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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 11/6/2013 November 2013 Le er to the Secretary Dear Mr. Secretary: Since the Commi ee last met in late July the economy has con nued to expand at a moderate pace. The October government shutdown not only restrained the growth of economic ac vity, but has also made it more difficult to assess the state of the business cycle, as a number of economic data releases have been delayed due to the temporary shu ering of federal sta s cal agencies. With this caveat in mind, it appears that real GDP growth in the third quarter was not materially different from the 1.8% annual pace registered in the first half of the year. Ac vity growth in the labor market has downshi ed in recent months, and the housing market has shown signs of cooling. However, the Federal Reserve has been more accommoda ve than market expecta ons, a development which has eased financial condi ons. As the distor ng effects of the government shutdown fade, the economy should regain firmer foo ng, though another round of fiscal debates in the first quarter loom as a poten al downside risk to the outlook. The pace of consumer spending growth appears to have remained subdued in the third quarter as real consump on outlays increased a tepid 0.1%, on average, in July and August, and likely registered a similar advance in September. Retail spending has been restrained by the weak pace of earnings growth, with labor income advancing at a rela vely slow 3.0% annual pace last quarter. Looking forward, consumers should get some relief in the form of lower retail energy prices, though October data may show some evidence of fiscal uncertain es leading to temporarily more cau ous consumer behavior. Business investment spending con nues to be a source of modest disappointment. Capital outlays for nonresiden al structures have been vola le, though appear to have advanced at a healthy clip last quarter. In contrast, business equipment spending growth has been anemic all year, and the recent orders and shipments data for capital goods indicate that this trend has persisted through late in the third quarter. The fundamentals for business investment spending remain solid, as corporate profit margins are high and the cost of capital is low. Nonetheless, the unexplained weakness in capital spending this year raises some ques ons about the vigor of any expected pick-up in cap-ex. Residen al investment spending has con nued to advance at a healthy pace, although the recent set-back in indicators of housing demand suggests the rebound in homebuilding may cool in coming months. Since the back-up in mortgage rates began in late May, several measures of home sales and home-buying a tudes have so ened. In addi on, while house price apprecia on is generally s ll quite strong, there are some hints that house price growth may cool some along with housing demand. The recent easing in mortgage rates should be suppor ve for home sale going forward. The federal government shutdown in October will reduce the output of government services in the fourth quarter, though this should prove to be only a temporary restraint. A second round of sequester cuts in January could prove to drag on the economy for longer. The temporary nature of the resolu on of the budget and debt ceiling implies that the possibility of another shutdown poses some downside risk to the outlook. The headwinds associated with the 2013 tax hikes should fade, par ally offset this fiscal drag in 2014. Real exports declined in July and August. Nonetheless, the external growth picture generally remains healthier than it did at the beginning of the year. Europe and Japan are s ll expanding, while an improvement in the Chinese data has eased fears of a hard landing in that economy. Labor market condi ons have been modestly disappoin ng as of late. A er increasing 195,000 jobs per month on average in the first half of the year, employment growth has slowed to 143,000 posi ons per month in the third quarter. In spite of the slowdown in the pace of job growth, the unemployment rate has con nued to decline, falling from 7.6% at the end of the second quarter, to 7.2% at the end of the third quarter. Wage infla on remains absent: average hourly earnings rose at a subdued 2.0% annual rate last quarter, the same pace as in the prior quarter. S ll, the labor market suggests that there is ample slack in the economy and that GDP is well below poten al. The labor market par cipa on rate is at 63.2%, a full 3 percentage points lower than the early-2007 level. While the par cipant rate differs by age group, the trend in the data is similar. For example, the par cipa on rate for the 45 to 54 age group is 2 percentage points lower than the early-2007 level. Infla on remains quiescent. The Consumer Price Index (CPI) increased at a 1.7% annualized rate over the three months ending in September, and the ex-food and energy “core” CPI rose at a 1.6% pace. The personal consump on expenditure (PCE) measure of infla on – available through August – increased 0.1% on average in July and August, and the core PCE measure was similarly subdued. There is li le indica on that infla on is set to accelerate any me soon. Since the Commi ee last met, Fed policy – and the outlook for future Fed policy – has shi ed no ceably. Contrary to market expecta ons, the FOMC chose not to reduce the monthly