We previously observed that the US Treasury, under advisement of TBAC
Chairman Matt Zames, who currently runs JPM's CIO group in the aftermath of the
London #FailWhale and who will become the next JPM CEO after Jamie Dimon decides
he has had enough of competing with the Fed over just who it is that run the US
capital markets, would soon commence issuing Floating Rate bonds (here
and here)
as well as the implication that the launch of said product is a green light to
get
out of Dodge especially if the 1951 Accord is any indication (which as we
explained in detail previously was the critical D-Day in which the Fed
formerly independent of Treasury control, effectively became a subservient
branch of the government, in the process "becoming Independent" according to
then president Harry Truman). Sure enough, minutes ago the TBAC just told Tim
Geithner they have given their blessing to the launch of Floating Rate Notes. To
Wit: "TBAC was unanimous in its support for the introduction of an FRN
program as soon as operationally possible. Members felt confident that there
would be strong, broad-based demand for the product." Well of course
there will be demand - the question is why should Treasury index future cash
coupons to inflation when investors are perfectly happy to preserve their
capital even if that means collecting 2.5% in exchange for 30 Year paper. What
is the reason for this? Why the Fed of course: "Whereas the Fed had, as a matter
of practice, reinvested those proceeds in subsequent Treasury auctions, Treasury
must now issue that debt to the public to remain cash neutral. For
fiscal years 2012-2016, this sums to $667 billion." Slowly but surely,
the Fed's intervention in the capital markets is starting to have a structural
impact on the US bond market.
And while this move was not unexpected, what is more curious, is that the TBAC, i.e., Wall Street, has issued its first formal warning on the student debt bubble:
Report to the Secretary of the Treasury from the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association
8/1/2012
July 31, 2012
And while this move was not unexpected, what is more curious, is that the TBAC, i.e., Wall Street, has issued its first formal warning on the student debt bubble:
Separately, TBAC expressed concern about what incentives these programs create in the field of higher education. Given that the program is fairly new, in time, more empirical data will help shed light on both the nature of the asset and liability management.From The Treasury Borrowing Advisory Committee:
Report to the Secretary of the Treasury from the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association
8/1/2012
July 31, 2012
Dear Mr. Secretary:
Since the Committee last met in early May the pace of
expansion has downshifted, as real output grew at only a 1.5% rate in the second
quarter, following a 2.0% pace of growth in the first quarter. This slowdown has
been accompanied by a worrisome deceleration in employment; on average only
75,000 jobs per month were created in the second quarter, after the first
quarter’s more respectable 226,000 monthly pace. The sudden slowing has been
blamed on several factors. Unseasonably warm weather may have pulled forward
activity into the winter months at the expense of the spring and summer.
Uncertainty regarding the domestic fiscal outlook and the European debt crisis
are likely adversely affecting business attitudes. Finally, a period of pent-up
demand in hiring and capital spending may have petered out of its own accord,
giving way to more subdued growth. Although economic developments have been
disappointing, the weekly and monthly economic reports point to slow growth, but
nothing worse. Most forecasters anticipate the economy will continue to expand
modestly in the third quarter.
Real consumer spending increased at only a 1.5% pace
last quarter, even though real disposable income expanded at a 3.3% rate.
Apparently households took advantage of the decline in energy prices to increase
saving rates, which had fallen sharply over the course of prior quarters. The
softening in the pace of nominal labor income growth may have contributed to the
more cautious attitide on the part of consumers. Looking forward, the lagged
effect of the decline in gasoline prices could provide some tailwind to consumer
spending, and the stabilization of house prices has buttressed household balance
sheets, but ultimately an improvement in labor income growth will be necessary
for consumers to make a healthy contribution to final demand growth.
The pace of corporate capital spending growth remains
solid, but has decelerated from more rapid gains earlier in the expansion. Real
business fixed investment outlays increased at a 5.4% annual rate in the second
quarter after growing at a 7.5% pace in the first quarter. The deceleration was
due to spending on nonresidential structures downshifting from a 12.9% pace to a
0.9% rate – a step-down that may owe in part to swings in the weather. Spending
on real equipment and software increased at a 7.2% pace last quarter, a modest
acceleration from the 5.4% growth registered the prior quarter. New orders for
capital equipment have turned down lately, raising some concerns about whether
the solid gains in equipment spending will persist into the second half.
Moreover, some surveys of business spending intentions have signalled that the
pace of investment outlays may slow some in coming months. Separately, it
appears that the shortfall in final demand last quarter may have left businesses
with more inventories than anticipated, as real inventories were accumulated at
a $66 billion rate last quarter – a rapid pace that will likely slow in the
second half as businesses pare unwanted stockpiles.
Homebuilding and related activity remains a bright spot
for the economy, as residential investment expanded at a 9.7% pace last quarter
and has increased in each of the past five quarters. Home sales generally
continue to move forward – albeit unevenly – and surveys indicate improving
confidence among realtors and homebuilders. One of the more promising elements
in the recent dataflow has been the continued signs of improvement in house
price measures. This should, over time, make its way into potential homebuyer
expectations for future house price appreciation, thereby further supporting
housing demand.
