Macro

US Treasury Counters Debt-Sales Criticism, Defends Issuance Strategy

Treasury defends debt issuance strategy, highlights minor 1% adjustment in long-term securities sales.

By Athena Xu

7/11, 10:40 EDT
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Key Takeaway

  • Treasury's Josh Frost defends the issuance strategy, emphasizing regular and predictable practices to ensure low borrowing costs.
  • Criticism from Republicans claims Yellen's team manipulated debt sales for political gain; Frost counters these are minor, strategic adjustments.
  • The share of short-term bills as a "shock absorber" aligns with historical norms, not violating any strict guidelines.

Treasury Issuance Strategy Under Scrutiny

The U.S. Treasury's approach to debt issuance has come under intense scrutiny, with Assistant Secretary for Financial Markets Josh Frost set to address these concerns in a speech to the Money Marketeers. Frost's remarks, prepared for Thursday evening, aim to counter claims that the Biden administration has deviated from long-standing issuance practices. "We issue securities in a regular and predictable fashion as part of our strategy to borrow at the lowest cost over time," Frost stated, emphasizing the continuity of the Treasury's mission despite recent criticisms.

The backdrop to Frost's address includes accusations from Republicans and market participants that Treasury Secretary Janet Yellen's team has mishandled debt sales. Scott Bessent, founder of Key Square Group LP, suggested that the Treasury's decision to slow the increase in sales of longer-term Treasuries last November was politically motivated to boost the economy ahead of the presidential election. David Malpass, former World Bank president, argued that this strategy crowded out small businesses that rely on short-term borrowing.

Frost refuted these claims, explaining that the slowdown in longer-term debt sales was a minor adjustment, consistent with the Treasury's historical use of short-dated bills as a "shock absorber." He noted that the increase in the share of bills was in line with past practices and did not represent a significant departure from norms. "Regular and predictable issuance doesn’t mean that Treasury steadfastly ‘stays the course’ even when presented with new information and situations," Frost said.

Market Reactions and Auction Performance

The Treasury market has seen significant movements, particularly in response to concerns about heavy U.S. borrowing requirements. Treasury yields surged from August to September, partly due to these concerns. In November, the Treasury announced a $112 billion quarterly refunding round of 3-, 10-, and 30-year Treasuries, slightly below the $114 billion expected by many dealers. Frost highlighted that the slowdown in added issuance of 10-, 20-, and 30-year securities amounted to roughly a 1% change, which he described as a modest adjustment within the regular and predictable framework.

Recent auction performance has been robust, with trading desks expecting solid results for the $39 billion 10-year reopening sale. Seven of nine coupon auctions since June have stopped through, including June’s 10-year reopening and a recent 3-year sale. Investor sentiment has improved with the recent rally, and positioning data points to increased longs, signaling strong demand for Treasuries. Wells Fargo bond strategists noted that end-user demand is typically elevated, leaving dealers with below-average allotment in July compared to other reopening months.

Addressing Misconceptions and Historical Context

Frost's speech aims to debunk misconceptions about the Treasury's issuance strategy. He emphasized that the Treasury's approach has been consistent with its long-standing mission to borrow at the lowest cost over time. The philosophy of maintaining a transparent, predictable issuance pattern has been in place since the 1970s, ensuring a broad investor base and promoting a liquid market. This approach helps Treasuries serve as a global benchmark for both investors and other issuers.

Frost also addressed the rise in the share of bills in U.S. debt outstanding, rebutting the idea that the Yellen team had violated guidelines to keep the share in a 15%-to-20% range. He explained that this range is a useful rule of thumb, not a hard and fast mandate. Since 1980, the bills share has fluctuated significantly, serving as a "shock absorber" for ebbs and flows in borrowing needs. Frost reiterated that the Treasury Borrowing Advisory Committee (TBAC) had expressed comfort with running T-bills in the range of their longer-term historical share of 22.4% for some time before returning to the 15%-to-20% range.

Street Views

  • Scott Bessent, Key Square Group LP (Bearish on Treasury's debt issuance strategy):

    "The Treasury’s decision last November to slow its increase in sales of longer-term Treasuries was designed to loosen financial conditions and juice the economy in the run-up to the presidential election."

  • David Malpass, Former World Bank President (Bearish on short-dated bills issuance):

    "By instead relying on a rise in the share of short-dated bills to fund the government, the Treasury has effectively crowded out small businesses — which tend to borrow more at shorter maturities."

Management Quotes

  • Josh Frost, Assistant Secretary for Financial Markets at US Treasury:

    "We issue securities in a regular and predictable fashion as part of our strategy to borrow at the lowest cost over time. This mission statement has existed for several decades, and we never lose sight of that north star."
    "Regular and predictable issuance doesn’t mean that Treasury steadfastly ‘stays the course’ even when presented with new information and situations."
    "This kind of modest adjustment is exactly what the regular and predictable framework calls for. This was not outside of any norms. This was driven by Treasury’s views of structural demand and updates to expected borrowing needs."