(Bloomberg) -- A panel of market participants that counsels the US Treasury pushed back against criticism the department had used short-term debt issuance to artificially suppress yields on longer-dated securities.
The US government asked the Treasury Borrowing Advisory Committee —- comprised of investors, dealers and other market participants — to take another look at the strategy for T-bills and what should inform issuance of the shortest-dated debt securities at its latest gathering. TBAC had previously recommended a 15% to 20% range.
The latest guidance offers a mark of support for the Treasury’s issuance strategy, which has been called into question by Republicans who say the Biden administration has manipulated the debt market to juice the US economy.
The group felt that supply “should continue to act as a shock absorber, allowing coupons to be issued in a regular and predictable manner,” which has sometimes driven bill share to as high as 30% to 35% for short periods, according to the report to Secretary Janet Yellen published Wednesday.
The committee also indicated it now sees 15% as the lower bound of the range that that supports healthy market functioning, along with 20% as an appropriate average over time.
“Reading between the lines, this charge looks like it is an attempt to discredit the recent accusation that Treasury was intentionally increasing the share of bill issuance to offset the impact of tighter monetary policy on the long-end of the curve (so-called ‘Activist Treasury Issuance’),” Jefferies senior economist Thomas Simons wrote in a note to clients.
The request to TBAC follows accusations from a number of Republican politicians and economic policy commentators that Yellen and her team had artificially tempered the volume of longer-term securities, choosing instead to use short-term debt known as bills to address extra funding needs. They argue it’s part of an effort to depress yields and bolster the economy, along with Democrats’ fortunes, ahead of the November vote.
Treasury bill issuance initially swelled in 2020 to finance the US response to the Covid-19 pandemic and, in November of that year, TBAC recommended allowing the share to gradually decline. However, supply shrank so much it was unable to keep pace with demand and ultimately pushed trillions of dollars into the Federal Reserve’s overnight reverse repurchase agreement facility.
Now, the supply of bills has increased by around $2.2 trillion since the start of 2023 — around 21% of total debt — and investors haven’t batted an eye, scooping them up even when other risk-free rates were higher.
“This updated recommendation comes on the heels of a number of discussions of the appropriate role of bills as a portion of our outstanding debt over the last several years,” Josh Frost, the Treasury’s assistant secretary for financial markets, said during a gathering with media on Wednesday.
He added that TBAC believed the bill share averaging around 20% over time “seemed to strike the right balance between the expected cost of financing and the volatility of that cost.”
Earlier this month Frost delivered a detailed speech explaining each aspect of Treasury issuance, showcasing how the department’s decisions have been well within normal bounds and in keeping with expectations — as well as recommendations — of market participants.
Wrightson ICAP economist Lou Crandall said the new guidance will be helpful in addressing “some genuine misconceptions” in the market as to how strongly the committee was recommending the 15% to 20% range. Yet Crandall and Jefferies’ Simons both reiterated that bill supply is intended to supplement changes in coupon issuance.
“Bills are not the tail that wags the dog,” Crandall said. “Yes, you can think about what kind of range you would like your central tendency of coupon auctions to imply for what kind of bills share. That certainly informs your coupon issuance over a two- or three-year period, but times change.”
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