Minutes of the Meeting of the Treasury Borrowing Advisory Committee January 30, 2024

The Committee convened in a closed session at the Department of the Treasury at 9:00 a.m.  All members were present.  Under Secretary for Domestic Finance Nellie Liang, Fiscal Assistant Secretary David Lebryk, Assistant Secretary for Financial Markets Josh Frost, Deputy Assistant Secretary for Federal Finance Brian Smith, Director of the Office of Debt Management Fred Pietrangeli, and Deputy Director of the Office of Debt Management Tom Katzenbach welcomed the Committee.  Other members of Treasury staff present were Sally Au-Yeung, Shantanu Banerjee, Chris Cameron, Nicholas Chisholm, Dave Chung, Andrew Cohen, Gabriella Csepe, Christian Furey, Chris Kubeluis, Katarina Liviana, Jeff Rapp, Renee Tang, Thomas Teles, and Laura Thrift.  Federal Reserve Bank of New York staff members Ellen Correia Golay, Peggy Kauh, and Kyle Watson were also present. 

Committee Chair Deirdre Dunn opened the meeting by welcoming Anastasia Titarchuk as the newest member of the Committee and thanking John Uglum for his service to the committee.  Following her remarks, Treasury counsel presented the annual review of Committee guidelines.

Director Pietrangeli reviewed highlights of changes in receipts and outlays during Q1 FY2024.  Receipts totaled $1.108 trillion, an increase of $82 billion (8%) compared to the same period last year primarily due to a combination of higher corporate tax receipts and delayed payments from areas that experienced natural disasters in 2023.  Outlays totaled $1.618 trillion, an increase of $171 billion (12%) compared to the same period last year, which was largely due to the impact of higher interest costs, inflation adjustments to transfer payments, and increases in defense expenditures. 

Pietrangeli then turned to privately-held net marketable borrowing projections.  Primary dealer estimates of privately-held net marketable borrowing were little changed over the past three months, with a median cumulative estimate for FY2024-FY2026 approximately $73 billion higher than last quarter.  Dealers noted that their level of confidence around these estimates was low, with the potential for risks related to the lagged impact of tighter financial conditions on economic growth and tax receipts, future changes to the pace of SOMA redemptions, and other factors that may affect future borrowing needs. 

Under Secretary Liang then provided a brief update on debt management and other Treasury priorities. 

Deputy Director Katzenbach reviewed primary dealers’ expectations for coupon issuance.  Primary dealers generally expected increases in nominal coupon issuance identical in magnitude and distribution to the increases implemented at the November refunding; dealers also expected continued increases in bill supply.  Most dealers expected that coupon size increases announced at the February refunding would be the last needed in the near-term, while uncertainty about the pace and duration of balance sheet normalization could be addressed via changes in bill supply. 

Debt Manager Chisholm then discussed primary dealers’ 2024 outlook for money markets and Treasury bill demand. Dealers broadly expected that the Federal Open Market Committee (FOMC) will reduce policy rates during 2024; there was likewise a broad consensus among dealers that the Federal Reserve would reduce the pace of SOMA redemptions in the coming year.  Dealers noted that, all else being equal, lower SOMA redemptions would reduce Treasury’s net privately-held borrowing needs.  As such, dealers anticipated this would likely result in fewer Treasury bills being issued to private market participants, given the role of bills as Treasury’s issuance “shock absorber.”  By contrast, dealers cautioned that lower short-term interest rates may present headwinds for Treasury bill demand during 2024 by reducing the relative attractiveness of money market funds and short-term investments.  However, dealers expressed confidence that money market funds would not face significant outflows and would continue to be a meaningful investor in both Treasury bills and Treasury repurchase agreements throughout 2024. 

