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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 7/31/2013 July 30, 2013 Dear Mr. Secretary: Since the Commi ee last met in late April the pace of economic growth has apparently decelerated, as spending data suggest real GDP expanded in the second quarter at a somewhat slower pace than the 1.8% annual rate experienced in the first quarter. Some of that slowing may reflect the impact of fiscal drags that are posing headwinds to the expansion. In par cular, the pace of consumer spending has been subdued, likely due to the restraint of higher payroll and income taxes. In spite of the slow pace of economic growth, employment has con nued to expand briskly, with payroll growth last quarter averaging close to 200,000 jobs per month. Recent Fed communica ons have indicated that the resilience of the labor market will most likely prompt a modera on in the pace of asset purchases some me later this year. The market reac on to this development has been acute, as medium- and longer-term interest rates have moved sharply higher. Thus far, interest-sensi ve sectors of the economy – most notably housing – have shown limited signs of slowing in response, though some delayed response to the ghtening in financial condi ons may be yet to come. Even so, most forecasters an cipate somewhat faster economic growth in the second half of the year rela ve to the first half. Consumer spending expanded at a 2.6% rate in the first quarter but appears set to step down to about half that pace in the second quarter, a decelera on that is a result of several factors. First, spending on u li es slipped back a er being boosted by unseasonably cold weather in the first quarter. Second, the increase in tax burdens at the beginning of the year is likely s ll having a depressing effect on consumer outlays. Lastly, rising energy prices toward the end of the second quarter also depressed real consumer purchasing power. Looking ahead, steady gains in labor income, as well as ongoing support to household balance sheets from a recovering housing market, should sustain be er gains in real consump on outcomes. A er slowing in the first quarter, investment spending by businesses has exhibited signs of healthier growth in the second quarter. Most of the re-accelera on reflects a rebound in business outlays for structures, a category which suffered a temporary pull-back in the first quarter. Corporate profits may have had another poor quarter, as the combina on of so nominal GDP growth and solid increases in the total business wage bill may have depressed profit margins. Even so, capital spending is generally expected to increase in the second half as most business surveys point to solid spending inten ons. The housing market remains a bright spot for the economy, as residen al investment con nues to contribute to overall GDP growth. Since the Commi ee last met, primary 30-year fixed mortgage rates have increased almost 100 basis points. Most data points related to housing demand have held in well, though it is s ll too soon to judge how much the increase in rates will restrain home sales. House prices con nue to register solid gains in most parts of the country. The government sector was a significant restraint on growth in the first half of the year. The drag from state and local governments appears to be modera ng, but declines in federal spending have intensified. Real federal outlays declined at an 8.7% pace in the first quarter and likely declined again in the second quarter, partly due to the implementa on of sequestra on, as s pulated by the Budget Control Act. While the ming of the full impact of sequestra on is difficult to gauge, there are likely to be addi onal declines in federal spending in the second half of the year. A er declining in the prior two quarters, real exports have increased in April and May. However, real import growth has been robust, and net exports likely subtracted from overall GDP growth last quarter. Foreign economic growth remains subdued. The Japanese economy has responded favorably to recent growth ini a ves, and there are some indica ons the European economies may be close to stabilizing. However, Chinese data remains disappoin ng and prospects for other large emerging market economies have downshi ed since the last mee ng. Labor market condi ons have shown further signs of improvement, as job growth in the first half of the year has been solid and steady. The contrast between a firm labor market and disappoin ng GDP is stark, and the manner in which this disparity is resolved is a preeminent ques on for the second half outlook. Since the Commi ee last met, the unemployment rate has been unchanged at 7.6%. However, this has come alongside two months of rising labor force par cipa on—a hopeful, albeit tenta ve, sign that labor supply could modestly accelerate. Wage gains remain subdued, with most measures increasing around, or a li le less than, 2% on a year-ago basis. Restrained wage gains have contributed to a so infla on environment. The PCE price deflator has increased 1.0% in the twelve months ending in May; the ex-food and energy core PCE measure has increased 1.1% over that same period. Tame domes c price pressures have been joined recently by falling import prices, thus crea ng a very weak pricing environment. In spite of very low infla on readings, most survey measures of infla on expecta ons have remained stable. Since the Commi ee last met, Fed communica ons have led to a material shi in market expecta ons regarding monetary policy. At the most recent FOMC mee ng in June, Chairman Bernanke indicated that the pace of asset purchases would likely