Audio · 2024-08-12 · 46m · 6 moments

How the US Treasury Will Fund the Next $20 Trillion in Debt

When it comes to financing the US government's borrowing needs, the Treasury Department has some discretion in how it's done. It can sell 30-year Treasuries. It can sell 10-year Treasuries. It can sell a lot of three-month T-bills. Every quarter, it's always going to be some kind of mix. And in theory, the decisions about where on the curve it issues debt can have effects on the market and the economy, since different instruments have different liquidity and risk profiles. Recently, the Treasury ✦ AI generated

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GUEST Amar Raganti

timeline · colored by role

Claim◆

The Treasury's job is to finance the government's deficit at the lowest cost for taxpayers, but this is complicated by the fact that its actions change market pricing and microstructure, making cost unknowable ex ante.

Amar Raganti explains that Treasury's stated goal is minimizing taxpayer cost, but the reflexive nature of its own actions on the market makes this unknowable in advance, similar to the Heisenberg uncertainty principle.

transcript

Amar Raganti: In sort of bold headlines, the Office of Debt Management would say its job is to finance the government's deficit at the lowest cost for taxpayers. The problem, of course, is that there's a lot of things behind that. The implications go beyond just sort of what you'd call a number that you could scratch down on a piece of paper. And then additionally, you know, what you're trying to solve for is something that you won't know ex ante, meaning like you won't know as you're doing it.

explains mechanism · 1

Mechanism◆

The Treasury's guiding principle is 'regular and predictable' issuance — being boring, not surprising markets, and maintaining the health of the entire Treasury ecosystem like gardening rather than tactical corporate issuance.

Raganti describes the 'regular and predictable' doctrine pioneered by Paul Volcker, comparing Treasury's role to gardening — maintaining a healthy ecosystem of diverse participants rather than making tactical issuance calls like a corporate treasurer.

transcript

Amar Raganti: So they try to actually take what I'll call the most boring route they could possibly take. And that is something that's called regulation — regular and predictable. Now, we toss this term around a lot. The idea is you're there not to surprise the market, not to shock it, importantly, not to be a source of volatility. And this was pioneered by Paul Volcker, actually, in the 1970s.

provides context · 1

Claim

Treasury's response to the 'activist issuance' criticism is consistent: it announces its issuance plans well in advance, and if the Fed disagrees with the impact, the Fed has tools to counteract — the Fed can always do more.

Raganti explains that Treasury's answer to critics — whether in 2011-12 (issuing too long while Fed bought long) or now (issuing too short while Fed tightens) — is always the same: plans are announced in advance, and the Fed can adjust with its own tools.

transcript

Amar Raganti: And Treasury's answer is usually remarkably consistent. We're announcing what we're doing well in advance of what we're going to do. If the Federal Reserve thinks this is inappropriate for monetary policy, it can absolutely take steps to do more. The Fed has the flexibility and freedom to do more. The Fed has tools where it can steepen the curve. It could outright sell securities from the SOMA portfolio and steepen the curve.

extends · 1gives example · 1

Data

The weighted average maturity of outstanding Treasury debt is currently around 71 months, well above the historical average of about 60-61 months, which actually argues for issuing more at the short end to normalize.

Raganti notes that the WAM is at 71 months versus a historical average of ~61 months, meaning the current tilt toward short-end issuance is actually a normalization, not a deviation. He also notes the bill-to-coupon ratio is slightly above the informal 20% guidance but has been much higher in the past.

transcript

Amar Raganti: So just to get back to the 60 months, and the average has been historically about 60 months. 61, yeah. Okay, so just to get back to average, would argue for actually doing what the Treasury's doing, which is issuing more at the short end of the curve.

provides context · 1

Context

The secretary of the Treasury is generally uninvolved in the granular debt management decisions — the process is technocratic, handled by career staff in the Office of Debt Management and the assistant secretary for financial markets.

Raganti pushes back on the 'activist treasury issuance' conspiracy theory by noting that the secretary has many other priorities (counterterrorism, financial diplomacy) and relies on the assistant secretary for financial markets and career debt managers for issuance decisions.

transcript

Amar Raganti: I think where they, you know, you could take a little umbrage at was this idea of activist issuance, some type of political push, because this is usually one of the most technocratic places within Treasury. The secretary generally has a lot of other things on his or her mind, everything from counterterrorism to the international affairs side, which is financial diplomacy. And debt management is an important piece, but it is a piece of that.

Mechanism

The 20-year Treasury bond has struggled because of path dependency and ecosystem factors — the 30-year is the entrenched benchmark for corporate hedging and liability-driven investors, and a new point on the curve takes decades to develop that same liquidity and utility.

Raganti explains why the 20-year bond trades cheap to the 30-year: the 30-year is deeply embedded as a benchmark for corporate bond hedging and pension fund liability matching, and a new issuance point takes significant time to develop comparable ecosystem support.

transcript

Amar Raganti: The demand for a particular treasury or a particular treasury security or a point on the curve is influenced by a whole lot of other things. So for example, why is the 30 year in such demand? Well, one, market participants already incorporated into their portfolios. Private sector issuers use it as a benchmarking security for their own issuance. So in a new issuance period for corporates, what you often do if you're an IGPM is you'll take delivery of the new private sector bond by so-and-so company, and then you'll sell your 30-year treasury or you'll short that point in the curve.

Highlight slides

The Treasury's Mandate vs. Market Reality✦ from: The Treasury's job is to finance the government's deficit at the lowest cost for taxpayers, but this is complicated by the fact that its actions change market pricing and microstructure, making cost unknowable ex ante.Why Cost Can't Be Known in Advance✦ from: The Treasury's job is to finance the government's deficit at the lowest cost for taxpayers, but this is complicated by the fact that its actions change market pricing and microstructure, making cost unknowable ex ante.The Treasury's 'Regular and Predictable' Doctrine✦ from: The Treasury's guiding principle is 'regular and predictable' issuance — being boring, not surprising markets, and maintaining the health of the entire Treasury ecosystem like gardening rather than tactical corporate issuance.Gardening, Not Corporate Finance✦ from: The Treasury's guiding principle is 'regular and predictable' issuance — being boring, not surprising markets, and maintaining the health of the entire Treasury ecosystem like gardening rather than tactical corporate issuance.

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The Treasury's job is to finance the government's deficit at the lowest cost for taxpayers, but this is complicated by the fact that its actions change market pricing and microstructure, making cost unknowable ex ante.

The Treasury's guiding principle is 'regular and predictable' issuance — being boring, not surprising markets, and maintaining the health of the entire Treasury ecosystem like gardening rather than tactical corporate issuance.

Treasury's response to the 'activist issuance' criticism is consistent: it announces its issuance plans well in advance, and if the Fed disagrees with the impact, the Fed has tools to counteract — the Fed can always do more.

The weighted average maturity of outstanding Treasury debt is currently around 71 months, well above the historical average of about 60-61 months, which actually argues for issuing more at the short end to normalize.

The secretary of the Treasury is generally uninvolved in the granular debt management decisions — the process is technocratic, handled by career staff in the Office of Debt Management and the assistant secretary for financial markets.

The 20-year Treasury bond has struggled because of path dependency and ecosystem factors — the 30-year is the entrenched benchmark for corporate hedging and liability-driven investors, and a new point on the curve takes decades to develop that same liquidity and utility.

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