Academic journal article Federal Reserve Bank of New York Economic Policy Review

The Effect of "Regular and Predictable" Issuance on Treasury Bill Financing

Academic journal article Federal Reserve Bank of New York Economic Policy Review

The Effect of "Regular and Predictable" Issuance on Treasury Bill Financing

Article excerpt

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In a speech in 2002, Peter Fisher, then under-secretary of the Treasury for domestic finance, stated that "the overarching objective for the management of the Treasury's marketable debt is to achieve the lowest borrowing cost, over time, for the federal government's financing needs" (Fisher 2002). Treasury officials have followed Fisher's agenda ever since.

In pursuit of financing at least cost over time, the Treasury adheres to a "regular and predictable" issuance program. As reported in Garbade (2007), the Treasury initially moved toward regular issuance of short-term notes in 1972 and fully embraced the practice in 1975 after rapid growth of the deficit. In 1982, Mark Stalnecker, then Treasury deputy assistant secretary for federal finance, testified that "regularity of debt management removes a major source of market uncertainty, and assures that Treasury debt can be sold at the lowest possible interest rate consistent with market conditions at the time of sale." In 1998, Gary Gensler, at the time the Treasury assistant secretary for financial markets, reinforced that principal, stating that "Treasury does not seek to time markets; that is, we do not act opportunistically to issue debt when market conditions appear favorable."

In practice, regular and predictable issuance entails prior announcement of the issuance schedule and gradual adjustment of issuance sizes. Of course, taking a regular and predictable approach does not mean that debt management practices never vary. Borrowing requirements change frequently and the Treasury constantly reevaluates issuance strategies and occasionally revises them to best serve the debt management mission. The process requires the definition of objectives and constraints, recognizing that, given multiple ways of satisfying financing needs, some approaches are better than others.

This article focuses on the potential impact of regular and predictable issuance on the short-run cost of issuing Treasury bills. As an issuer of both Treasury bills and coupon-bearing securities (including fixed-rate and inflated-protected securities), and given a coupon issuance schedule, the Treasury uses the bills in part for short-term financing and in part for cash management. The overriding constraint is to raise enough cash to satisfy the government's financing needs. In addition, cash balances need to be in an appropriate range-large enough to provide the Treasury with a buffer against unexpected events, but not so large as to create inefficiencies through over-borrowing. In addition, since Treasury bills are used extensively in the global financial system, it is desirable to maintain a steady supply for investors.

The historical bill issuance and amounts outstanding during the past fifteen years are shown in Chart 1. The figures reflect private issues only, and exclude rollovers in the Federal Reserve's System Open Market Account (SOMA) and sales of Supplementary Financing Program (SFP) bills.1 Because of the short maturity of bills, the gross auction amount is astonishingly large, reaching a peak of almost $6.7 trillion in fiscal 2009 amid the turbulence of the financial crisis. Issuance subsequently decreased when the Treasury moved to extend the weighted average maturity of debt to reduce "rollover risk"-the risk of facing unfavorable interest rates when rolling over matured debt in the future-and to take advantage of historically low term premia.

A key question-which is simple, yet has important policy implications-is whether regular and predictable issuance raises the Treasury's borrowing costs. Relevant studies in the literature are scarce. Garbade (2007) relies on a "natural experiment" in which he compares nominal coupon issuance in 1971-75 (when bills were sold on a "tactical" basis) with that in 1981-86 (when they were offered on a "regular and predictable" schedule). Using the root-mean-square change in yields over the interval from the close of business one business day before an auction announcement to the close of business one business day after the announcement, Garbade finds that most changes in yield are statistically significant in the tactical period while all changes in yield are insignificant in the regular period. …

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