A newly published white paper has sparked debate on Wall Street and in Washington by accusing the Treasury Department of excessively relying on short-term Treasury bills to manipulate the economy for political purposes, potentially risking a resurgence of inflation.
The paper, released last week, argues that the Treasury’s strategy of financing a significant portion of the U.S. debt with short-term Treasury bills constitutes deliberate economic manipulation. The authors, Stephen Miran and Nouriel Roubini, have coined the term “activist Treasury issuance” to describe this practice.
“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,” Miran and Roubini wrote.
The Treasury Department has strongly denied these allegations, and many bond-market experts also dispute the paper’s conclusions. Lou Crandall, chief economist at Wrightson ICAP, stated in a report to 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. The Treasury is simply doing what it said it was going to do.”
Treasury Secretary Janet Yellen also refuted the claims, telling MarketWatch, “I can assure you 100% that there is no such strategy. We have never, ever discussed anything of the sort.” Her statement first appeared in a Bloomberg News report.
According to Miran and Roubini, the Treasury’s excess issuance of bills over the past nine months has had an impact equivalent to roughly $800 billion in quantitative easing, similar to reducing the 10-year yield by 25 basis points or the federal-funds rate by a full percentage point. This, they argue, has undermined the Federal Reserve’s efforts to tighten monetary policy and cool the economy.
Senator Bill Hagerty, a Tennessee Republican, echoed these concerns, suggesting that the Treasury’s reliance on bills is politically motivated. He said in a statement to 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. 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.”
A Treasury official, who spoke on condition of anonymity, criticized the paper for misrepresenting the guidance issued by the Treasury Borrowing Advisory Committee (TBAC). The official emphasized that the 15% to 20% range recommended by TBAC is not a strict rule but a guideline that allows for flexibility. They also noted that the shift toward more bill issuance was more modest than the paper suggests and that the Treasury has been gradually reducing its issuance of bills as a share of net new debt issued.
Despite these denials, some experts see merit in the paper’s arguments. Bob Elliott, CEO of Unlimited and former chief of foreign-exchange policy at Bridgewater Associates, questioned why the Treasury hasn’t reduced the share of bills more quickly, noting that the current economic conditions do not require significant easing.
The idea that the Treasury might be working against the Fed’s efforts first gained traction after the department’s quarterly refunding announcement for the fourth quarter on November 1. The bond market was experiencing turmoil at the time, with the yield on the 10-year Treasury note hitting its highest level in over 15 years.
Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott, pointed out that while the Treasury’s actions might influence financial conditions, other factors, such as the Federal Reserve’s stance on interest rates, also play a significant role.
Miran defended the use of TBAC guidance as a benchmark, stating it was the only suitable reference provided by the Treasury. He argued that the Treasury has not provided a convincing reason for its continued reliance on bills.
Details from the next quarterly Treasury refunding announcement are expected on Wednesday, while the Federal Reserve will announce its latest decision on interest rates later in the day.
