Gurus at Treasury Jiggering Its Offerings

Oct. 31, 2018
by Bob Adelmann

The announcement from the U.S. Treasury was terse:

Total net marketable securities issued in the fourth quarter will be a projected $425 billion.

That will bring total debt issued in 2018 to $1.34 trillion, the highest since $1.59 trillion was issued in 2010.

2018 debt issuance also jumped 146% from 2017, when just $546 billion was issued.

It took Liz McCormick at Bloomberg to explain just how Treasury was going to manage all of that: stay short and provide inflation protection. Specifically, Treasury’s latest offerings will focus on five-year maturities and less, and brush the dust off its TIPS – Treasury Inflation-Protected Securities.

But of course that hardly addresses the underlying problem: a government continuing to spend beyond its (taxpayers’) means. The numbers are ugly: The national debt of the United States Government jumped by $1.3 trillion during its fiscal year that ended on September 30. The gap between the government’s spending and its income for that fiscal year was $779 billion, a jump of $113 billion over the year before.

At some point, the question will be raised: Who will buy? That was the question raised back in 2011 when Standard & Poor’s cut the government’s credit rating and put it on its “negative” watch list. Said S&P at the time:

The downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.

Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government's debt dynamics any time soon.

This was written seven years ago, prompting the question: Has anything changed since then? Answer: the government’s deficits are approaching a trillion dollars a year, and the national debt is 50 percent larger. Aside from that, not much.

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In 2010, the excuse used for the issuance of such massive (and incomprehensively large) amounts of debt was the spending necessary to accomplish the “recovery” from the Great Recession. Under Keynesian theory, the best way to keep the banks from failing was to bail them out with taxpayer monies. Only the taxpayer didn’t have the money, so the Treasury borrowed it in their name, leaving them on the hook to pay it back later.

Now, however, it’s “later,” and instead of paying back what the Treasury borrowed, it’s borrowing more, using a different excuse: tax reform, more government spending, and an aging population demanding their entitlements.

Add to that the Fed’s plan to continue to sell off some of the U.S. Treasury securities it bought during the crisis, which is adding another $30 billion a month for the bond market to absorb, and one can see the challenge faced by the funding agency, which is tasked with paying the government’s bills.

In the short run, the gurus at Treasury can jigger and juggle its offerings to reduce, on the margins, any latent but increasing anxiety about the government’s continuing ability to pay its bills. Adding inflation protection is a nice touch, but avoids the underlying problem: Who will buy junk when it is finally exposed to be junk?

The credit rating agencies are of little help and probably add to the problem by papering it over. Although S&P continues to hold U.S. paper at AA+, the other two – Fitch and Moody’s – insists on keeping U.S. paper at AAA. All three hold their current outlooks at “stable.” How is that possible? The deficits are a trillion dollars a year and the national debt is 50 percent larger today that it was just seven years ago. Perhaps they remember that, following the S&P downgrade, the head of the agency was booted for even raising the question.



Treasury Announces Marketable Borrowing Estimates

The Wall Street Journal: Treasury Expects to Issue Over $1 Trillion in Debt in 2018 Mnuchin Set to Top Geithner Record as Treasury Auctions Grow The US will issue over $1.3 trillion in new debt in 2018, the highest amount since the depths of the recession

United States federal government credit-rating downgrades

Current US credit ratings by various credit rating agencies

Explanation from the government on TIPS

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