debt buyback or debt exchange programs. One member suggested that bond exchanges may be a more efficient way to conduct debt strategy op miza on. A er a robust discussion, the Commi ee agreed that debt buybacks could be a valuable tool in debt management strategy to aid transi ons in debt profile, enhance liquidity and smooth debt maturi es, in par cular as issues approach maturity. While not cri cal at this moment in me, the Commi ee recommends that Treasury con nue to evaluate the efficacy of buybacks and bond exchanges. TBAC Recommended Financing Table Q1 2015 and TBAC Recommended Financing Table Q2 2015 https://www.treasury.gov/press-center/press-releases/Pages/jl9761.aspx 2/2
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