U.S. Treasury Advisers, Brookings Meet on Debt Strategy Models

(Bloomberg) -- The U.S. Treasury’s external advisory team on structuring debt issuance is meeting privately with academics in Washington to discuss a plan to write a paper explaining the model its recommendations arise from.

Wednesday’s meeting, which comes as the U.S. Treasury is ramping up debt issuance to more than $1 trillion this year, is hosted by the Brookings Institution. The Treasury Borrowing Advisory Committee initiated the meeting, and some members are attending, according to people familiar with it who requested anonymity to discuss a private event. The goal is to publish a paper through the Hutchins Center on Fiscal and Monetary Policy at Brookings, where the two most recent Federal Reserve chairs, Janet Yellen and Ben Bernanke, are fellows.

TBAC, which meets quarterly with the Treasury Department to advise on borrowing plans and to answer specific “charge questions” posed by the department, has been working more than a year on analyzing quantitative models that governments around the world have used to evaluate alternative financing strategies. With the government’s borrowing needs surging because of tax cuts and the Fed’s balance-sheet runoff under way, Treasury market participants have been agitating to look under the hood.

“It would be very useful to get more dependable guidance on what issuance is going to be going forward because the size of the Treasury’s financing needs are increasing exponentially,” said Ward McCarthy, chief financial economist at Jefferies LLC. “We need more clarity and more transparency. There is no single right way to increase issuance, but at least if we have some handle on what the parameters are, then we’ll better know what to expect.”

Brookings spokeswoman Delaney Parrish wouldn’t say who was attending Wednesday’s meeting, citing firm policy. She said Hutchins, whose working papers include ones on debt management strategies, will publish a paper in a few months, but there’s no firm date. A Treasury spokeswoman declined to say if department officials were attending.

The meeting follows a year in which TBAC and the Treasury Department sparred over whether to add an ultra-long bond to the government’s product line. Treasury Secretary Steven Mnuchin floated the idea of a 50- or 100-year bond in order to lock in interest rates near record lows, TBAC dismissed the idea saying there wouldn’t be enough demand, and the department thus far has backed down.

TBAC is made up of representatives of dealers, asset managers and hedge funds. Jason Cummins, chief economist and head of research at Brevan Howard, is the committee’s current chairman; Stuart Spodek, co-head of U.S. fixed income at BlackRock, is vice chairman.

The sheer volume of increased issuance has also produced disagreement among dealers about how best to distribute the supply across the product line. The U.S.’s borrowing needs are expected to grow after President Donald Trump signed tax cuts and a massive spending bill into law this year. However Mnuchin has consistently said he expects solid demand for U.S. Treasuries.

TBAC discussed the issuance model development most recently in its fourth-quarter 2017 report, following a request by the Treasury Department for an update. It said it had made various improvements, including incorporating volatility and financial stability-related constraints on the supply of Treasury bills.

“It would be interesting to know how the TBAC feels that the Treasury’s fiscal outlook should factor into the maturity-selection process,” Lou Crandall, chief economist at Wrightson ICAP, said. “Longer maturities might be relatively more attractive if you expect the debt-to-GDP ratio to rise steadily in the years ahead. However it may be difficult to incorporate those kinds of considerations into a rate optimization model of the sort the TBAC is developing.”

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