FROM THE OFFICE OF PUBLIC AFFAIRS
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July 8, 2004
JS-1776
Statement of Jeff Huther
Office of Debt Management
U.S. Treasury Department
before the International Fund Forum
For issuers, inflation-indexed securities can be thought of as simply another financing tool. As promoters of more efficient markets, we welcome what a fully-developed inflation-indexed market must mean to you, the investor. The consequences of the evolution of the inflation-indexed securities market include the scrutiny of price indices and the increased ability to express views on economic fundamentals.
Scrutiny of price indices will increase the pressure on those of us in government to provide more accurate measures over time. Additional focus on the movements in price indices is likely to lead you to think more about the components of pricing and the weightings attached to those components. This scrutiny, I believe, will ultimately lead to more efficient treatment of inflation in a wide range of contracts that rely on inflation indices.
Inflation-indexed securities expand the universe of positions investors can take on the economic fundamentals. Fixed income participants have long studied the relationship between core and volatile components of prices and the factors that influence the actions of central banks around the world. As the inflation-indexed market develops, more emphasis is likely to be given to a country's potential for productivity growth, structural demand for capital, productivity differences across sectors and countries, and alertness for signs of changes in real economic variables.
Increased attention to economic fundamentals may lead investors to answer such questions as should we expect breakevens to remain so flat, is the natural shape of the real yield curve upward sloping and will demand readily adjust to supply at specific maturities? We expect and encourage you to take views on questions of breakevens and real rates. You should expect us, on the other hand, to issue TIPS regardless of what those views are. We have increased issuance because we believe that TIPS will, on average, prove to be a low cost form of borrowing over time.
Just as we do not base our issuance decisions of nominal securities on fluctuations in nominal rates, our TIPS issuance decisions will not be based on fluctuations in real yields, breakeven rates or seasonal fluctuations in the price index. