Minutes of the Meeting of the Treasury Borrowing Advisory Committee July 30, 2024

July 31, 2024

The Committee convened in a closed session at the Department of the Treasury at 9:00 a.m. All members were present. Veronica Clark from Citigroup was also present to assist the Committee Chair. Under Secretary for Domestic Finance Nellie Liang, Fiscal Assistant Secretary David Lebryk, Assistant Secretary for Financial Markets Josh Frost, Deputy Assistant Secretary for Federal Finance Brian Smith, Director of the Office of Debt Management Fred Pietrangeli, and Deputy Director of the Office of Debt Management Tom Katzenbach welcomed the Committee. Other members of Treasury staff present were Shantanu Banerjee, Chris Cameron, Nicholas Chisholm, Dave Chung, Gabriella Csepe, Chris Kubeluis, Joshua Stachura, Renee Tang, and Laura Thrift. Federal Reserve Bank of New York staff members Ellen Correia Golay, Brian Greene, and Kyle Watson were also present.

Director Pietrangeli reviewed year-over-year changes in receipts and outlays through Q3 FY2024. Receipts totaled $3.75 trillion during the first nine months of FY2024, an increase of $342 billion (10%) compared to the same period last year. This increase was primarily due to higher non-withheld and corporate taxes following an extension of several federal tax deadlines from FY2023 into FY2024.Outlays totaled $5.02 trillion through Q3 FY2024, an increase of $217 billion (5%) compared to the same period last year, which was largely attributable to higher gross interest on the public debt as well as cost-of-living adjustments to Social Security and other transfer payments.

Pietrangeli then turned to privately-held net marketable borrowing projections. Primary dealer estimates for the next three fiscal years were somewhat higher than previous estimates, with the median aggregate estimate for FY2024-FY2026 approximately $397 billion higher than last quarter. Dealers voiced uncertainty regarding borrowing needs in FY2025 and FY2026, citing the path of monetary and fiscal policy, the duration of System Open Market Account (SOMA) redemptions, and the economic outlook.

Under Secretary Liang provided a brief update on debt management and other Treasury priorities andthanked Mohit Mittal for his willingness to serve as Vice Chair of the Committee. She also thanked Greg Davis and Gil Holmes for their service to the Committee.

Deputy Director Katzenbach reviewed primary dealers' expectations for coupon issuance. All primary dealers expected nominal coupon and floating rate note (FRN) issuance to remain unchanged at the August refunding. Looking ahead, while dealers anticipated that nominal coupon and FRN auction sizes would remain unchanged through the end of calendar year 2024, some thought that modest increases might be needed sometime in 2025 or 2026. Several dealers cited uncertainty about borrowing needs and the potential for a debt limit impasse in the first half of next year as possible complicating factors. With respect to Treasury Inflation-Protected Securities (TIPS), nearly all dealers expected Treasury to increase the size of the 10-year TIPS reopening in September 2024 and a slight majority expected Treasury to increase the size of the 5-year TIPS new issue in October.

Debt Manager Banerjee summarized primary dealers' views on the effects of FINRA's publication of transaction data for on-the-run nominal coupons at the end of each day (and historical uncapped transactions data). Primary dealers estimated that the publication had little to no impact on liquidity conditions and market functioning, citing pre-existing price transparency for on-the-runs and the end-of-day timing of the data release.

Debt Manager Chisholm then reviewed primary dealers' views on the impact of liquidity support buyback operations thus far. Dealers characterized buybacks as moderately supportive of liquidity and market-making in specific sectors, but they suggested that the combination of already robust off-the-run liquidity and the limited size of Treasury's purchases meant that the effect of buybacks on broader liquidity conditions in the Treasury market was hard to measure. Dealers commonly viewed buybacks as a tool to exit positions in securities that were relatively less liquid, enabling them to redeploy balance sheet for new client activity. Dealers suggested the effect of liquidity support buybacks may be enhanced once Treasury removed its temporary CUSIP limits and increased the size of the program to its previously announced $30 billion per quarter cadence.

Chisholm then reviewed the nine liquidity support buyback operations conducted between May 29 and July 24 and compared par offered against par accepted by Treasury in each of the buyback operations. Chisholm noted Treasury purchased the maximum par amount in five of the nine buyback operations, consistent with Treasury's price sensitive approach to buybacks. In the context of the final operation where Treasury made no purchases, it was noted that buyback results can be affected by market moves near the close of an operation.

