What factors are behind the recent surge in treasury issuance?
In early February, Congress and the President reached the 2-year budget deal for financing the federal government. At the same time, they suspended the debt ceiling until March of 2019. With that, the Treasury has been freed to issue Treasury securities, particularly, Treasury bills as a means of increasing financing for the federal government. There's essentially three factors behind the treasury issuance. One, the Treasury wants to issue its operating cash balance. It has wanted to do it for some time, to protect against market disruptions and has been unable to do so because of the debt ceiling constraints. So, they've been free to issue securities to boost their cash balance. Two, the treasury has needed to increase issuance, in order to offset the Fed tapering process. As the Fed purchases fewer securities, the Treasury needs to issue more to the direct market and they've opted to do so for the most part in the form of Treasury bills recently. Third, because of the fiscal packages that have been agreed upon in Congress. The federal government's financing need have grown and the Treasury need to issue them in order to meet these financing needs.
Does the increase in Treasury supply allow the Fed to be more measured with policy?
Unless there's a notable tightening in financial conditions, of which there has not been. I think Treasury issuance really doesn't have an impact on the Federal Reserve's monetary policy going forward. I think it has been beneficial to us at the front-end of the market by offering us attractive yields, and a lot of those attractive yield increases have come as a result of the pace of Treasury issuance to the front-end. As we move forward in 2018, I don't expect that to continue at quite the same pace, so as a result I don't expect to see the same notable increases in yields on Treasury securities as a result of supply. We do expect to see increases in yields as a result of expectations of Fed policy, so from the Fed's perspective, again unless there's a notable impact on growth through a tightening of financial conditions, I would expect them to keep steady in their course to consider the upcoming economic data and expectations of inflation in setting policy.
Views are as of April 19, 2018 and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector. Federated Investment Management Company 18-74152 (4/18)