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Debt limit and spending under Biden to be borne by issuance at the front-end of the curve, ex-Treasury official says.
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The U.S. Treasury Department will likely ramp up bills auctions to fund President Joe Biden's USD1.9 trillion relief package and infrastructure plan later in the year while maintaining coupon auctions and continuing to avoid ultra-long bonds, former Treasury deputy assistant secretary for federal finance James Clark said in an interview.
Earlier this month the Treasury Borrowing Advisory Committee projected steep paydowns in bills of USD422 billion through March and USD616 billion for the second quarter. But that could be revised up moderately closer to net zero despite Treasury's intent to draw down its cash balance to meet a late July deadline for its debt limit, said Clark, who served under the Obama administration from 2012-2017.
"Any significant increase in immediate cash needs would be borne primarily by the front-end of the curve" where there is more flexibility, Clark told MNI. "Treasury would then likely spread these and any additional funding requirements across other securities over coming months or more" depending on the nature of the final fiscal deal.
"I'd be surprised if they cut coupon issuance" in the months leading up to the debt limit in the summer, he said, adding Treasury could even raise its record coupon issuance again to fund the fiscal package as well as a trillion-dollar infrastructure proposal expected to come later in the year.
Much of December's USD900 billion relief package has been pre-funded but Biden's USD1.9 trillion package would likely put pressure on Treasury to adjust bills issuance again ahead of the July 31 debt limit deadline that forces Treasury to whittle down its cash pile to USD133 billion from USD1.6 trillion today.
But Clark said it is unlikely debt managers would float a 50-year-bond despite Treasury Secretary Janet Yellen's promising Congress to look again at the idea.
Proponents of the ultralong bond say it offers a benchmark rate for corporate debt, but the interest rates demanded for longer-dated bonds are almost always higher than those of their shorter-dated equivalents, he said, pointing to a steepening yield curve.
The primary goal for the Treasury's debt management office is to fund the government at the lowest expected cost over time. With USD27.7 trillion of debt outstanding, annual interest expenses of about USD300 billion according to CBO, and trillions of dollars in additional fiscal stimulus still needed to combat the ramifications of a global pandemic, it is critical that the Treasury not waiver from its main mandate, Clark said.
Adding longer-dated debt would increase the weighted average maturity of Treasury's portfolio and add protection against interest rate risk, but "it wouldn't come for free," said Clark. There is also some theoretical benefit to reducing rollover risk, said Clark, but with an average of about USD350 billion coming due each week, Treasury would need to issue a hefty volume of ultra-long bonds to meaningfully reduce this risk.
"Increasing WAM does not, by itself, mean that the debt is inherently safer, more creditworthy, or has less interest rate risk," he added, and rollover risk is better mitigated by holding a prudent level of cash than by extending the maturity of the debt, he said.
Still, some lawmakers on Capitol Hill have pressed Treasury officials to consider long bonds. While long bonds may not be a practical route, Clark said, it is not possible to dismiss the argument entirely.
"It is very difficult to look at the fiscal situation of the United States, with debt levels at historic highs and huge additional stimulus on the horizon, and not think that Treasury is carefully evaluating every source of potential demand."
The Treasury Department under the Trump administration looked at long-bonds but the idea was kicked away. Some former industry advisers then told MNI they weren't convinced that ultra-long bonds would be feasible or would be met with sufficient demand. The Treasury instead sold a 20-year bond in May, the first issue at that maturity since 1986.