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76 R. Greenwood, S. G. Hanson, J. S. Rudolph, and L. H. Summers COMMENT Mary John Miller From the perspective of a Treasury debt manager during most of the period covered in this chapter, as well as a former market participant, I would like to address three of the authors’ recommendations: first, the addition of new mandates to traditional debt management policy; second, shifting debt issuance to short-term bills; and third, requiring coordination between the Treasury and the Federal Reserve over debt management policies. The U.S. Treasury occupies a unique role in world markets, offering the deepest and most liquid securities market. The Treasury yield curve is considered the risk-free benchmark yield curve against which corporate, municipal, mortgage market, and even other sovereign issuers price their debt. The authors assign little value to the risk-free benchmark yield curve and, in fact, seem to indicate that investors consume duration regardless of maturity , which suggests that simply buying more shorter-duration securities is the functional equivalent of fewer longer-duration securities. This is not in practice how it works. There is clear demand for securities of different maturities and durations, and the market plays a role in arbitraging opportunities across the yield curve. The disciplined approach built by Treasury debt managers over decades results in low borrowing costs and liquidity premiums—the ability to finance at low cost because investors perceive a benefit to holding Treasuries versus other investments. The hallmark of this approach is telegraphing well in advance the size and frequency of borrowing needs, with any adjustments made with lots of notice. The decision to extend the average maturity of the debt post–financial crisis is a good example of this communication strategy. Despite adding longer-term supply, Treasury debt enjoyed higher coverage rates in auctions and lower premiums for longer-term debt during this period. It is worth noting that compared to the G-7 debt issuers described in the chapter, the U.S. Treasury had the shortest weighted average maturity in 2014, even after five years of debt extension. Contrary to the impression that the chapter may create, the bulk of Treasury borrowing occurs at maturities of less than five years. The economists’ view represented in this chapter is concerned with managing aggregate demand in the economy and financial stability with the additional tool of debt management. Treasury is naturally more concerned with managing aggregate demand in the market for its securities as it seeks to finance the government at the lowest possible cost over time. It is one of the reasons that Treasury developed and issued new floating-rate debt during this period to address both the desire to issue term debt as well as the market ’s demand for highly liquid short-term securities. It is odd that the authors never mention Treasury’s new floating-rate debt. Treasury has no choice but to borrow; the Federal Reserve’s purchases of long-term assets are discretionary. Even if deficits disappeared tomorrow, there is still an enormous stock of debt to refinance, not to mention the value of the Treasury market itself to investors. The Fed’s decisions to influence economic activity, such as with quantitative easing, can move markets with new information. If the Treasury were to adjust its borrowing around Fed announcements, this would fundamentally change the way markets view Treasury debt, likely introducing new uncertainty and borrowing costs. Rather than enjoying a liquidity premium, Treasury debt would assume a risk premium as the market awaited Fed meeting announcements regarding debt issuance. This seems entirely backward. The Treasury market should be a source of financial stability, not a contributor to excess volatility and uncertainty. The chapter’s premise that the taxpayers were harmed by a lack of coordination over debt management, that the Treasury’s actions somehow tightened financial conditions beyond the level desired by the Federal Reserve, rests on big assumptions. If the Federal Reserve believed the Treasury’s actions were reducing the impact of its purchase programs, it could have scaled up quantitative easing, akin to the proportion of other countries’ programs, such as the United Kingdom and Japan. The authors also argue for restructuring Treasury borrowing toward more short-term debt. While in most markets the yield curve is upward sloping—meaning it costs less to borrow in T-bills than thirty-year bonds— the absolute level of rates also matters. Over the past thirty years, ninetyday T-bill rates have normally been above the current thirty-year...


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