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by Lee Adler
The Treasury Borrowing Advisory Committee (TBAC) released its quarterly advice to the Treasury yesterday. This is public domain stuff, and since I haven’t heard much mention of it in the mainstream media, I am reposting it here in its entirety. This is an unfolding horror story. This report paints a picture of the financial apocalypse the US government faces in stark detail unlike anything you will ever see in the mainstream media, and just about anywhere else except the most hard core permabear websites. Remember, the piece you are about to read is published by the US Government, Department of the Treasury. That makes it all the more frightening.
Read it and weep:
"Since the Committee last convened in early November, the contraction in economic activity has deepened and broadened, while financial markets have remained under duress. The unprecedented volatility present in capital markets when the Committee last met has diminished somewhat but conditions still are exceptionally challenging. Policy efforts have begun to unlock credit for select high-quality borrowers. But the magnitude of wealth destruction, the still heightened cost of economy-wide capital and the impaired system of financial intermediation continue to cast a dark cloud over the economic outlook.
Monetary and fiscal policy action now being implemented will help to prevent an even more serious downturn than otherwise would be the case. Policymakers’ efforts to restore the flow of credit to households and businesses, backstop critical financial intermediaries through capital injections and loan guarantees, and stimulate economic activity via lower interest rates, tax cuts and government spending are positives. Nonetheless, the necessary deleveraging of both the financial and household sector is considerable and has further to run.
Price pressures are receding rapidly. Headline inflation already has collapsed toward zero due in large part to the steep declines in commodity costs. More notably, core inflation also is cooling quickly amid the slump in demand and rising unemployment and remains close to the Federal Reserve’s comfort range for this series. Moreover, the speed at which businesses are cutting headcount and reducing compensation is raising the risk of deflation. Given elevated debt levels, such an outcome would be extremely problematic for the financial sector and real economy.
Federal Reserve officials have dropped the funds rate to effectively zero and are focused on using the bank’s balance sheet to help to restore the flow of private sector credit. Forthcoming implementation of the TALF program to restart the flow of credit in the asset-backed securities market is one example of the Fed’s efforts, as is its ongoing purchases of agency and agency-backed mortgage debt. Additional asset purchases – including the buying of Treasury securities if the FOMC determines that such purchases would be “particularly effective in improving conditions in private credit markets” – also are possible.
Despite the latest steepening in the yield curve, the curve has flattened since the Committee convened in November. The spread between the two- and ten-year and two- and thirty-year Treasury yield, for instance, has narrowed by about 50bp and 25bp, respectively. The flatter curve, despite a lower funds rate, reflects investors’ concerns about deflation. The recent steepening led by the rise in longer-dated yields, however, partly may be a by-product of the Treasury’s outsized funding needs in 2009-2010. Further substantive increases in Treasury yields may prove counterproductive to policy actions already underway.
Those outsized funding needs reflect the dismal outlook for economic growth and Congress and the Administration’s efforts to bolster the economy through policy action. Tax receipts are declining at a brisk pace given the climb in unemployment, reduced wealth and slowing corporate profits. Receipts were down by nearly 10% in the first three months of the new fiscal year and the pace of decline appears to have accelerated in January. Individual nonwithheld tax receipts in the month plunged by almost 15% versus a year ago. Meanwhile, outlays are surging at a breakneck pace as automatic stabilizers (unemployment compensation, food stamps, etc.) kick in and the government puts in place programs to try and stabilize the financial sector.
The deterioration in the budget outlook, combined with expenditures associated with the TARP, potential FDIC guarantees, and expected additional stimulus spending have increased private forecasts for total funding needs of the U.S. government for fiscal year 2009 to approximately $2 trillion. This is likely to stress the existing auction schedule and consequently warrants tangible adjustments to that schedule.
Faced with an unprecedented increase in net borrowing needs, the Treasury in its first charge to the Committee sought our advice and recommendation on changes to the auction calendar for debt issuance.
In keeping with past practices, the Committee recommended that the Treasury address its needs by reviewing the size, frequency and then the elimination, or in this case addition of debt maturity issues.
Furthermore, the Committee also stressed the importance of maintaining focus on the overall average maturity of the debt to ensure that financing is distributed across the maturity spectrum.
Faced with such extraordinary financing needs, the Committee focused on the optimal potential size of each coupon issue, while not jeopardizing a successful auction process.
It was the Committee’s recommendation that existing monthly 2-year and 3-year notes could be increased by $5 billion in size, to $45 billion and $35 billion, respectively.
