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The Optimal Maturity of Government Debt 33 issuing short-term securities for liquidity provision and financial stability, a relatively new consideration in maturity management. Alternative measures involving regulation and supervision do not “get in all the cracks” (Stein 2013) the way that Treasuries do, suggesting a unique role for near-money Treasury assets. But quantifying how much Treasury supply is needed and at what maturities to fill that role remains an open question. These are all quantitative policy choices, yet we still lack a complete framework in which to balance them. These qualms about quantitative recommendations should be taken as a call for analysis, not as a recommendation for paralysis. This chapter provides a framework and four main objectives for debt management, adding in two— aggregate demand and financial stability—not on the traditional list. The inclusion of these concerns follows directly from experience during the financial crisis. Even if we don’t yet have a detailed roadmap for policy, this is the right discussion at the right time. COMMENT Brian Sack The Treasury has managed its debt in an effective manner, allowing it to fund a sizable debt stock at relatively low interest rates. Investors place considerable value on the safety and liquidity of Treasury securities, giving the Treasury’s extensive borrowing capacity at all times, even during periods of market stress. These characteristics of Treasury debt reflect many factors, but sound debt management decisions have certainly contributed to them. These comments are based in part on the presentation I made at the 2014 Roundtable on Treasury Markets and Debt Management held by the Treasury on December 5, 2014. I thank Derek Kaufman for his feedback on these comments and Evan Wu for his assistance in preparing them. All views expressed here, and any errors, are my own and do not represent in any way the views of The D. E. Shaw Group. 34 R. Greenwood, S. G. Hanson, J. S. Rudolph, and L. H. Summers This success has come despite the absence of a clear analytical framework for understanding the debt management decisions made by Treasury. Treasury officials have at times made general comments about the goals of debt management, noting the Treasury’s focus on achieving the lowest cost of funding. However, these comments have not fully identified all aspects of the objective function of debt management. As a result, while debt management decisions have been made in directions that seem intuitive, it is difficult to rigorously assess them or to calibrate how far they should go. Consider, for example, the current discussion of the weighted average maturity of outstanding Treasury debt. The average maturity has risen markedly from its trough in 2008 and is set to move well above its historical range under current issuance patterns—an outcome that some might argue is desirable in the current environment of a low-term premium. However, without a more complete description of the Treasury’s objectives, it is difficult to assess how far this pattern should extend, or even to determine all of the issues that should affect this decision. For these reasons, it is an important exercise to more rigorously define the objective function of U.S. debt management. In this regard, the chapter by Greenwood, Hanson, Rudolph, and Summers makes a valuable contribution. The authors present a thorough discussion of the most relevant debt management issues and push beyond the standard perspective by raising some additional considerations. The authors say that there should be four objectives for debt management: “(1) financing the government at least cost by catering to liquidity premia and economizing on term premia; (2) limiting fiscal risk, particularly that associated with short-term financing; (3) managing aggregate demand by using the maturity of government debt to influence long-term interest rates; and (4) promoting financial stability by issuing enough short-term government debt to counteract the financial system’s tendency toward excessive liquidity transformation.” I will begin with the first two items, because they are the key considerations in most discussions of debt management. As the authors discuss, these two items present a trade-off when considering the maturity of the debt being issued. Issuing longer-term debt generally involves paying a higher expected funding cost, at least when the term premium is positive (meaning that long-term rates are higher than the expected path of short-term rates to compensate investors for duration risk). In return, by locking in its funding cost for a longer time, the Treasury reduces the amount of...


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