Today, I want to show you a very intriguing little piece of information. The Treasury knows that I’m watching their machinations, and they don’t like it one bit.
If you’ll recall, the TBAC (Treasury Borrowing Advisory Committee) is the shadowy “power behind the throne” that advises the Treasury on debt issuance. The Treasury very rarely deviates from their recommendations.
And their latest report was… interesting.
The latest TBAC report started with a wildly bullish preamble. This kind of noxious sentiment is typical of the froth that happens at a major market cycle top, if not a secular top.
Nevertheless, financial conditions have eased significantly. Since the last refunding, the equity market is up more than 10%, the broad trade-weighted exchange value of the US dollar has depreciated by 4%, and credit markets have been healthy. Meanwhile, the Fed’s program to normalize its balance sheet is proceeding in the background.
Against this favorable financial backdrop, the US economy enters its ninth year of expansion with renewed dynamism. The aging business cycle would typically be displaying late-cycle dynamics of slower growth and rising inflation. However, this cycle is defying that pattern. Economic activity appears to be accelerating further above trend and inflation pressures are only beginning to emerge. Despite the age of the business cycle, the data suggest that this cycle is behaving in a mid-cycle fashion paced by improved consumption and investment.
They were similarly foaming at the mouth over the tax cuts.
According to many estimates, the combination of individual and business tax cuts will raise the level of real GDP by about 1% in the next few years, perhaps add to the potential growth rate of the economy, and significantly increase the federal deficit as many of the tax benefits are front-loaded.
The Treasury needs to borrow so much money that the TBAC wants to introduce a 2 month T-bill along with an additional settlement cycle for bills. This at a time when the Fed is pulling money out of the markets. Adding more short term paper to the market under the circumstances will go over like a lead balloon.
And then finally – here’s the most interesting part – they left us with this tidbit:
Lastly, you will note that we have delinked the TBAC recommended refinancing tables from this letter. In the prior refunding in November, some market commentators focused on the tables for specific guidance about Treasury’s expected issuance [Gee. I wonder who that might be…] in the following quarter. It is a mistake to use the tables for precise predictions. It is this letter and the minutes of the TBAC meeting that should be the focus of attention for our recommendations. The refunding tables should be considered as illustrative examples rather than any kind of exact policy guidance.
If you’re interested, the offending report that I published in December is right here.
I know of no other commentators who pay any attention to this. So I’m definitely honored by the TBAC’s attention (wink wink)! However, any time Fed or Treasury policymakers tell you to ignore something, you damn well better pay even more attention.
And that’s what we’ll do in the coming weeks (even though they’re trying to get us off their trail).
Have a great weekend!