July 30, 2024
Letter to the Secretary
Dear Madam Secretary,
Since the Treasury Borrowing Advisory Committee (TBAC) last met in late April, slowing inflation and a loosening labor market have led Treasury yields to move lower with growing expectations of rate cuts from the Federal Reserve. Yields on 10-year Treasuries have fallen by close to 40 basis points, with 2-year Treasury yields lower by around 50 basis points in the last three months. Various political developments are increasingly in focus as the November election approaches but so far have had a limited impact on asset prices.
After a 3.7% QoQ annualized increase in Q1, core PCE inflation slowed to 2.9% in Q2. The monthly inflation readings for May and June were particularly subdued. Goods prices, while not as soft as in the second half of 2023, have moved largely sideways despite elevated shipping costs. Anecdotes from companies suggest limited ability to raise consumer prices further. Shelter inflation, which has remained strong for much of the last three years, slowed to a typical pre-pandemic monthly pace in June. There remains some “stickiness” in certain elements of non-housing-related services inflation, such as financial or medical services.
Federal Reserve officials have indicated that recent inflation data have helped to increase confidence that inflation is sustainably slowing to their 2% target but that some more evidence could still be required to begin lowering rates. Market participants increasingly expect a first rate cut at the September FOMC meeting, with close to 25 basis points of cuts priced for that meeting and just over 60 basis points of cuts priced for this year as a whole.
Chair Powell indicated in congressional testimony on July 9th and 10th that risks around the Federal Reserve’s dual mandate of price stability and maximum employment are now more balanced. The risk of stronger inflation is balanced by the risk of a softer labor market as inflation has slowed but the unemployment rate has risen.
Monthly establishment survey (payroll) job growth remains strong, averaging 218k jobs added per month over the last year ending in June. But strong payroll job growth has also occurred alongside a more consistent rise in the unemployment rate in recent months. The unemployment rate has increased from a low of 3.4% in April 2023 to 4.1% as of June 2024. Job openings have also declined, and with the increase in unemployment, the ratio of job openings to unemployed workers has returned to 1.2:1, in line with pre-pandemic norms.
Activity has also slowed in recent months from a very strong pace in H2-2023 but with aggregate output continuing to rise. Real GDP growth rose 1.4% QoQ SAAR in Q1 and 2.8% in Q2, with final private domestic demand rising by 2.6% each quarter.
On May 1st, the Federal Reserve announced it would begin to slow its balance sheet reduction pace starting June when it reduced its cap on Treasury securities redemptions from $60 billion per month to $25 billion per month.
Ten-year Treasury yields have recently fallen to around 4.2%, lower than this year’s highs around 4.6%, but still above lows at the start of this year around approximately at about3%. This pullback from peaks earlier this year reflects both declining real yields and declining inflation expectations due largely due mainlyto slowing economic activity and price pressures .
In light givenof this fiscal backdrop contextthe , TBAC reviewedTreasury’s August Quarterly Refunding Presentation . Basedonestimates published July29th , Treasury currently expects privately-held net marketable borrowingof$740 billionin Q42024( CYthirdquarter )with assumed end-of-September cashbalance$850 billion .The borrowing estimateis$106billionlower than whatwas announcedApril.Forecastforfirst quarter FY25(Q42024)expectprivatelyheldnetmarketableborrowing$565billionwithendDecembercashbalanceassumedatapproximately $700 billion .
Primary dealers revisedtheirdeficitandprivatelyheldnetmarketableborrowing estimates slightlyhigherovereachFY24throughFY26,resulting additionalforecastedborrowingofapproximately400blnoverperiod.Committeenoted variedinterest rate assumptionsusedby primarydealersOMB,and CBO,some committee membersnotedtheseprojectionsassumecurrentlawcouldcontributeto elevatednear-termuncertaintyaroundthese forecasts .
CommitteeappreciatedupdateonsuccessfulimplementationTreasury'sliquiditysupportbuybackprogram.Treasurycommunicateddealer saw buybacksmodestlysupportive liquiditylimitedsizeandalreadyliquidmarketconditionsdifficultascertainfullimpactprogram.CommitteeofferedcommentsdistributioninterestcertainCUSIPs program,certainpartscurve(e.g.,TIPS)amongpotentialparticipants.Treasurynotedcontoursprogramcouldbeadaptedovertimeasmovesbeyondinitialphasewelcomesfeedbacksuggestionspossibleenhancementsexecutionreporting .
