Views on Treasury

Debt ManagemenFrameworkBrian SackThe D. E. Shaw GroupNovember 2015Any views expressed here are my own and do not represent those of the D. E. Shaw group.
Broad Views on Treasury Debt Management

 Treasury has established many sound debt management pra

− These have contributed to the attractiveness of Treasury securiti

 Overall objective function for debt management could be cl

− Still some uncertainty about the specific objectives governing de

management decisions and their relative importance

− Makes it difficult to quantify optimal debt maturity/structure

 Treasury faces several key issues in the current market enviro

− Must determine how to adjust debt in response to the low level 

term rates and the potential demand for Treasury bills
Maintaining a Low Funding Cost is Critical

Source: Congressional Budget Office (August 2015 Baseline Projections)
Treasuries Highly Valued for Safety and Liquidity

Source: Federal Reserve Bank of New York, Bloomberg
Sound Debt Management Practices in Place

 The value that investors place on Treasury securities reflects 

factors underlying their safety and liquidity

 Sound debt management practices have been an important  Treasury benefits from a set of practices in place for some tim

− Regular and predictable issuance− Large benchmark issue sizes− Wide range of maturity points− Efficient auction procedures− Effective relationships with primary dealers
Optimal Maturity/Structure of Debt is Less Clear

Source: US Treasury
Have Decisions on Debt Structure Been Systematic?

Dependent Variable: WAM Sample: 1980Q1 - 2015QConstant 

Outstanding Debt / GDP 

10y ACM Term Premium 

R

2 

HAC t-stats in parentheses

Source: US Treasury
Developing Explicit Debt Management Objectives

 Critical for determining optimal maturity/structure of debt In my view, the objective function has three components

− Expected funding cost over time − Variation in funding cost− Efficient market functioning

 Key debt management practices understood in this context

− Practices such as regular and predictable issuance are not thems

objectives of debt management

− They are practices that are useful for achieving above objectives
Incorporating the Low Level of Long-term Interest R

* Zero-coupon security. Sources: Federal Reserve Bank of New York; Adrian, Crump, and Moen
Considerations Regarding Low Long-term Rates

 Distinguish between low rates and low term premium

− Maturity structure should depend on term premium, not level o− Term premium is difficult to measure

 Low term premium is a reason for longer maturity Arguments for being cautious about further maturity extens

− The extent to which the low term premium will persist is uncerta− Term premium appears particularly low at shorter maturities− Variation in funding costs from shorter debt has good correlatio− Bill demand is substantial relative to supply

 WAM has already been extended meaningfully

− Case for further extension is less clear
Empirical Estimates of the Term Premium

* Zero-coupon securities, on 9/8/2015 Sources: Federal Reserve Board; Federal Reserve Bank of New York; Adrian, Crump, and Moench (2013); Kim and Wright (2005)
Variation in Funding Costs from Short-term Debt

Sources: Bloomberg; Federal Reserve Bank of St. Louis; Federal Reserve Bank of New York; Adrian, Crump, and Moench (2013)

Dependent Variable:Sample: 1981M9 - 2015M9Constant 1.44 

(7.37

Primary Surplus / GDP 0.37 

(8.01

R

2 0.28 

HAC t-stats in parentheses

Real 3

Bill Ra
Incorporating the Demand for Treasury Bills

Source: US Treasury Source: US Treasury; Bloomberg
Conclusions

 Debt management has established many sound practices − Regular and predictable issuance, large benchmark issue sizes, w

maturity points, efficient auction procedures, primary dealer rela

 Recent debt management decisions seem productive − Extension of the WAM in recent years, maintaining a larger cash 

potential increase in bill issuance

 Efforts to specify the overall framework should continue − Would be useful to define the objective function more explicitly − Allow Treasury to make debt maturity decisions in more systema

− Address issue of whether WAM should be extended further