Furthermore, the Committee recommends that monthly 5-year notes have the greatest room for expansion given their liquidity and focus and should be increased by as much as $10 billion per issue. This would bring the monthly issuance size to as much as $40 billion.
And lastly, the committee recommends that the Treasury increase the size of the newly issued quarterly 10-year notes by $5 billion and by $4 billion when re-opened the two months following the new issue. In other words, the sizes of the 10-year issuances would increase from $20 billion, $16 billion and $16 billion each quarter to $25 billion, $20 billion and $20 billion, respectively.
The Committee also reviewed the frequency of the relevant issues and reiterates its recommendation to Treasury to issue 30-year bonds monthly, following the pattern of 10-year issuance. In other words, to have a new 30-year bond auction each quarter in February, May, August and November followed by re-openings of that issue in the two months following. The Committee recommends that the Treasury size these auctions to $15 billion, $10 billion, and $10 billion, respectively.
Furthermore, the Committee recognized that the changes were not sufficient to meet its borrowing needs and that the Treasury must introduce new coupon issues to its calendar.
While the number of new issues discussed by market participants, and the Committee, were a 4-year, 7-year, 20-year, and super-long (50-year) maturity issue. Among these choices, the Committee believes that a 7-year issue would be best accepted by the marketplace.
Consequently, after much discussion, the committee recommends that the Treasury announce a new 7-year maturity issue monthly. The pattern and size of the issue is recommended to be $15 billion quarterly, with subsequent re-openings of $10 billion over the following two months.
A number of Committee members noted that despite the tremendous growth in proposed coupon issuance, the average maturity of Treasury debt will likely fall further and that additional changes will need to be discussed by market participants in coming months.
The average maturity of the debt has already fallen from a range of 60 to 70 months which existed from the mid 1980’s until 2002 to a level of 48 months more recently.
One member of the Committee suggested that the Treasury consider setting a target or guideline for this measure. While few agreed with setting a hard target level, most concurred that the Treasury needs to be focused on distributing its issuance across the maturity spectrum and avoid letting the average maturity fall too low.
In its second charge to the Committee, the Treasury sought our input on factors that might affect the supply and demand for Treasury securities over the next couple of years.
One member presented a deck of charts and exhibits that were prepared prior to the meeting and are attached.
by Lee Adler
The Treasury Borrowing Advisory Committee (TBAC) released its quarterly advice to the Treasury yesterday. This is public domain stuff, and since I haven’t heard much mention of it in the mainstream media, I am reposting it here in its entirety. This is an unfolding horror story. This report paints a picture of the financial apocalypse the US government faces in stark detail unlike anything you will ever see in the mainstream media, and just about anywhere else except the most hard core permabear websites. Remember, the piece you are about to read is published by the US Government, Department of the Treasury. That makes it all the more frightening.
Read it and weep:
"Since the Committee last convened in early November, the contraction in economic activity has deepened and broadened, while financial markets have remained under duress. The unprecedented volatility present in capital markets when the Committee last met has diminished somewhat but conditions still are exceptionally challenging. Policy efforts have begun to unlock credit for select high-quality borrowers. But the magnitude of wealth destruction, the still heightened cost of economy-wide capital and the impaired system of financial intermediation continue to cast a dark cloud over the economic outlook.
Monetary and fiscal policy action now being implemented will help to prevent an even more serious downturn than otherwise would be the case. Policymakers’ efforts to restore the flow of credit to households and businesses, backstop critical financial intermediaries through capital injections and loan guarantees, and stimulate economic activity via lower interest rates, tax cuts and government spending are positives. Nonetheless, the necessary deleveraging of both the financial and household sector is considerable and has further to run.
Price pressures are receding rapidly. Headline inflation already has collapsed toward zero due in large part to the steep declines in commodity costs. More notably, core inflation also is cooling quickly amid the slump in demand and rising unemployment and remains close to the Federal Reserve’s comfort range for this series. Moreover, the speed at which businesses are cutting headcount and reducing compensation is raising the risk of deflation. Given elevated debt levels, such an outcome would be extremely problematic for the financial sector and real economy.
Federal Reserve officials have dropped the funds rate to effectively zero and are focused on using the bank’s balance sheet to help to restore the flow of private sector credit. Forthcoming implementation of the TALF program to restart the flow of credit in the asset-backed securities market is one example of the Fed’s efforts, as is its ongoing purchases of agency and agency-backed mortgage debt. Additional asset purchases – including the buying of Treasury securities if the FOMC determines that such purchases would be “particularly effective in improving conditions in private credit markets” – also are possible.