The Committee then discussed the first charge regarding considerations for Treasury bill issuance. The presenting members cited four key factors: financing costs over time, the use of bills to preserve regular and predictable coupon issuance, market structure and demand, and the impact of bills on Treasury's debt maturity profile. The presenting members also highlighted the Committee's previous work on bill issuance and the guidance provided to Treasury in recent quarters, emphasizing flexibility with bill issuance in support of regular and predictable coupon issuance. The Committee discussed volatility in financing needs, changes in the cyclicality of the deficit, term premia, and additional metrics for evaluating bill supply. After discussion, the Committee decided to update its recommendations to Treasury, highlighting that regular and predictable coupon issuance should be prioritized, outlining a broader range of metrics to monitor, and suggesting that a Treasury bill share averaging around 20 percent over time appeared to provide a balanced trade-off between cost, volatility, and the need for flexibility to adapt as market conditions evolve, while a 15 percent share was recommended as the lower bound for proper market functioning.

The Committee adjourned at 12:00 p.m. for lunch.

The Committee reconvened at 1:15 p.m.

Upon reconvening the Committee turned to a presentation on demand for Treasuries and shifts in the investor base. The presenting member began by reviewing recent developments in demand for Treasury securities by key investor types and noted a shift in the investor base toward more price sensitive investors. The member then went on to cover factors Treasury should consider when evaluating the outlook for both domestic and foreign demand. These ranged from regulatory factors that impact both bank and money market fund demand for securities to monetary policy's impact on currency hedging costs for foreign investors. Discussion focused on public and private pension fund investment activity and the role of the basis trade in demand for cash securities. The Committee concluded that investor classes such as banks, money market funds, pension funds, and foreign investors exhibited increased demand, often for specific maturity sectors, while the demand outlook for households remained uncertain and represented a potential area for additional study.

The Committee then discussed its financing recommendation for the upcoming quarters and advised that Treasury maintain nominal coupon and FRN auction sizes at current levels. Finally, the Committee recommended gradual increases to TIPS auction sizes.

The Committee adjourned at 2:20 p.m.

The Committee reconvened at 5:00 p.m.

Finally, the Chair summarized key elements of the Committee report for Deputy Secretary Adeyemo and followed with a brief discussion of recent market developments.

The Committee adjourned at 5:30 p.m.

_________________________________

Brian Smith

Deputy Assistant Secretary for Federal Finance

United States Department of the Treasury

July 30, 2024

Certified by:

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Deirdre Dunn, Chair

Treasury Borrowing Advisory Committee

July 30, 2024

Treasury Borrowing Advisory Committee Quarterly Meeting

Committee Charge - July 30, 2024

Fiscal Outlook

Taking into consideration Treasury's short, intermediate, and long-term financing requirements, as well as the variability in financing needs from quarter to quarter, what changes, if any, do you recommend to Treasury issuance? Please also provide perspectives regarding market expectations for Treasury issuance, the effects of changes in SOMA holdings, the evolution of Treasury holdings by different types of investors, as well as auction calendar construction.

Considerations for T-bill Issuance

In November 2020, following the surge in Treasury bill issuance to finance the pandemic response, "the Committee recommended allowing the share of T-bills to decline gradually to a range of 15% to 20% of outstanding debt." In November 2021 when T-bills represented 17% of outstanding debt, the Committee recommended gradual reductions in coupon auction sizes to avoid the T-bill share falling considerably below 15% but highlighted the flexibility to fall below 15% or rise modestly above 20% to help maintain regular and predictable coupon issuance.

Please discuss relevant developments in markets, regulations, and Treasury issuance since these recommendations were made. In light of these developments, what considerations should inform Treasury bill issuance going forward? Could additional metrics enhance the Committee's recommendations for Treasury bill issuance? Please elaborate.

Developments in Demand for US Treasuries

Please discuss recent developments in demand for Treasury securities and any changes in the investor base. What factors are affecting domestic and foreign demand, and how does the Committee anticipate investor demand may evolve over the next several years?

Financing this Quarter

We would like the Committee's advice on the following:

• The composition of Treasury notes and bonds to refund approximately $111 billion of privately-held notes maturing on August 15, 2024.
• The composition of Treasury marketable financing for the remainder of the July-September 2024 quarter.
• The composition of Treasury marketable financing for the October-December 2024 quarter.

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