pace of asset purchases at the September policy mee ng. In addi on, certain Fed policymakers have downplayed their earlier indica ons that asset purchases likely would be concluded as the unemployment rate approached 7%. These developments led market par cipants to simultaneously push back the date of the first expected tapering of asset purchases as well as to push back expecta ons for the normaliza on of the federal funds rate. This change in Fed expecta ons has since been reinforced by somewhat disappoin ng data, and many now expect the first slowing in asset purchases to occur some me in the first half of 2014. Against this economic backdrop, the Commi ee’s first charge was to examine whether adjustments to the debt issuance schedule were warranted. The Commi ee con nues to recommend a gradual lengthening of the weighted-average maturity of the debt. However, given the uncertainty surrounding the economic impact of budget nego a ons, the recent government shut-down and the debt ceiling nego a ons, as well as the trajectory of future tax receipts, the Commi ee recommended that the issuance remain at current levels and not con nue with the gradual decline of 2 and 3 year maturity issuance sizes as was recommended at the July TBAC mee ng. The Commi ee also recommended that Treasury move forward with the inaugural auc on of $10 to 15 billion of 2 year maturity Floa ng Rate Notes, which the Commi ee views as a subs tute for Treasury bill issuance, with the flexibility for longer maturi es as the market develops. Evolving regula on and poten al market structure changes that could impact short-term funding markets were discussed by the Commi ee. Specifically, the calcula on of the Supplementary Leverage Ra o (SLR) when this regula on is finalized could poten ally unfavorably impact liquidity condi ons and US Treasury issuance dynamics. The discussion highlighted that the proposed Basel leverage ra o calcula on, which does not permit repo ne ng (as described in FIN 41), could have significant nega ve consequences on financing markets and overall market liquidity. In this context, the Commi ee considered the composi on of marketable financing for the remainder of the October to December 2013 quarter and the January to March 2014 quarter. The Commi ee’s recommenda ons are a ached. The Commi ee’s second charge was to discuss how technological advances have impacted the way assets are traded in the fixed income markets, with a focus on the increase of electronic trading (both High Frequency (HFT) and Algorithmic Trading (AT)), specifically in the US Treasury market. The presen ng members focused on the use of electronic trading for both execu on strategies and automated https://www.treasury.gov/press-center/press-releases/Pages/jl2206.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 … trading strategies. The presen ng members emphasized that there is a lack of consensus regarding electronic trading protocols, methods and venues, given the wide variety of market par cipants such as tradi onal dealers, HFT firms and end users. These par cipants have diverse trading objec ves, strategies and requirements in their use of electronic trading. Further, the adop on of electronic trading in the fixed income and foreign exchange markets has been extremely gradual, with the largest volume occurring in the most homogenous, liquid and commodi zed segments of the markets, primarily on-the-run US Treasuries and spot FX. As the electronic trading volume of on-the-run Treasury securi es increases, it could enhance their liquidity and reduce future Treasury borrowing costs, especially if volumes of electronically traded off-the-run securi es increase over me as well. The presen ng members emphasized the importance of implemen ng quality risk controls for firms that par cipate in the HFT and AT given the associated risks. They concluded that it is unlikely that a singular end state solu on for fixed income electronic trading will emerge given the heterogeneous nature of the market and the diverse needs of the market par cipants and that asynchronous mandates for Central Clearing and electronic trading create stresses on the linkages across the rates markets (cash bonds and repo, swaps, futures and credit (cash and CDS)). Given the linkages across the rates markets, liquidity in one market can significantly impact the others; regula ons and protocols for each market should be synchronized so as not to have an adverse impact on overall liquidity. Lastly they provided a lis ng of current industry “best prac ces” for automated trading. Con nuing with a topic that was ini ated during the July 2013 TBAC mee ng, the Commi ee discussed the engagement of the academic community for projects that would benefit from longer-term research and analysis. A er considerable discussion, the consensus was for a subset of the TBAC, with support of the Treasury staff, to seek the engagement of academic experts to undertake a study of the op mal sovereign debt issuance strategy with a comparison to current prac ces, including prac cal sugges ons for poten al considera on. Respec ully, ________________________ Dana M. Emery Chairman ________________________ Cur s Arledge Vice Chairman TBAC Recommended Financing Table Q4 2013 and TBAC Recommended Financing Table Q! 2014 https://www.treasury.gov/press-center/press-releases/Pages/jl2206.aspx 2/2
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