A recently published white paper is causing a stir on Wall Street and in Washington, accusing the Treasury Department of conspiring to stimulate the economy for political purposes, risking a resurgence of inflation.
The paper, published last week, argues that the Treasury Department’s decision to continue financing an excessive portion of the U.S. debt with short-term Treasury securities amounts to deliberate manipulation of the economy. The authors even coined a term for it: “activist Treasury issuance.”
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“By adjusting the maturity profile of debt issuance, the Treasury Department dynamically manages financial conditions and thus the economy, and takes over the core functions of the Federal Reserve,” co-authors Stephen Miran and Nouriel Roubini wrote in the article’s introduction.
The Treasury Department has strongly denied the allegations, and bond market experts also have doubts.
Lou Crandall, chief economist at Wrightson ICAP and a longtime bond market watcher, rejected the paper’s conclusions in a report he shared with MarketWatch.
“The bottom line is that Treasury issuance has evolved over the past year in ways that are consistent with both historical behavior and more recent Treasury guidance,” Crandall said. “Treasury is simply doing what it said it was going to do.”
“I can assure you 100 percent there is no such strategy. We have never, ever discussed anything like this,” Treasury Secretary Yellen said in a comment shared with MarketWatch. The statement first appeared in a report by Bloomberg News.
According to Miran and Roubini, the Treasury Department’s excessive issuance of government bonds over the past nine months has had an impact comparable to about $800 billion in quantitative easing, the Fed’s post-crisis bond-buying program.
This equates to a 25 basis point cut in the 10-year yield, or a full percentage point in the federal funds rate.
The Treasury Department’s decision to rely more on banknotes effectively neutralizes some of the Fed’s efforts to tighten monetary policy and cool the economy, undermining the central bank’s claims that monetary policy is restrictive, the paper’s authors said.
Miran and Roubini concluded that this has brought the overall policy level closer to neutral, which may explain why financial conditions remain relatively benign even with interest rates at their highest level in more than 20 years.
Many of the concerns expressed in the document echo comments made by Sen. Bill Hagerty, a Republican from Tennessee, who questioned Fed Chairman Jerome Powell about the Treasury Department’s reliance on legislative proposals during a recent Senate Banking Committee hearing.
When asked for comment, Hagerty’s office shared the following statement with MarketWatch.
“Politics has no place in the issuance of government debt. Unfortunately, Minister [Janet] Yellen’s Treasury has manipulated long-term interest rates by dramatically shifting the maturities of U.S. debt, all in an effort to boost the economy before November,” he said. “This backdoor quantitative easing undermines the public’s confidence in our nation’s debt and poses a significant risk to our government’s ability to respond to future crises.”
Treasury refutes claims
A Treasury official who spoke to MarketWatch but spoke on condition of anonymity said the document misrepresented the importance of Treasury Borrowing Advisory Committee guidelines, which the document’s authors used as a benchmark in calculating the Treasury’s excess note issuance.
“They say this 15% to 20% range is a Treasury rule. It’s a TBAC recommendation, one that TBAC has emphasized that there needs to be some flexibility in,” the official said in an interview with MarketWatch.
There are currently approximately $6 trillion worth of banknotes in circulation, representing about 22% of the total government bond market.
The official also said the shift toward more bill issuance in the fourth quarter of last year was more modest than the paper implied. Assistant Secretary for Financial Markets Joshua Frost made a similar claim in a speech earlier this month.
The Treasury Department ultimately cut bond issuance by about $3 billion a month, a drop in the ocean compared to the $300 billion it was issuing in total.
Since then, the Treasury Department has gradually reduced its issuance of bank notes as a share of net new debt issued, though much of the decline occurred in the second quarter, when millions of Americans paid their taxes, reducing the Treasury Department’s need for short-term borrowing. The document excludes the second quarter from the analysis, which also skews the findings, the Treasury official said.
Miran said he and Roubini ruled out the second quarter because there was no evidence of activist government bond issuance at the time.
Others, however, have said the article makes some important and valid points. Bob Elliott, head of foreign exchange at hedge fund Bridgewater Associates and CEO of Unlimited, which manages the Unlimited HFND Multi-Strategy Return Tracker exchange-traded fund HFND, questioned why the Treasury Department had not acted more quickly to reduce the share of outstanding accounts.
“The context is that you have increased account share in an environment where the economy is strong and financial conditions are very strong. It’s really a piecemeal effort to ease financial policy at a time when the economy doesn’t need significant easing,” Elliott said in an interview with MarketWatch.
Where it all started
The idea that the Treasury Department might be at odds with the Fed first arose after the department released its fourth-quarter reimbursement announcement on Nov. 1.
Previously, the bond market was in poor condition.
The yield on the 10-year Treasury note BX:TMUBMUSD10Y hit its highest level in more than 15 years in late October, according to Dow Jones Market Data. While yields rose in September and October, a selloff in bonds dragged stocks down with them.
Earlier, the Treasury’s announcement about the summer quarterly refund, released in July, had received an outsized amount of attention in the financial press. Some blamed it for helping to stoke concerns about the market’s ability to digest unhindered U.S. deficit spending after the Treasury unveiled plans to issue slightly more notes and bonds than investors had expected, Elliott said.
After this, leading hedge fund managers, such as Bill Ackman of Pershing Square, began telling the public that unsustainable budget deficits had prompted them to bet against Treasuries.
But by the time the next announcement arrived in November, the Treasury Department announced that it would issue fewer notes and bonds than investors had expected. Although the shift was relatively modest, it appeared to have a calming effect on the market.
It’s difficult to determine how much of this was due to the Treasury Department’s shift and how much to a change in the Fed’s guidance on short-term interest rates.
“There’s a confounding factor here, which is that in August of 2023, the Fed was still raising rates and being extremely cautious. And in November of 2023, they weren’t,” Guy LeBas, chief fixed income strategist at Janney Montgomery Scott, told MarketWatch in an interview.
LeBas made a similar point about the impact of government bond issuance.
“The authors argue that when the Treasury issues more short-term debt, it is constructive for financial conditions, and when it
“Issuing more long-term debt is negative for financial conditions,” he said. “Nothing in the world is that simple.”
LeBas added that it’s more likely that the Treasury will simply issue debt along the segment of the curve where there’s the most demand, which is currently on the short side.
Miran said he decided to use the TBAC guidelines as a reference because it was the only suitable benchmark provided by the Treasury. He added that despite the denials, the Treasury has not provided a convincing reason why it has not shifted more of its borrowings into notes and bonds.
“I haven’t heard a good explanation yet of why they’re doing what they’re doing,” said Miran, who worked at the department under former Treasury Secretary Steven Mnuchin.
Details of the next quarterly Treasury repayment announcement will be shared Wednesday morning. On Monday, the Treasury said it would need to borrow $565 billion in net marketable debt in the fourth quarter. The Fed will announce its final decision on interest rates, and Powell will hold a press conference later in the day.
