How the US Treasury Will Fund the Next $20 Trillion in Debt

Joe Weisenthal (0:02)

Bloomberg Audio Studios.

Tracy Alloway (0:04)

Podcasts, radio, news.

Joe Weisenthal (0:18)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:24)

And I'm Tracy Alloway.

Joe Weisenthal (0:25)

Tracy, every once in a while, and I mostly see this on Twitter, if I'm being honest, but every once in a while, I see people trying to make a big deal about the quarterly refunding announcement by the Treasury as if it's gonna be some big market mover on par with a Fed decision or something like that.

Tracy Alloway (0:44)

I like how you say mostly on Twitter, like there's even a probability that you would be walking down the street and someone's talking about debt issuance, other than maybe looking at that debt clock or whatever it is.

Joe Weisenthal (0:56)

Yes, like it's not something that comes up at a bar specifically, or I don't hear people talk about it on the street. I also don't know if it's a real thing that people in markets actually care about, or if it's just sort of this talking point, pundit sort of quasi-political thing. So we are recording this august 8th, but in late July, Nouriel Roubini and Steven Miren put out this paper essentially saying that the nature of current issuance, which is that the government is borrowing a lot at the short end of the curve. I think they called it like this like stealth QE and maybe insinuated that there were sort of like political or specific economic motivations that causing them to issue where they do. So there's a lot of like talk about this.

Tracy Alloway (1:41)

Yes, so I am vaguely aware of some of this discussion. So the idea here per Robini and Mirren is they're calling it activist Treasury issuance or ATI. And the idea as you say is maybe some of the stuff the Treasury is doing and specifically choosing to kind of reduce the amount of longer term Treasuries they've been issuing and rely more on shorter term bills. That's something they've done recently. The idea is that in so doing, they're essentially mounting the stealth QE, easing financial conditions in a politically sensitive election year, flattening the yield curve to stimulate growth. And then ultimately, per their calculations, there's a very detailed paper, it's worth like 100 bips in a benchmark interest rate cut. But it's being done by the Treasury, which is something that the Treasury is supposed to be independent to the Federal Reserve. And so there's this discussion about political motivations and conspiracy and things like that.

Joe Weisenthal (2:46)

Right. And it's a very interesting topic because the question is like, okay, there's some sort of framework that the Treasury uses to figure out where and when they're going to issue on the various curve, and are they deviating from that in some way. And part of the timing here is that the Fed is currently doing QT, right? It's letting those longer dated assets roll off the balance sheet. And so then the question is like, oh, is the Treasury purposely trying to counteract that by, okay, if the Fed is selling long-term debt, is Treasury selling less long-term debt, muting the impact of monetary policy? All kinds of interesting questions. Anyway, we've never really done, I don't think, an episode on how governments manage debt and think about this challenge. And so it's a very timely time to do so and to sort of look at what really is going on.

Tracy Alloway (3:34)

No, we haven't. And I'm really interested in this topic. I know you and I talk about the Treasury market, but we haven't gotten into those specific decision-making processes and the rules that maybe govern debt issuance. All I know about the Treasury is the ultimate financial markets, Karen, because every quarter it's out there asking for a refund.

Joe Weisenthal (3:56)

Good one, Tracy.

Tracy Alloway (3:57)

Thank you. Thanks, Joe. No, I'm excited about this conversation. Let's do it.

Joe Weisenthal (4:01)

I'm really excited because again, there's the short-term question, there's the interaction of issuance in QT, there's the election, there's the economic cycle, there's fighting inflation, and then we have huge deficits in this country, and they're going to expect to be bigger and bigger. In February, the CBO put out an estimate that there was going to be another 20 trillion in accumulated deficits between 2025 and 2034 The estimate will certainly be wrong in one direction or another, but there is a lot of debt management out there. Anyway, I am excited to say we really do have the perfect guest. We are going to be speaking with Amar Reganti. He is a fixed income strategist at Wellington Management and Hartford Funds, but also, importantly, he spent four years, 2011 to 2015, in the Office of Debt Management itself. He was a debt manager. He made these decisions, understands how they're made within the Treasury. So Amar, thank you so much for coming on Odd Lots.