Is the Treasury conspiring to manipulate markets and the economy? A new paper sparks debate on Wall Street.
A newly published white paper is causing a stir on Wall Street and in Washington by accusing the Treasury Department of conspiring to boost the economy for political ends, and of risking a revival of inflation in the process.
The paper, published last week, claims that the Treasury Department’s decision to continue financing an outsize chunk of the U.S. debt with short-term Treasury bills is tantamount to deliberate manipulation of the economy. Its authors even invented a term for this: “activist Treasury issuance.”
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“By adjusting the maturity profile of its debt issuance, Treasury is dynamically managing financial conditions and through them, the economy, usurping core functions of the Federal Reserve,” co-authors Stephen Miran and Nouriel Roubini wrote in the paper’s introduction.
The Treasury Department has vigorously denied the allegations, and bond-market experts have cast doubt on them as well.
Lou Crandall, chief economist at Wrightson ICAP and a longtime follower of the bond market, rejected the paper’s conclusions in a report shared with MarketWatch.
“The bottom line is that Treasury issuance over the past year has evolved in ways that are consistent both with its historical behavior and with more recent Treasury guidance,” Crandall said. “The Treasury is simply doing what it said it was going to do.”
“I can assure you 100% that there is no such strategy. We have never, ever discussed anything of the sort,” said Treasury Secretary Yellen in a comment shared with MarketWatch. The statement first appeared in a report from Bloomberg News.
Over the past nine months, the Treasury’s excess issuance of bills has had an impact similar to roughly $800 billion in quantitative easing, the Fed’s postcrisis bond-buying program, Miran and Roubini contend.
This is equivalent to lopping 25 basis points off the 10-year yield, or a full percentage point from the federal-funds rate.
In effect, the Treasury’s decision to rely more heavily on bills is neutralizing some of the Fed’s efforts to tighten monetary policy and cool the economy, undercutting the central bank’s claims that monetary policy is restrictive, the paper’s authors said.
This has brought the aggregate level of policy is closer to neutral, Miran and Roubini concluded, which might help explain why financial conditions remain relatively benign even with interest rates at their highest levels in more than 20 years.
Many of the concerns expressed in the paper echo comments from Sen. Bill Hagerty, a Tennessee Republican, who questioned Fed Chairman Jerome Powell about the Treasury’s reliance on bills during a recent Senate Banking Committee hearing.
When approached for comment, Hagerty’s office shared the following statement with MarketWatch.
“Politics has no place in Treasury debt issuance. Sadly, Secretary [Janet] Yellen’s Treasury has manipulated long-term interest rates by dramatically shifting the maturities of U.S. debt, all in an effort to boost the economy before November,” he said. “This back-door quantitative easing undermines the public’s trust in our nation’s debt, and poses significant risks to our government’s ability to respond to future crises.”
Treasury rebuts claims
One Treasury official who spoke with MarketWatch but asked for anonymity said the paper misrepresented the importance of guidance issued by the Treasury Borrowing Advisory Committee. The paper’s authors used this guidance as a benchmark when calculating excess bill issuance by the Treasury.
”They assert that this 15% to 20% range is a Treasury rule. It’s a TBAC recommendation, one that TBAC has emphasized there should be some flexibility,” the official said during an interview with MarketWatch.
About $6 trillion in bills are currently in circulation, accounting for roughly 22% of the entire Treasury market.
The official also said the shift toward more bill issuance during the fourth quarter of last year was more modest than the paper lets on. Assistant Secretary for Financial Markets Joshua Frost made a similar assertion in a speech earlier this month.
The Treasury ultimately decreased issuance of notes and bonds by about $3 billion combined per month — a drop in the bucket compared with the $300 billion of their gross issuance.
Since then, the Treasury has gradually reduced its issuance of bills as a share of net new debt issued, although much of the decrease arrived during the second quarter, when millions of Americans were paying their taxes, reducing the Treasury’s need for short-term borrowing. The paper excludes the second quarter from its analysis, which also distorts its findings, the Treasury official said.
Miran said he and Roubini excluded the second quarter because there was no evidence of activist Treasury issuance then.
Still, others have said the paper makes some important and valid points. Bob Elliott, a former chief of foreign-exchange policy at hedge fund Bridgewater Associates and the CEO of Unlimited, which manages the Unlimited HFND Multi-Strategy Return Tracker exchange-traded fund HFND, questioned why the Treasury hasn’t moved more quickly to pare back the share of bills outstanding.
“The context is there is an elevated bill share in an environment where the economy is strong, financial conditions are very strong — it’s essentially an incremental effort to ease financial policy at a time when the economy doesn’t need significant easing,” Elliott said during an interview with MarketWatch.
Where it all started
The notion that the Treasury might be working at cross-purposes with the Fed first emerged after the department released its quarterly refunding announcement for the fourth quarter on Nov. 1.
Prior to that, the bond market was in rough shape.
The yield on the 10-year Treasury note BX:TMUBMUSD10Y hit its highest level in more than 15 years in late October, according to Dow Jones Market Data. As yields powered higher in September and October, the selloff in bonds took stocks down with it.
Previously, the Treasury’s summertime quarterly refunding announcement, released in July, had garnered an inordinate amount of attention in the financial press. Some blamed it for helping to revive concerns about the market’s ability to stomach untrammeled U.S. deficit spending after the Treasury unveiled plans to issue slightly more notes and bonds than investors had expected, Elliott said.
Afterwards, prominent hedge-fund managers like Pershing Square’s Bill Ackman started telling audiences that unsustainable budget deficits had inspired them to bet against Treasurys.
But by the time the next announcement arrived in November, the Treasury announced that it would issue fewer notes and bonds than investors had expected. Although the shift was relatively modest, it appeared to have a calming effect on the market.
It is difficult to disentangle how much of this was due to the Treasury’s shift and how much was due to a change in the Fed’s guidance about short-term interest rates.
“There’s a confounding factor, which is that the Fed was still in hiking mode and expressing extreme caution in August 2023. And in November 2023, they were not,” Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott, said in an interview with MarketWatch.
LeBas made a similar point about the impact of the Treasury’s bill issuance.
“The authors are claiming when Treasury issues more short-term debt, that’s constructive for financial conditions, and when they
issue more long-term debt, that’s negative for financial conditions,” he said. “Nothing in the world is that simple.”
LeBas added that the more likely scenario is that the Treasury is simply issuing debt along the segment of the curve where there is the most demand. Right now, that is on the short end.
Miran said he decided to use the TBAC guidance as a reference because it was the only suitable benchmark supplied by the Treasury. He added that despite its denials, the Treasury hasn’t shared a convincing reason for why it hasn’t shifted more of its borrowing into notes and bonds.
“I haven’t heard a good explanation for why they’re doing what they’re doing,” said Miran, who served in the department under former Treasury Secretary Steven Mnuchin.
Details from the next quarterly Treasury refunding announcement will be shared Wednesday morning. On Monday, Treasury said it would need to borrow $565 billion in net marketable debt during the fourth quarter. The Fed will deliver its latest decision on interest rates, and Powell will hold a press conference, later in the day.