be moderated later this year, a message that was hinted at in the Chairman’s earlier tes mony before Congress on May 22nd. The resul ng increase in longer-term interest rates was greater than could be explained by standard es mates of the effect of asset purchases on yields. A change in expecta ons regarding future overnight interest rate policy, as well as an unwinding of levered posi ons, may have also contributed to the increase in interest rates seen since early May. Most surveys of market par cipants indicate that a modera on in the pace of asset purchases is expected at the September FOMC mee ng. Against this economic backdrop, the Commi ee’s first charge was to examine whether adjustments to the debt issuance schedule were warranted in light of the Treasury’s reduced financing needs. In par cular, the Commi ee discussed reducing coupon issuance given the recent pay down in marketable debt over the April to June 2013 quarter as well as the poten al for a surplus in financing over the coming two fiscal years if the Treasury con nued on the current coupon financing schedule. Given the Commi ee’s long established goal to increase the weighted-average maturity of the debt, moderate reduc ons to the coupon schedule in 2 and 3 year maturi es were recommended. The Commi ee emphasized the importance of making gradual and modest adjustments to the issuance schedule in order to maintain future financing flexibility in light of the uncertainty regarding economic growth, budget related ma ers and the trajectory of future tax receipts. The Commi ee also considered making adjustments via reduc ons in US Treasury bill issuance but ul mately decided against this recommenda on. Discussions centered around the reduc on to Treasury bill issuance in the April to June 2013 quarter and the importance of safeguarding the liquidity and depth of the Treasury bill market given growing structural demand for high quality, short term securi es. The Commi ee also noted the upcoming inaugural 2 year maturity Floa ng Rate Note issuance in January 2014 would be a replacement for Treasury bill issuance. Next the Commi ee considered the concept of engaging members of the academic community to assist in projects that require longer-term analysis. Members of the Commi ee will make a recommenda on for the poten al format and structure of these types of engagements at the November 2013 mee ng. https://www.treasury.gov/press-center/press-releases/Pages/jl2127.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 … The second charge was to evaluate the liquidity of fixed income markets, both currently and prospec vely, given changes to market regula ons, market structure and technological capabili es. The presen ng members concluded that while volumes and turnover have increased, market depth had been reduced, especially in mes of elevated market vola lity. The discussion highlighted some of the regulatory factors that contributed to declines in dealer balance sheet capacity, in their roles as intermediaries between buyers and sellers of fixed income securi es. The Commi ee also considered the recently proposed supplementary leverage ra o. It was broadly agreed that this rule could have nega ve consequences for the Treasury repo market and Treasury’s cost of financing. Technological advances and shi s in market structure have added to the appearance of liquidity as volumes and turnover levels have increased, but have not added to the depth of the markets as measured by occasional increases in bid-offer spreads and decreasing average sizes of block trades. In addi on, the presen ng members highlighted the poten al for a significant disloca on in the markets if investor flows into riskier fixed income securi es were to reverse. The third charge was a comprehensive review of addi onal debt management tools and processes that Treasury could consider to minimize borrowing costs, be er manage its liability profile, enhance market liquidity and expand the investor base for Treasury securi es. A similar charge had been discussed in February 2011 with a comprehensive review of addi onal types of debt instruments and maturi es, ul mately resul ng in a recommenda on to introduce a Floa ng Rate Note program. It was generally viewed that addi onal products should not be considered at this me un l this program is well established. The discussion covered a wide range of alterna ve primary market issuance techniques including mul ple-price auc ons, syndica ons, reverse inquiries and window-driven issuance. Taps, mini-tenders and over-allotment op ons were also considered. The discussion included an assessment of the benefits and important considera ons of each technique. Next, various secondary market-techniques were discussed including repurchases, buybacks, switches, and securi es lending and collateral swap facili es. The conclusion, a er a lengthy discussion, was that it is important that the Treasury con nues as a “regular and predictable” borrower in its debt management procedures and that the benefits do not outweigh the costs of alterna ve techniques or new products at this me. In the final charge, the Commi ee considered the composi on of marketable financing for the remainder of July to September 2013 quarter and the October to December 2013 quarter. The Commi ee’s recommenda ons are a ached. Respec ully, _____________________________________ Dana M. Emery Chairman _____________________________________ Cur s Y. Arledge Vice Chairman TBAC Recommended Financing Table Q3 2013 and TBAC Recommended Financing Table Q4 2013 https://www.treasury.gov/press-center/press-releases/Pages/jl2127.aspx 2/2
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