Activist Treasury Issuance and the Tug-of-War Over Monetary Policy

Published Monday, August 5, 2024

Overview

ATI, performed by the US Treasury, adjusts the issuance of short-term and long-term government debt (bonds) to influence interest rates and economic conditions by shifting issuance towards short-term bills and away from long-term bonds, ATI reduces the amount of interest rate risk in the market, functioning similarly to the Fed's QE programs which remove such risks by purchasing longer-term securities.

Another example of our current period of Fiscal Dominance, in my opinion.

Impact on the Economy

• ATI's estimated to have reduced 10-year Treasury yields by about 0.25%, equivalent to an estimated 1% (100bp) cut in the Fed Funds rate.

• ATI and higher neutral interest rates suggest that overall monetary conditions are neutral, contrary to the Fed’s aim of restrictive conditions to curb inflation.

Future

• If ATI is unwound, such as by converting $1 trillion of short-term bills to long-term debt, 10-year yields could temporarily rise by 50 basis points, then settle with a permanent 30-basis point increase.

• If ATI becomes a normal policy tool, it may lead to higher long-term inflation and interest rates due to its stimulatory effects.

Criticism

See "Criticisms of the ATI View".

• There are criticisms regarding ATI's classification as monetary policy and its predictability. Some argue that the bill share variance is within historical norms.

• Analysts question why markets have not fully priced in the potential terming out of excess bills.

Comparison with QE

• Both ATI and QE aim to influence financial conditions by altering the amount of interest rate risk in the market.

  • QE involves the Fed buying long-term securities to reduce market-held risk, while ATI reduces issuance of such securities to achieve a similar effect.