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Treasury is holding steady after recent gains as optimism grows over the Fed's first rate cut. Bond trade is also looking ahead to next week's quarterly refunding announcement from the Treasury Department. Alongside us in the studio here in New York, the former World Bank President David Malpas David good mornety, sir, good morning. I want to start with this quote, and I think it's a timely conversation for us. It comes from Hudson Bank Capital, Stephen Mirron, Noria Rabini. Two people.
I'm sure you know. Well, here's the quote. By adjusting the maturity profile of its debt issuance, Treasury is dynamically managing financial conditions and through them, the economy, essentially taking over the core functions of the Federal Reserve. And they dubbed this novel tool activist Treasury Issuance or ATI. Can we just reflect on all of this? What did you make of this piece? What are they? Talagus?
I love new acronyms. ATI so activism. So Treasury has to decide every quarter where whether to issue t bills or bonds, in which bonds to issue, and they do that in conjunction with Wall Street. And the problem, and I've written a lot about this in the Wall Street Journal, is that puts an overlap between them and the Federal Reserve. So that's a challenge right there. As you decide where the issuance is going, it affects the shape of the
yield curve. And when you do that, you're affecting stock prices. So you've got this giant direction for capital based on whether Treasury is borrowing short or long right now, for years now, they've been borrowing too much at the short end and not enough in the ten year kind of window, the thirty year window.
And why does that deliver meaningful consequences? Can we explore that a little bit more? If you think about the shape of the yield curve, it's the same amount of debt, it's just being issued at the front end of the yield curve and less of the long head. Why the meaningful consequences when you increase or decrease the level of debt the longer end of the curve.
When QET started, that was the Federal Reserve buying a lot of bonds in say twenty ten, eleven twelve thirteen, that flattened the yield curve, so you had the FED buying longer maturities. Basically, the FED buying duration. So when the market hears that, that's positive for equities, but it's not positive for small businesses around the country. They borrow
at the short end. So basically Treasury is the bigfoot coming in and borrowing right at the spot where your small businesses want to borrow for inventory for construction loans. So if you could, if you could change the shape of the yield curve to be more upsloped or upsloped at all, right now, you would liberate a lot of floating rate loans for people that really need them day by day in order to get their businesses growing.
Some people could say that this is actually just smart policy, because ultimately the Treasure Department didn't want to lock in borrowing costs at five percent for the next ten years, and they want to have a short term kind of lease on rates that were at the highest levels in decades. Why don't you see it that.
Way, Lisa, I think that's a bet made by the Treasury. So we already saw a giant bet made by the Fed on duration and They've lost billions and billions. I think it will end up being a trillion dollars from that mistake when they were buying long bonds with short term interest rates. Think Silicon Valley Bank, or think a hedge fund that made a bad bet. So as Treasury does that, they should be more neutral about the economy.
Here we are coming into an election cycle and they have they're holding down the long end of the curve, which props up the equity market. It fuels think of where the capital is going right now. Treasury is barring short so it means a lot of long term, long duration capital can go into equities or can go into long term bonds. So you have this phenomenon for years now of corporations issuing bonds and buying back their stocks.
You've got dividend recapitalizations going on now. This is all a phenomenon of the shape of the yield curve, which is being controlled, I think in an anti growth way by Treasury in the FED.
This may sound like an esoteric conversation, it's pretty much anything, but is talking ahead of eight thirty am on Wednesday, where we're going to get the Treasury refunding agreement where they announced what kind of maturities at the amounts that they're going to be selling of government debt. It comes at a time where Fitch said in a recent report that heavy treasury supply is a key risk to our lower yields call across the curve. And it comes at a time when you potentially a rumor to have an
ear toward another administration of Donald Trump. What would you if you were in a situation to dictate maturities do in order to say increased maturity of US government debt while not sort of causing this massive sell off at the long end that could be hugely disruptive.
Yeah, and I think you have to be neutral from Treasury and from FED that you're not trying to manipulate the yield curve. You know, historically there was the remember the Operation Twist, which was a big failure in a previous decade, a previous century, and so the government has tried to do this and it ends up hurting people
within the country. So all you have to do, I don't think it's that hard is say what your goals are that you're trying to not have the short term funding be the most efficient.
The treasury is.
Making a bet right now that they'll be able to refund at a lower yield later on. How do they know that? And wouldn't it be more confidence inspiring if they allowed the market to help them do that. They're asking the world to keep giving the US borrowed treasury borrowed in twenty twenty three third twenty three trillion dollars in its coincidence in twenty twenty three, and so that's a giant amount of debt for the market to digest.
So say to the market, we are working toward a lower yield curve that's upsloped, that's going to maximize business confidence and be very positive for growth. But they're not doing that. They're saying instead, we're going to keep borrowing short term because, as Lisa is pointing out, it might be cheaper. If yields fall, it might cost them a lot. Right now, it hasn't been a good bet. If you look back, you know it is just to jump down.
Is meant to be regular and predictable debt issuance out of the treasury. That's meant to be the core principle. Do you think we've moved away from that? Do you think this is a permanent fixture of policy. Now this tool, clearly.
It depends on the political cycle where you're going to borrow on the yield curve and if you're trying to prop up markets in the short term and the long term, and that also affects and it's very important the actual capital flows going on in the economy. So there's been this heavy bias toward big companies and toward the government.
So you know, that same point that you're making about where the Treasury is issuing means that the government feels comfortable with this giant fiscal debt because you're not borrowing
at the at the long end of the curve. I think we need to go to a more neutral, balanced environment with a more independent FED that's not really facilitating this process through its own Is it coincidence that the Fed moved to QTU to to I mean to uh to phasing out qt right now in this in this part of the curve, they should be allowing that long bound portfolio to run off. That would be confidence inspiring for markets.
David, It's going to catch up with me, sir. I feel like I've only scratched the surface and we need to go a lot deep from this topic. Thanks for giving, it's your insight. David Malpass, the former World Bank President