FEW THINGS BETTER KNOW BEFORE BUYBACK 4 : As a Tool of Debt Management
生日倒數趕快來補即將上路美債回購計畫的坑，前情提要寫流動性應該差不多了，這集開始要來了解財政部的初衷和計劃設計的來龍去脈，繼2000年初執行過後，再正式提起就是2015年第一季的TBAC了!!! 略懶覺得願意看buyback連載的人應該不需要我翻譯吧，為了提高效率只發英文摘要了XD
Treasury Borrowing Advisory Committee Discussion Charts p.65–84, Feb 2015.
- Previous Experience
In the early 2000s, Treasury used buybacks as a tool to enhance the liquidity of its benchmark issuance during a time of budgetary surpluses. Treasury bought back $67.5 billion of outstanding bonds from March 2000 to April 2002 through reverse auction operations. The program was implemented in response to shrinking financing needs and ended once funding needs began to increase.
- Debt management
Change in outstanding debt = Gross debt issuance — Maturing debt — Debt buybacks
With buybacks set at zero, any variation in the Treasury’s funding need must be met by changing gross debt issuance. Treasury could consider running a program of regular buybacks with the ability to adjust the size over time.
- Purpose of Buyback
- Enhance liquidity of Treasury securities
Treasury can optimize the size of on-the-run issues, rather than having it imposed by budget needs. Regular buybacks offer liquidity events for off-the-run securities; this could be particularly helpful during periods of market dysfunction or stress. Any reduction of illiquidity discount should also benefit newly issued securities.
2. Smooth gross issuance of debt over time
Buybacks could be used to maintain consistent issue sizes for coupon securities during periods of overfunding. Approach might be appealing if issue sizes would have to increase again beyond the overfunded period. While as outlook swings towards underfunding, buybacks will exacerbate need to raise issue sizes.
3. Reduce short-run variation in Treasury bill issuance or cash balance
Treasury faces considerable variation in funding needs at a higher frequency due to timing mismatch of revenues and expenditures. Historically, much of this variation has been met through large fluctuations in bill issuance. Buybacks could be used to dampen these seasonal swings in bill issuance/cash balances. However, there are limits on the scope of using buybacks for this purpose. Buybacks would be much smaller than the variation in bills and operations would have to focus on issues with very short remaining maturities. To date, there has been little apparent cost due to the variation in bill issuance.
4. Reduce maturity peaks in outstanding debt
Treasury faces an uneven profile of maturing debt, and this pattern creates considerable variation in gross funding needs. This variation could result in increased rollover risk and Makes it more challenging to smooth gross coupon issuance. Buyback Allows the Treasury to essentially pre-fund the maturing debt through purchase coupon securities as they approach maturity.
5. Allow more efficient changes to Treasury debt profile
Treasury should have the flexibility to alter broad characteristics of its debt over time, including change the WAM or the proportion of bills. This adjustment could be achieved by adjusting new issuance abruptly, while it would be quicker and more efficient through buyback implementation.
- Concern about Buyback
1. Costs of operating on both sides of the market
Pay bid-offer spread, plus additional concessions at auctions and at buyback operations. However, Treasury would be capturing more liquidity premium, mitigating this concern. It would be important for the Treasury to monitor such costs if it were to implement buybacks.
2. Discomfort with Treasury interfering in market functioning
Some may worry about the market functioning consequences of additional Treasury activity. While net supply would basically remain on same path that it would without buybacks; Treasury would just be achieving that path in a more effective manner.
3. Accounting issue with buying premium bonds
Premiums on purchased securities count as current expenditures, so they would increase the reported budget deficit. This issue could interact with the debt limit, since the limit is measured on par debt.
- International experience
A recent OECD survey indicated that 29 of the 33 countries surveyed had used such programs. Buyback operations are usually targeted at securities that are approaching maturity. Most respondents said that the purpose was to smooth the redemption profile or to mitigate refinancing risk.
- How to implement (initial idea only)
1. Conduct as reverse auction over defined set of securities. Place ownership limits on individual CUSIPs. Exclude particular issues as needed. Exclude STRIPS.
2. Aim for some degree of “regular and predictable” activity. But also want the flexibility to adjust sizes and composition over time, given some of the objectives noted above. Adjustments should not be so abrupt to create meaningful uncertainty about gross issuance.
- Capacity?
Consideration along with Fed purchase at that time. Would be much slower pace than QE. Nevertheless, back in that time, Fed’s programs showed that sizable purchases can be achieved without notable detriment to market functioning.
- Conclusion
Buyback program is operationally feasible and provides benefits discussed above. Need to consider more on Buyback design.
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