Hedge fund study on U.S. Treasury issuance fuels debate

By Davide Barbuscia

NEW YORK (Reuters) – A hedge fund study that said the U.S. Treasury last year effectively provided economic stimulus by moderating long-dated bond sales has sparked a debate in the bond market and a denial from the U.S. Treasury that said it was not aiming for such an effect.

The U.S. Treasury Department announced in November it would slow the pace of auction size increases of long-dated debt securities, a move that gave relief to bond markets rattled by previous increases in long-term debt supply.

This led to a decline in 10-year Treasury yields equivalent to the economic stimulus that would be provided by a one percentage point reduction in the Fed’s policy rate, according to a study published by Hudson (NYSE:) Bay Capital Management.

The study was authored by senior economic advisor Nouriel Roubini, an economist who rose to prominence for predicting the global credit crisis, and senior strategist Stephen Miran, who was an advisor for economic policy at the U.S. Department of the Treasury under former Treasury Secretary Steven Mnuchin, when Republican nominee Donald Trump was U.S. president.

“Our interpretation is that while the Fed was raising the Fed fund rate all the way to 5.5%, these (Treasury) policies were effectively pushing long yields lower,” said Roubini in an interview. “The Fed has been trying to raise rates to pull down the economy and achieve a soft landing, but … it looks like we could be in a no landing zone, with growth persistently above potential.”

The study echoes suggestions by Republican senators last month that the Treasury deliberately increased issuance of short-term Treasury bills to give the economy a “sugar high” ahead of the elections. Roubini’s paper drew a similar parallel.

The U.S. Treasury denied any such strategy.

The Roubini paper “suggests a strategy that is intended to ease financial conditions, and I can assure you one hundred percent that there is no such strategy. We have never, ever discussed anything of the sort,” Treasury Secretary Janet Yellen, who was appointed by U.S. President Joe Biden, said on Friday.

Assistant Secretary for Financial Markets Joshua Frost in a speech earlier this month addressed what he said were common misconceptions about Treasury issuance, saying the reduction in long-dated debt increases last year was modest.

The Hudson Bay’s paper compares changes in Treasury issuance to quantitative easing – a bond buying program used by the Fed to stimulate the economy. Several bond market analysts said the comparison was overstated.

“At best, this … kept rates marginally lower than they would have otherwise been,” said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities USA. “This is highly consistent with Treasury’s goal to obtain the best possible funding for the taxpayer and is not in any way a sinister plot to ‘ease’ monetary policy,” he added.

The move demonstrated “higher than expected market sensitivity on the Treasury’s part during a period of volatility,” said Jonathan Cohn, head of U.S. rates desk strategy at Nomura Securities International.

“Treasury may not be a market timer, but it is also not market agnostic nor deliberately ignorant of market functioning,” he added.