FT Alphaville " A lengthening Treasury stock Ultra-low rates, plenty of demand... why on earth wouldn't you lock that in? The chart below shows the US Treasury is adopting just such an approach with the average maturity of its debt stock now at a decade-high and not all that far off the all time top: From Colin Kim at the US Treasury (all our emphasis): Since the depths of the financial crisis in late 2008, Treasury has lengthened the average maturity of outstanding marketable Treasury securities by nearly 32 percent. In fact, the average maturity of outstanding marketable Treasury securities (63.9 months in May 2012) is now at its highest level in a decade. It is also above the 30-year historical average of 58.1 months between 1980 and 2010. Moving forward, we intend to continue gradually lengthening the average maturity of outstanding Treasury securities. We will do so consistent with our long-term objectives of financing the government at the lowest cost over time, and ensuring regular and predictable management of our overall portfolio. SocGen note that federal spending on interest is projected to double over the next 10 years, from $454bn in 2011 to $866bn in 2022 (or from 1.5 per cent to 2.5 per cent of GDP), driven by normalization in interest rates and further increases in the amount of debt outstanding. They argue the rise in interest expense could be even more dramatic if the fiscal cliff is delayed and the debt trajectory is not stabilized: And it is partly in preparation for that eventual move in short-term rates that the Treasury has been extending the duration of its liabilities. From SocGen again: If the current mix of issuance is maintained, the Office of Debt Management estimates that in the next ten years the average maturity of Treasury debt outstanding will increase from 5.2 years to 6.5 years. But does the very sensible effort to lock in longer-dated debt on sweet rates conflict with the Fed's attempts to push-down longer-term interest rates via Operation Twist? The yes argument runs into the idea that the real agenda of QE has and always will be to monetize debt so as to create an environment that gives governments a license to borrow - mainly by keeping long-term interest rates low. Izzy has a look at that idea here. Or as Cardiff put it, the message sent by Bernanke to the Treasury could be interpreted as: Hey, pssst, US Treasury, I'll keep rates low. Please issue whatever you have to and top up the goddamn system with collateral. At least until the financial sector is finished deleveraging or until an accelerating economic recovery naturally raises the outstanding value of collateral. Anyhoo... the WSJ argued the yes side, arguing that "the Fed's plan to take long-term bonds out of the market may be somewhat muted by the Treasury continuing to push longer-term debt..." before arguing that the Fed's actions have a much bigger impact on current markets than the Treasury's. But how much water does that hold, even if the two agencies are reading from the same play-book? Atig and Robertson over at the Atlanta Fed's macroblog highlight the work of Sharon Kozicki at the Bank of Canada: The effectiveness of unconventional monetary policy measures depends on several factors. Measures appear to have been effective (i) when targeted to address a specific market failure, focusing on market segments that were important to the overall economy; (ii) when they were large in terms of total stock purchased relative to the size of the target market; and (iii) when enhanced by clear communication regarding the objectives of the facility. They argue that the accumulated evidence suggests we should be really thinking in terms of something like the stock or accumulated total of Fed purchases relative to the size of publicly held Treasury debt: But whether one prefers to think in terms of stock-share or flow-share, thinking in terms of ratios does highlight an important part of the policy environment of the moment. Harvard professor and former Treasury Secretary Lawrence Summers has, for example, suggested that the federal government issue more longer-term debt in order to support government spending at a low cost. Because both QE2 and the more recent maturity extension program were targeted at reducing the holdings of longer-dated Treasury securities that would otherwise be held by private investors, the effectiveness of the Fed's actions is sensitive to the type of debt management actions advocated by Summers. More generally, if the Fed's share of publicly held debt is a key element in determining the degree of monetary policy accommodation, changes in the level and composition of outstanding government (or agency) debt may amplify or mitigate the effects of central bank asset purchases. In normal times we wouldn't think too much about this impact because explicit changes in the funds rate would swamp any effects of asset share, which in any event would only evolve gradually. But with the funds rate at the zero bound, asset share and composition take on more importance. Thus, and as the Fed's latest policy meeting approaches next week, it is probably good to remember that just because central bank asset purchases might stand still, it does not necessarily mean monetary policy will follow suit. Related links: Breaking the negative feedback loop - Lawrence Summers The impact of Federal Reserve asset purchase programmes: another twist - BIS Fed purchases of government debt: Flow-share versus stock-share - Macroblog at the Atlanta Fed Unconventional Monetary Policy: The International Experience with Central Bank Asset Purchases - The Bank of Canada This entry was posted by David Keohane on Wednesday, June 13th, 2012 at 17:50 and is filed under Uncategorised.