Treasury Department Tries Its Own QE/Operation Twist

It is usually several months later in the year that I begin my annual lament over the state of the U.S. federal budget. Not so much the deficit — which is too high, but manageable — but rather the foolhardy method we have for funding it. (See recent discussions here, here, andhere).

I am not going to spend too much time on the issue of a long bond, other than to reiterate this simple formulation: Demand for Treasuries + ultralow rates + big, persistent U.S. funding needs = need for a long bond, preferably one that matures in as much as 50 years. However, there is an enormous difference between the abstract debate over how big our deficit is or should be and the more pragmatic discussion of how best to fund it.

The latter is our subject matter for today. Despite near-record low interest rates — the 10-year Treasury bond yields less than 1.9 percent — we finance our deficits with lots of short-term debt, rolling it over constantly. There are any number of problems with this approach: Funding could be subject to disruptions if we have another financial crisis; the administrative costs are more expensive than they need be; and it misses the opportunity to match duration of long-term, persistent obligations with long-term, stable funding.

But rather than taking a sensible approach to deficit funding, it seems like we’re going in the opposite direction based on the latest statement from the Treasury Department:

In November 2015, Treasury reiterated intentions to increase Treasury bill issuance . . . Treasury is announcing reductions of $1 billion to each of the next 5-year, 7-year, 10-year, and 30-year nominal coupon offering sizes, for both new issues and reopenings. In aggregate, relative to what would have been issued under the previous schedule, nominal coupon issuance will be reduced by $12 billion over the upcoming quarter.  These adjustments will begin with the 10- and 30-year nominal note and bond auctions being announced today. . . Treasury is also announcing downward adjustments to the offering sizes for all TIPS tenors over the next quarter.  Specifically, Treasury is announcing reductions of $2 billion to each of the next 5-year, 10-year, and 30-year TIPS offering sizes . . . TIPS issuance will bereduced by $6 billion over the upcoming quarter.  (Emphasis added.)

Just a reminder that Treasury bills are obligations that mature in one year or less. So how to read the statement above: More short-term debt, $18 billion less in long-term bonds.

If that sounds a bit familiar, it’s because it is a variation on what the Federal Reserve did with Operation Twist . . .


Continues here: This Is No Way to Fund the Deficit

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