Debt Manager Banerjee reviewed primary dealers’ views on recent trends in global demand for inflation-linked securities and the market’s capacity to absorb additional TIPS issuance.  Dealers noted that the TIPS market continues to function well despite retail outflows over the last year from inflation-indexed products driven by the softening inflation backdrop and losses for TIPS funds as a result of higher real rates.  On the topic of trends in international issuance of inflation-linked securities, primary dealers referenced decisions by Canada and Germany to cease issuance of inflation-linked bonds. Most dealers noted that the long-term impact of both announcements on the TIPS market is expected to be small due to the size of both markets relative to TIPS and the potential for investors to seek inflation protection through other investments.  Finally, dealers expressed confidence in the market’s ability to absorb incremental increases in TIPS issuance: dealers expected increases of $1 billion in the 10-year reopening with many dealers expecting small increases in the new issue 5- and 30-year tenors in the coming quarter. 

The Committee then discussed recent trends in Treasury futures positioning.  The presenting member began by reviewing data produced by the Commodity Futures Trading Commission (CFTC).  This data shows that, since 2022, asset managers have emerged as consistent buyers of Treasury futures; by contrast, leveraged funds, such as hedge funds and commodity trading advisors, have been consistent sellers. 

The presenting member noted that asset managers’ preference for Treasury futures may result from regulatory considerations in addition to the embedded leverage and operational flexibility that futures afford.  These features, the presenting member posited, enable asset managers to enhance returns in fixed income funds that track broad market indices by facilitating additional exposure to credit products.  However, the presenting member noted that the additional flexibility of Treasury futures is not without costs, which are ultimately reflected in the Treasury cash-futures basis. 

The Committee adjourned at 12:00 p.m.

The Committee reconvened at 1:15 p.m. 

The presenting member proceeded to describe how leveraged funds are typically short the futures that asset managers are long as part of the cash-futures basis trade.  The presenting member discussed the estimated size of those positions and the typical leverage used by leveraged funds.  The presenting member concluded by noting associated risks and recommending potential metrics for Treasury to monitor as well as potential areas of future study. 

The Committee then discussed its financing recommendation for the upcoming quarters.  Based on updated borrowing estimates, the Committee advised Treasury to continue increasing nominal coupon auction sizes for this upcoming quarter at the same pace as in the November refunding.  The Committee also highlighted the high level of uncertainty about the current outlook and noted that it may consider recommending additional increases to coupon auction sizes over time based on changes in borrowing needs.  Finally, the Committee also recommended gradual increases to floating rate note and TIPS auction sizes. 

The Committee adjourned at 2:45 p.m.

The Committee reconvened at 5:00 p.m.

Finally, the Chair summarized key elements of the Committee report for Secretary Yellen and followed with a brief discussion of recent market developments.

The Committee adjourned at 5:30 p.m.

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Brian Smith

Deputy Assistant Secretary for Federal Finance

United States Department of the Treasury

January 30, 2024

Certified by:

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Deirdre Dunn, Chair

Treasury Borrowing Advisory Committee

January 30, 2024

Treasury Borrowing Advisory Committee Quarterly Meeting

Committee Charge – January 30, 2024

Fiscal Outlook

Taking into consideration Treasury’s short, intermediate, and long-term financing requirements, as well as the variability in financing needs from quarter to quarter, what changes, if any, do you recommend to Treasury issuance?  Please also provide perspectives regarding market expectations for Treasury issuance, the effects of changes in SOMA holdings, the evolution of Treasury holdings by different types of investors, as well as auction calendar construction.

Cash-Treasury Futures Basis Trade

According to Treasury futures positioning data, asset manager long positions and leveraged fund short positions have increased significantly. Please discuss the factors that could be driving this dynamic.  What are the reasons for asset managers to prefer the Treasury futures market over the cash market for their duration needs?  What type of activity does the leveraged short positioning reflect for example, to what extent could this be cash futures basis trading activity?  What are important factors to consider when monitoring changes in cash futures basis positions?

Financing this Quarter

We would like the Committee’s advice on the following:

• The composition of Treasury notes and bonds to refund approximately $105.1 billion of privately-held notes maturing on February 15, 2024.

• The composition of Treasury marketable financing for the remainder of the January-March 2024 quarter.

• The composition of Treasury marketable financing for the April-June 2024 quarter.