A new white paper is making waves on Wall Street and in Washington, D.C. It says that the Treasury Department is working together to boost the economy for political reasons, which could lead to inflation rising again.
The paper, which came out last week, says that the Treasury Department’s choice to keep using short-term Treasury bills to pay for a huge portion of the U.S. debt is the same thing as purposely messing with the economy. The people who wrote it came up with a term for this: “activist Treasury issuance.”
In the beginning of the paper, co-authors Stephen Miran and Nouriel Roubini said, “By changing the maturity profile of its debt issuance, Treasury is dynamically managing financial conditions and, through them, the economy, usurping core functions of the Federal Reserve.”
Miran and Roubini say that the Treasury’s overissuance of bills has had the same effect over the past nine months as the Federal Reserve’s quantitative easing program, which bought bonds after the crisis for about $800 billion.
Cutting 25 basis points off the 10-year yield or a full percentage point off the federal-funds rate is the same thing.
The choice by the Treasury to rely more on bills is effectively neutralizing some of the Fed’s efforts to tighten monetary policy and slow down the economy. This goes against the central bank’s claims that monetary policy is restrictive, the paper’s authors said.
Miran and Roubini came to the conclusion that the overall level of policy is closer to neutral. This may help explain why the economy is still doing pretty well, even though interest rates are the highest they’ve been in more than 20 years.
A lot of the worries in the paper are the same ones that Tennessee Republican Sen. Bill Hagerty raised when he asked Fed Chairman Jerome Powell about the Treasury’s reliance on bills at a recent meeting of the Senate Banking Committee. When asked for comment, Hagerty’s office didn’t respond, and a Fed representative said they couldn’t say anything because of the central bank’s pre-meeting blackout time.
A tough argument
Top Treasury officials have strongly disagreed with the paper’s conclusions, and experts in the bond market have also cast question on them. But some people on Wall Street have reason to be wary.
“I promise you without a doubt that there is no such plan.” “We have never, ever talked about anything like that,” Treasury Secretary Janet Yellen said in a statement that the Treasury Department gave to MarketWatch. The comment was first seen in a Bloomberg News story.
A Treasury source who spoke to MarketWatch on the condition of anonymity said the paper lied about how important the advice from the Treasury Borrowing Advisory Committee was. The authors of the study used this advice as a guideline when figuring out how much extra money the Treasury issued.
“They say that this 15% to 20% range is a rule from the Treasury.” “It’s a TBAC recommendation, and TBAC has made it clear that there should be some room for maneuver,” the official told MarketWatch.
There are currently about 6 trillion bills in circulation, which is about 22% of the whole Treasury market.
This person also said that the change toward more bills being printed in the fourth quarter of last year was not as big as the news story makes it seem. This was also said by Assistant Secretary for Financial Markets Joshua Frost in a statement earlier this month.
The Treasury eventually cut the total amount of notes and bonds issued by about $3 billion per month. This is a very small amount compared to the $300 billion that they issued in the first place.
Since then, the Treasury has slowly cut down on the number of bills it issues as a percentage of its net new debt. However, most of the drop happened in the second quarter, when millions of Americans paid their taxes and the Treasury had less need for short-term borrowing. The paper doesn’t look at the second quarter, which also changes the results, the Treasury source said.
Miran and Roubini left out the second quarter because there was no proof of activist Treasury issues during that time.
Still, some people have said the paper makes some good and important points. When Bob Elliott was CEO of Unlimited, which runs the Unlimited HFND Multi-Strategy Return Tracker exchange-traded fund HFND 0.44%, he was in charge of foreign exchange policy at the hedge fund Bridgewater Associates. Elliott asked the Fed why it hasn’t moved faster to reduce the amount of outstanding bills.
In an interview with MarketWatch, Elliott explained that the situation is that the bill share is high while the economy and financial conditions are strong. “It’s basically an incremental effort to ease financial policy at a time when the economy doesn’t need significant easing,” Elliott said.
Many years of studying the bond market have led Lou Crandall, chief economist at Wrightson ICAP, to disagree with the paper’s findings in a report given to MarketWatch.
Crandall said, “The bottom line is that Treasury issuance over the past year has changed in ways that are consistent with both how it has behaved in the past and with fresh Treasury guidance.” “All the Treasury is doing is what it said it would do.”
Where it all began
People first thought that the Treasury and the Fed might not be working together when the Treasury made its refunding announcement for the fourth quarter on November 1.
The bond market was in bad shape before that.
From late October to early November, the yield on the 10-year Treasury note TMUBMUSD10Y 4.146% reached its best level in over 15 years. In September and October, when yields went up quickly, stocks went down along with them.
The Treasury’s summertime quarterly refunding statement, which came out in July, used to get way too much attention in the financial press. Elliott said that some blamed it for making people worry again about the market’s ability to handle unchecked U.S. deficit spending after the Treasury announced plans to sell a few more notes and bonds than investors had thought.
After that, well-known hedge fund managers like Bill Ackman of Pershing Square began telling audiences that they had bet against Treasurys because of unsustainable budget deficits.
But when the Treasury made its next announcement in November, it said it would issue fewer bonds and notes than buyers had thought. Even though the change wasn’t very big, it seemed to calm the market.
It’s hard to tell how much of this was because of the Treasury’s change and how much was because the Fed changed what it said about short-term interest rates.
“One thing that makes things more complicated is that the Federal Reserve was still raising rates and warning of extreme caution in August 2023.” “They weren’t in November 2023,” Guy LeBas, chief fixed-income analyst at Janney Montgomery Scott, told MarketWatch.
LeBas said the same thing about the effect of the Treasury issuing bills.
“The writers say that when the Treasury issues more short-term debt, it’s good for the economy, and when they say that
“If you issue more long-term debt, that will hurt the economy,” he said. “Life isn’t that easy.”
Miran said that he chose to use the TBAC advice as a guide because it was the only useful benchmark that the Treasury gave him. He also said that the Treasury hasn’t given a good reason for why it hasn’t put more of its borrowing into notes and bonds, even though it has denied this.
“They haven’t given me a good reason for what they’re doing,” Miran, who worked in the department under Steven Mnuchin as Treasury Secretary, said.
Details about the next quarterly release from the Treasury about refunds will be given out Wednesday morning. The Treasury said on Monday that it would need to borrow $565 billion in net tradable debt in the fourth quarter. Later that same day, the Fed will make its latest decision on interest rates, and Powell will speak to the press.
