There’s a story going around Wall Street that the Treasury Department is trying to help Democratic candidates in November by how it issues debt. I don’t buy it.
Scott Bessent, a hedge fund manager who has raised money for Donald Trump’s campaign, told me last week that he thinks Janet Yellen, the current Treasury secretary, is an “apparatchik” for the White House whose behavior is “appalling.”
Nouriel Roubini, a well-known economist who describes himself as a lifelong Democrat, isn’t as harsh as Bessent, but he told me he thinks the Treasury Department is inappropriately engaging in a kind of monetary policy, which is the purview of the Federal Reserve. “The Fed is in charge of managing the business cycle,” he said. “Treasury doesn’t have that mandate.”
I’ll explain why I think Bessent, Roubini and others are barking up the wrong tree, but first I’ll lay out their argument.
The story is that the Treasury, which is responsible for raising money by selling interest-bearing securities to investors, has kept a lid on long-term interest rates to stimulate economic growth and the stock market in an election year.
The Treasury is manipulating interest rates, the story goes, by selling relatively few longer-term securities, such as 10-year Treasury notes and 20- and 30-year Treasury bonds. Investors competing for the limited supply of those long-term securities accept lower yields, so interest rates fall. The Treasury market is so big and important that when Treasury yields fall, other long-term interest rates also fall, such as rates on 30-year mortgages.
The claim is that the Treasury is overly tilting its debt issuance to bills, which mature in a year or less. That doesn’t have much effect on short-term interest rates, which are more heavily influenced by the Fed’s monetary policy.
The Treasury has a target of having 15 percent to 20 percent of its outstanding debt in the form of bills, as requested by the Treasury Borrowing Advisory Committee, which represents buyers of the debt. It hit around 60 percent bill issuance in the last quarter of 2023 and first quarter of this year, a pattern that if it lasted for a long time would put bills’ share of debt way above the target range.
The bill issuance during that period was way too high, Roubini told me. This month he and a colleague, Stephen Miran, issued a paper on the topic accusing the Treasury of “activist” issuance. Roubini is a senior adviser at Hudson Bay Capital, a hedge fund, and Miran, who was a Treasury official during the Trump administration, is a senior strategist at Hudson Bay.
What’s wrong with their argument? The Treasury’s critics concede that they have no direct evidence that it’s trying to manipulate rates to get Democrats elected — say, a political directive from Yellen to Josh Frost, the assistant secretary for financial markets, who runs the Treasury’s quarterly refunding auction.
“We have never, ever discussed anything of the sort,” Yellen said last week in an interview with Bloomberg News.
The critics’ evidence is purely circumstantial, namely that the Treasury issued a lot of bills recently. They argue that Frost hasn’t provided any justification for doing so, leaving politics as the only plausible motivation.
In fact, though, the Treasury has explained its modus operandi. It says it needed to issue a lot more debt than usual to restock the Treasury General Account, which is the government’s checking account. The government usually has more than $500 billion in the account, but it ran the account down to $23 billion in June of last year because of Congress’s delay in raising the debt ceiling.
True, the Treasury could have issued lots more long-term securities to rebuild the checking account, but it prefers to keep the size of those issuances relatively stable and predictable to keep debt buyers happy and instead use the issuance of bills as a shock absorber, increasing and decreasing it as needed. Buyers of bills are less bothered by fluctuations in issuance sizes.
While the issuance of Treasury bills ran above normal for a while, it wasn’t enough to significantly increase their share of total outstanding debt. It’s right around its long-term average of about 22 percent, according to a quarterly presentation by the Treasury Department. Since April, the Treasury has actually reduced the amount of bills outstanding. (Bessent said he’s aware of this argument by the Treasury but doesn’t accept it.)
If the Treasury really were undermining the Federal Reserve by making financial conditions easier than the Fed wanted, you might expect to hear complaints from the Fed. There have been none. The Fed chair, Jerome Powell, was asked at a hearing this month whether the Treasury’s issuance pattern could stimulate inflation. “I wouldn’t say that has important inflation implications, no,” Powell answered.
Others on Wall Street see nothing amiss. The pattern of debt issuance “is highly consistent with Treasury’s goal to obtain the best possible funding for the taxpayer and is not in any way a sinister plot to ‘ease’ monetary policy,” Gennadiy Goldberg, the head of U.S. rates strategy at TD Securities USA, said, according to Reuters.
The critics do have one valid point: The Treasury issues so much debt to keep the federal government operating that its decisions about issuance patterns really can have macroeconomic effects. “With $27 trillion marketable debt outstanding (and rising), it takes less than a four-point swing in the bill share to cause a market flow in excess of $1 trillion,” which is in line with what the Federal Reserve could achieve with a “moderately sized” program of quantitative easing, also known as bond-buying, Miran and Roubini wrote.
But that’s not to say that the Treasury is deliberately affecting the economy. And if the Treasury’s issuance pattern has any unintended ill effects, it’s up to the Fed to counter them.
Bessent argues that Yellen has become overtly political in a way that’s unbecoming of a Treasury secretary. In May she gave a speech on the economic case for democracy, referring to “the notorious day of Jan. 6,” that struck some as an attack on Trump. “I admit that this doesn’t seem like typical terrain for a Treasury secretary,” she said at the time. At the Group of 20 summit in Rio de Janeiro this month, she seemed to plug Vice President Kamala Harris, saying, “I feel that the core values that have been reflected in the policies of this administration are ones that Vice President Harris deeply embraces.”
The Treasury’s issuance of debt is supposed to be — and I believe truly is — strictly nonpartisan. Bessent argues that Yellen can’t claim to be neutral when she extols Harris and implicitly attack Trump. On the other hand, saying Jan. 6 was a dark day isn’t exactly going out on a limb. And Yellen’s praise for Harris hardly compares to the behavior of Trump’s Treasury secretary, Steven Mnuchin, who attended a fund-raiser for Trump’s re-election campaign in 2019 a day after rejecting a request from House Democrats for the president’s tax returns.
This Wednesday the Treasury will announce its financing plans for the coming quarter. Critics will be watching closely for any evidence that the department is behaving in a partisan way. So far they haven’t made their case.
Elsewhere: In China, Pessimism About Growth
The yield on China’s 10-year government note has fallen to the lowest in records going back to 2002, according to Bloomberg data. The decline in the bond yield and the nearly 3 percent decline so far this year in the Shanghai Composite stock index “are clear signs that the markets are pricing in a recession and deflation in the world’s second-largest economy,” David Rosenberg, the president of Rosenberg Research in Toronto, wrote in a client note on Friday. Last week, in a bid to stimulate economic growth, China’s central bank unexpectedly cut its rate on one-year loans to commercial banks.
Quote of the Day
“The sinews of war, infinite treasure.”
Cicero, “Philippics” (43 B.C.)
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