Real government outlays continued to contract in the
second quarter, declining at a 1.4% annual rate. Spending at the state and local
level fell at a 2.1% pace, the eleventh consecutive down quarter, and outlays at
the federal level declined modestly. Over the past year defense outlays have
fallen 4.0%, the most since the early 1990s when the end of the Cold War led to
large declines in defense spending. Fiscal policy remains a source of
uncertainty in the economic outlook, as the “fiscal cliff” comes closer into
view. Although concerns surrounding the cliff have increased, action to address
this impending fiscal tightening are unlikely to occur until after the November
election.
Thus far, the global growth slowdown has spared U.S.
exporters, as exports expanded at a 5.3% rate in the second quarter, after
increasing at a 4.4% pace the prior quarter. Surveys of manufacturers point to
more subdued growth in industrial output in the third quarter, and the external
environment is commonly noted as the largest headwind to the factory sector.
Even so, the European sovereign debt crisis has not materially tightened credit
conditions in the U.S.
After a good start to the year, the labor market has
once again become a source of concern. The unemployment rate fell 0.8%-point in
the six months ending in March, but has since held relatively steady at 8.2%.
The softening in the labor market has also hit nominal labor incomes, and wages
and salaries grew at only a 3.4% rate last quarter after expanding at a 7.6%
pace in the first quarter. Any pick-up in consumer spending from the anemic
second quarter showing will require some firming in the growth of labor income.
The jobless claims data have been particularly noisy in recent weeks, and
business surveys do not point to any material change in hiring attitudes
relative to the current subdued pace.
Consumer price inflation has eased recently, largely
due to declining energy prices. The headline PCE price index advanced at only a
0.7% annual rate in the second quarter, down from the 2.5% inflation rate seen
in the first quarter. The ex-food and energy core PCE rose at a 1.8% pace in the
second quarter, and has been growing at a similar pace over the past year. Core
inflation has continued to run close to the Fed’s 2.0% goal. Wage inflation
remains subdued and inflation expectations appear well-anchored. Commodity
prices may have diverging influences on consumer price inflation in coming
months; while industrial commodity prices have moved lower in the wake of the
global slowdown, prices for some agricultural commodities have been lifted by
drought conditions in the US. On balance, headline inflation should remain
modest in the second half of the year.
Since the Committee last met, the FOMC has extended the
Maturity Extension Program (Operation Twist) through year-end, and stated that
it will take “further action as appropriate” to fulfill its mandate. Since that
statement was made at the June meeting, data have continued to print on the soft
side, fuelling speculation that the Fed will do something at an upcoming meeting
to stimulate growth. At the semi-annual monetary policy testimony before
Congress, Chairman Bernanke highlighted communications and asset purchases as
the two major tools the Fed could employ if it decides that the speed of the
recovery is inadequate for making progress towards full employment.
Against this economic backdrop, the Committee’s first
charge was to examine what adjustments to debt issuance, if any, Treasury should
make in consideration of its financing needs. The Committee did not feel that
any immediate changes to Treasury coupon issuance were necessary. Yet, the
evolution of the Fed’s Maturity Extension Programs (MEP) warrants increased
issuance to the public sector. We examined this more closely in the second
charge.
Separately, the Committee again discussed Treasury’s
capability to auction bills at negative yields. The Committee unanimously felt
that Treasury should move as quickly as possible towards implementation.
We further discussed the prospects for a Floating Rate Note (FRN)
program. TBAC was unanimous in its support for the introduction of an FRN
program as soon as operationally possible. Members felt confident that there
would be strong, broad-based demand for the product. A dialogue ensued about
which floating rate index should be used. The Committee gravitated towards
referencing treasury general collateral, in lieu of federal funds effective and
T-bills. The introduction of GCF futures aided the argument.
The second charge was to examine the impact of the
Federal Reserve’s MEP on Treasury’s borrowing needs. The presentation,
[attached], highlights how the Federal Reserve’s sales associated with MEP
transferred the maturing stock of debt held by the Fed to private investors.
Whereas the Fed had, as a matter of practice, reinvested those proceeds in
subsequent Treasury auctions, Treasury must now issue that debt to the
public to remain cash neutral. For fiscal years 2012-2016, this sums to $667
billion. A discussion followed about the composition of the additional
needed issuance. TBAC agreed that maintaining flexibility, given the uncertainty
surrounding the fiscal outlook, was critical. Furthermore, the Committee
continues to be committed to lengthening the Weighted Average Maturity (WAM) of
its debt. Hence, we felt a combination of larger T-bill issuance, FRNs,
and a modest increase in coupon issuance was appropriate.
The third charge was a detailed examination of
the Department of Education’s federally funded student loan programs.
Subsequent to 2010, all federal student loans are now funded by Treasury. The
presentation, [attached], attempts to encapsulate the anticipated, growth in
size, credit quality, duration, and convexity of these loans. A
discussion ensued about what liability structure Treasury should employ to fund
these assets. Separately, TBAC expressed concern about what incentives
these programs create in the field of higher education. Given that the
program is fairly new, in time, more empirical data will help shed light on both
the nature of the asset and liability management.
In the final charge, the Committee considered the
composition of marketable financing for the remainder of the July 2012 to
September 2012 quarter and the October 2012 to December 2012 quarter. The
committee’s recommendations are attached.
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