Despite the latest steepening in the yield curve, the curve has flattened since the Committee convened in November. The spread between the two- and ten-year and two- and thirty-year Treasury yield, for instance, has narrowed by about 50bp and 25bp, respectively. The flatter curve, despite a lower funds rate, reflects investors’ concerns about deflation. The recent steepening led by the rise in longer-dated yields, however, partly may be a by-product of the Treasury’s outsized funding needs in 2009-2010. Further substantive increases in Treasury yields may prove counterproductive to policy actions already underway.
Those outsized funding needs reflect the dismal outlook for economic growth and Congress and the Administration’s efforts to bolster the economy through policy action. Tax receipts are declining at a brisk pace given the climb in unemployment, reduced wealth and slowing corporate profits. Receipts were down by nearly 10% in the first three months of the new fiscal year and the pace of decline appears to have accelerated in January. Individual nonwithheld tax receipts in the month plunged by almost 15% versus a year ago. Meanwhile, outlays are surging at a breakneck pace as automatic stabilizers (unemployment compensation, food stamps, etc.) kick in and the government puts in place programs to try and stabilize the financial sector.
The deterioration in the budget outlook, combined with expenditures associated with the TARP, potential FDIC guarantees, and expected additional stimulus spending have increased private forecasts for total funding needs of the U.S. government for fiscal year 2009 to approximately $2 trillion. This is likely to stress the existing auction schedule and consequently warrants tangible adjustments to that schedule.
Faced with an unprecedented increase in net borrowing needs, the Treasury in its first charge to the Committee sought our advice and recommendation on changes to the auction calendar for debt issuance.
In keeping with past practices, the Committee recommended that the Treasury address its needs by reviewing the size, frequency and then the elimination, or in this case addition of debt maturity issues.
Furthermore, the Committee also stressed the importance of maintaining focus on the overall average maturity of the debt to ensure that financing is distributed across the maturity spectrum.
Faced with such extraordinary financing needs, the Committee focused on the optimal potential size of each coupon issue, while not jeopardizing a successful auction process.
It was the Committee’s recommendation that existing monthly 2-year and 3-year notes could be increased by $5 billion in size, to $45 billion and $35 billion, respectively.
Furthermore, the Committee recommends that monthly 5-year notes have the greatest room for expansion given their liquidity and focus and should be increased by as much as $10 billion per issue. This would bring the monthly issuance size to as much as $40 billion.
And lastly, the committee recommends that the Treasury increase the size of the newly issued quarterly 10-year notes by $5 billion and by $4 billion when re-opened the two months following the new issue. In other words, the sizes of the 10-year issuances would increase from $20 billion, $16 billion and $16 billion each quarter to $25 billion, $20 billion and $20 billion, respectively.
The Committee also reviewed the frequency of the relevant issues and reiterates its recommendation to Treasury to issue 30-year bonds monthly, following the pattern of 10-year issuance. In other words, to have a new 30-year bond auction each quarter in February, May, August and November followed by re-openings of that issue in the two months following. The Committee recommends that the Treasury size these auctions to $15 billion, $10 billion, and $10 billion, respectively.
Furthermore, the Committee recognized that the changes were not sufficient to meet its borrowing needs and that the Treasury must introduce new coupon issues to its calendar.
While the number of new issues discussed by market participants, and the Committee, were a 4-year, 7-year, 20-year, and super-long (50-year) maturity issue. Among these choices, the Committee believes that a 7-year issue would be best accepted by the marketplace.
Consequently, after much discussion, the committee recommends that the Treasury announce a new 7-year maturity issue monthly. The pattern and size of the issue is recommended to be $15 billion quarterly, with subsequent re-openings of $10 billion over the following two months.
A number of Committee members noted that despite the tremendous growth in proposed coupon issuance, the average maturity of Treasury debt will likely fall further and that additional changes will need to be discussed by market participants in coming months.
The average maturity of the debt has already fallen from a range of 60 to 70 months which existed from the mid 1980’s until 2002 to a level of 48 months more recently.
One member of the Committee suggested that the Treasury consider setting a target or guideline for this measure. While few agreed with setting a hard target level, most concurred that the Treasury needs to be focused on distributing its issuance across the maturity spectrum and avoid letting the average maturity fall too low.
In its second charge to the Committee, the Treasury sought our input on factors that might affect the supply and demand for Treasury securities over the next couple of years.
One member presented a deck of charts and exhibits that were prepared prior to the meeting and are attached.