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 Minutes of the Meeting of the Treasury Borrowing Advisory Committee Minutes of the Meeting of the Treasury Borrowing Advisory Committee Of the Securities Industry and Financial Markets Association August 5, 2014


8/6/2014
The Committee convened in closed session at the Hay Adams Hotel at 10:30 a.m.  All members were present.  Under Secretary for Domestic Finance Mary Miller, Assistant Secretary for Financial Markets Matthew S. Rutherford, Deputy Assistant Secretary for Federal Finance James G. Clark, and Director of the Office of Debt Management Fred Pietrangeli welcomed the Committee.  Other members of Treasury staff present were Deputy Director Amar Reganti, John Dolan, Won Chung, Jake Liebschutz, Seth Carpenter and Tom Katzenbach.  Federal Reserve Bank of New York staff members Nathaniel Wuerffel and Lorie Logan were also present.
 
Deputy Assistant Secretary (DAS) Clark began by discussing recent trends in tax receipts.  He noted that receipts through June 2014 continued to grow at a relatively strong pace.  He stated that the volume of FY 2014 receipts falling in line with FY 2013 was notable given last year’s strength. 
 
Clark then showed a chart with the eleven largest outlays in the fiscal year to date.  He explained that outlays to Health and Human Services (HHS) had risen by $25 billion, or 3.8 percent, compared to the first three quarters of last year.  This increase was driven primarily by expanded coverage of Medicaid in the Affordable Care Act (ACA).  Social Security (SSA) also rose by $29 billion, or 4.5 percent, due to a cost-of-living adjustment (COLA) and increased enrollment.  Treasury expenditures increased $28 billion, or 7.7 percent, due to lower GSE receipts and higher interest payments due to the increased level of debt.  Education outlays also increased by $20 billion, or 74 percent, due to a downward revision on its subsidy estimate that largely resulted from a change in interest rate assumptions.
 
Clark then turned to budget deficits and borrowing forecasts.  He pointed out that cumulative budget deficits were tracking significantly lower than last year and have exhibited the lowest rate of increase since prior to the financial crisis.  He explained that the Treasury recently estimated that net marketable borrowing/GDP for FY 2014 would be approximately 3.8 percent. 
 
Director Pietrangeli turned to the financing results from the April to June period.  He observed that Treasury had paid down $64 billion of debt and ended the period with a cash balance of $139 billion.  Pietrangeli stated that Treasury would raise $216 billion for the July through September period, consisting of $38 billion in bills and $178 billion in coupons, assuming no changes to the current borrowing schedule.  However, he noted that Treasury had recently announced that it was expected to borrow $192 billion over the same period, with an increase of cash from $139 billion to $150 billion, implying that Treasury is overfinanced by $24 billion through the end of September.
 
In the next two slides, Pietrangeli briefly reviewed the composition of OMB’s projections of new borrowing from the public.  In addition, he reviewed the interest rate assumptions in OMB projections relative to the market implied forward rates.
 
Director Pietrangeli then turned to the chart that illustrates net borrowing estimates from primary dealers, the CBO and the OMB relative to Treasury’s current borrowing.  He observed that the chart suggests that Treasury remains appropriately funded for FY 2014 and FY 2015.  However, beyond 2015 Pietrangeli noted that borrowing estimates were forecast to rise.  Pietrangeli noted that Treasury’s borrowing needs would be impacted by the Federal Reserve’s decision to redeem or reinvest maturing securities in the SOMA portfolio.  If the Federal Reserve redeems, he explained that Treasury would be underfunded by approximately $775 billion from 2016 through 2018.  If the Federal Reserve reinvested the portfolio, Treasury would be underfinanced by approximately $100 billion between 2016 and 2018.
 
Pietrangeli then turned to portfolio metrics.  He noted that the weighted average maturity (WAM) of the portfolio continued to increase and currently stands at 68.4 months.  He noted that the WAM is on track to reach 80 months by 2022, the highest level since the mid-1950s.
 
Pietrangeli then moved to auction performance and analytics.  He stated that bill coverage remained at or near historic highs.  He also discussed robust FRN auction coverage and noted that it appeared that FRN bid-to-covers were moving more in line with other bill products.  In addition, Pietrangeli noted that investment funds had increased their share of awards in bills, long coupons and TIPS.  Finally, Pietrangeli noted that foreign awards had remained stable over the last two years.
 
Pursuant to the Committee’s request at the April meeting that Treasury present a cash balance management framework that mitigates certain risks, DAS Clark began his presentation by reviewing Treasury’s current cash balance objectives.  He explained that Treasury’s main sources of cash are susceptible to risk, noting that Treasury has historically focused on risks associated with errors in fiscal forecasting.  Clark stated that several events had made it clear that market access and settlement risks could also potentially impair Treasury’s ability to fund government expenditures for several business days. 
 
A detailed discussion ensued amongst Committee members around the benefits and potential concerns related to holding a higher cash balance in order to mitigate the consequence of losing market access.  The Committee concluded that it would be cost effective and prudent for Treasury to hold a higher cash balance.  They suggested that Treasury should continue to analyze the details of maintaining a higher cash balance and present its findings at an upcoming TBAC meeting.
 
Next, the Committee turned to whether Treasury should continue its coupon cuts in 2-year and 3-year Treasury securities.  The Committee concluded Treasury’s current financing was adequate and coupon reductions did not need to continue.  Therefore, Treasury will hold steady its current level of 2-year and 3-year security issuance sizes.
 
Finally, a Committee member presented a charge regarding the historically low levels of volatility in securities markets.  The Committee member reviewed a number of drivers of this low volatility and discussed whether markets had become too complacent.  The presenter concluded that monetary policy and regulatory changes have contributed to the decline in volatility.  In addition, he noted with concern that liquidity providers have declined in number and capacity, making the system less able to deal with unexpected volatility.  A discussion ensued amongst the Committee members. 
 
The meeting adjourned at 1:00 p.m.
 
The Committee reconvened at the Department of the Treasury at 5:00 p.m.  All Committee members were present.  The Chair presented the Committee report to Secretary Lew.
 
A brief discussion followed the Chair’s presentation but did not raise significant questions regarding the report’s content.
 
The Committee then reviewed the financing for the remainder of the July through September quarter and the October through December quarter (see attached).
 
The meeting adjourned at 6:00 p.m.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
_________________________________
 
James G. Clark
Deputy Assistant Secretary for Federal Finance
United States Department of the Treasury
August 5, 2014
 
 
 
Certified by:
 
 
_________________________________
 
Dana Emery, Chairman
Treasury Borrowing Advisory Committee
Of The Securities Industry and Financial Markets Association
August 5, 2014
 
 
_________________________________
 
Curtis Arledge, Vice Chairman
Treasury Borrowing Advisory Committee
Of The Securities Industry and Financial Markets Association
August 5, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Treasury Borrowing Advisory Committee Quarterly Meeting
Committee Charge – August 5, 2014
 
Drivers of Low Volatility
 
Asset price volatility has declined over the past two years both in the United States and globally. At the same time, forward-looking measures of market uncertainty across a range of fixed income, equity, and foreign exchange markets have also declined.  What are the Committee’s views on these developments and the factors that have contributed to the current environment of low volatility globally?
 
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