Committee then reviewed charges forthisquarter.FirstchargeCommittee welcomed opportunity revisit historicalguidanceoptimalT-billsharedebtoutstanding.pastfivequartersCommitteemaderecommendationscouponissuancedecisionsresultedinrunningT-billsharehigherthan20percentoutstandingdebt.Treasury'sgoalsminimizingcosttaxpayerovertimewithregularpredictableissuancecentraldebatesaroundrecommendations.PresentingmembershighlightedfourmainareasconsiderT-billissuance:financingcostsovertime regularpredictableissuancesecurities marketstructureinvestordemand debtmaturitydistribution.Committeefelt T-billissuanceshouldcontinuetoactshockabsorberallowingcouponsissuedregularpredictablemanner.HistoricallynecessitatedoperatingwithT-billshareshighas30-35percentshortperiods.Inorderre-examineconsiderationsforT-billissuancemediumlongterm,presentingmembersusedOptimalDebtModelcloselyreviewtrade-offbetweenaverageinterestcostsandvolatilityindebtservicecosts.notedinchargevolatilityaroundfundingcostsreducedwhenT-billshareatbelow20percent.Modelprovideshelpfulframeworkdiscussion Committeefeltresultsoneconsiderationmany.Significantdebatevalue"share"metric.mostfelt T-billsharenottargetitselfmembersagreedmonitoringshare(alongsideothermetrics,suchabsoluteandnetissuance)valuable.Ascontinuationmostmembersfeltlowerboundmoreimportantupperbound.appropriatelowerboundcanvaryduetotalT-billsoutstandingoverallhighqualityliquidassets effectsMMFReformsamongotherthings Committeefeltcurrently15percentsupporthealthymarketfunctioning.consideramediumlongtermaverage Committeefeltthat T-billshareshouldnotfirstconsiderationissuancedecisions notingmanyotherfactorshighlightedincharge.groupfocusedprioritizingregularpredictablepatternsincoupons trade-offbetweeninterestratecostsandvolatilitydebtfinancingrolloverrisk.mostCommitteemembersfeltcurrently T-bill shareaveraging20percenttimeappearsprovidetrade-offbetweenthese factors.however CommitteenotedimportanceforTreasuryretainflexibilityadaptovertimeevolvingmarketdynamics.Secondchargereviewedby Committeeinvolveddevelopments outlookfordemandTreasuries.presentingmembernotedrecenttrendsshowedincreasedTreasurydemandfrompricesensitivebuyerslikehouseholds(includinghedgefunds)money marketfundswhile reviewinghistoricalholdingsdataacrossmultiyearperiod.onforwardbasis presentingmemberpositeddemandforTreasureiscouldremainsupportedamongvariousbuyers.bankdemandcouldshiftAgencyMBSTreasuriesduetoregulatorychangesparticularlyshort-dated Treasuriesdurationassetsshortentomatchliabilitiesfollowingbankstressesspring2023.MMFDemandgovernmentsecuritiesincreasingaheadupcomingSECmandatoryliquidityfeerequirementstakingeffectOctober HedgefundhouseholddemandcouldremainrobusteasinginflationimprovingvalueTreasureisashedgeriskassets.committeediscussedinterplayassetmanagerhedgefundholdingsincludingthroughbasistradeimplicationsrepofinancingbothnowpostimplementationSECsfinalruleclearingUSTreasuryrepo trades.Committee felt outlookinvestordemandUSTreasureismodestlypositivesomemembersnotedriskmovehighertermpremiumbaseddeficitoutlook.intermsissuanceupcomingquarter CommitterecommendedTreasurykeepnominalcouponauctionsizesunchangedturningtips committeesupportedincreasing5yTipsauctionby$1bln($blnincrease reopening10ytipsseptember).withinformationsubsequentquartercommitteefeltunchangednominalcoupons,$blnincreasetoJanuary10yTips issuanceappropriate.subsequentquarter Committeefeltcontinuedmarginal increases5y10y tips auctionsappropriatewhenconsideringshareoutstandingcurrenttips maturityprofilelimitednumbertipsauctionseachquarter.committeealsodiscussedpotentialimpactdebtceilingconstraintsonTreasurys issuancestrategyFYespeciallylimitsto treasuryflexibilitylikelihoodincreased coststaxpayer.periodicoccurrencedebtceilingepisodesdriveselevateduncertaintyinfunding costs.AdditionallytheseepisodescausesignificanteconomicuncertaintyaffectfinancialmarketsimpactU.Screditratings notedletterswrittenbothpartQuarterlyRefundingprocessalsoindependently201120162021andlackresolutiondebtceilingrunsriskunderminingfoundationofthe U.S Treasures market
Respectfully,
Deirdre K Dunn Chair TBAC Mohit Mittal Vice Chair TBAC
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