Trump’s top economic advisers are pursuing the exact same debt issuance strategy they lambasted Janet Yellen for
Appropriate debt management strategy for me, stealth QE for thee.
The typically unsexy world of Treasury debt management strategy was besieged by a massive dose of political intrigue in the middle of 2024.
“Secretary Yellen has departed from norms regarding the issuance profile of Treasury debt in an effort to stimulate markets in advance of the election,” Scott Bessent, then the head of Key Square Group, said in June.
The former head of the Treasury was engaging in “activist Treasury issuance” (ATI) and “stealth quantitative easing” to give the economy some extra juice, argued a paper published shortly thereafter by Hudson Bay Capital analyst Stephen Miran and economic adviser Nouriel Roubini.
Their case went (loosely) along these lines:
Treasuries are somewhat — though not primarily — subject to some of the basic laws of supply and demand. All else equal (and all else is never equal), issuing more debt would lead to a decrease in its price and an increase in borrowing costs. Yellen was issuing more debt than usual in the form of bills (which mature in one year or less) instead of longer-term bonds. Therefore, she was artificially keeping longer-term interest rates low, and longer-term rates are more important for the real economy (thanks to the structure of the US mortgage market) as well as financial markets than their short-term counterparts.
Well, Bessent is now the secretary of the Treasury. Miran has been nominated to serve as chairman of the Council of Economic Advisers — that is, the administration’s top economist. They now have significant power to shape the Treasury’s debt management strategy. Cue this morning’s quarterly refunding announcement:
“Based on current projected borrowing needs, Treasury anticipates maintaining nominal coupon and FRN [floating-rate note] auction sizes for at least the next several quarters,” per the statement.
So, they’re not planning on changing the composition of debt issuance away from bills and toward coupons (i.e., longer-term obligations).
And these decisions are not made in a vacuum. Yellen then, and Bessent now, have been largely aligned with guidance from the Treasury Borrowing Advisory Committee (or TBAC). This group of “senior representatives from a variety of buy and sell side institutions, such as banks, broker-dealers, asset managers, hedge funds, and insurance companies,” offers thoughts on how much debt the Treasury should issue at different maturities.
This is the Spider-Man meme: it’s the same group of Wall Street folks offering similar advice, to two different administrations, that is largely followed. But if there’s a Treasury Department between the two that appears to be ignoring some of its advice, it would seem to be the current one.
Ahead of this release, the TBAC suggested that the Treasury might want to remove or soften the language about longer-term bond issuance being stable going forward.
“The Committee uniformly encouraged Treasury to consider removing or modifying the forward guidance on nominal coupon and FRN auction sizes that has been in the refunding statement for the past four quarters,” reads its letter to the Treasury.
By contrast, this is what the Committee was telling Yellen around the time Miran and Roubini published their report:
“For the past five quarters, the Committee has made recommendations for coupon issuance decisions which resulted in running a T-bill share higher than 20% of outstanding debt. Treasury’s goals of minimizing the cost to the taxpayer over time, with regular and predictable issuance, were central to the debates around these recommendations... First and foremost, the Committee felt that T-bill issuance should continue to act as a shock absorber, allowing coupons to be issued in a regular and predictable manner.”
With the benefit of hindsight (and perhaps an overly deep bent toward cynicism), one can wonder whether the July 2024 paper was all about providing an intellectual justification for a strategy that Miran and co. wanted permission to pursue going forward. To quote:
“There is every reason to expect that once one political party begins using ATI to stimulate the economy into election season, it may be used repeatedly by all future administrations...
There is no reason to expect this policy innovation of using the issuance profile to avoid tightening financial conditions will not become normal practice in Washington.”
...which would make this kind of pearl-clutching appear a little unseemly:
“Our greatest concern is that regular use of ATI will push us into a world of more volatile political business cycles, with higher equilibrium inflation and interest rates.”
We’re all looking for the guy who did this!
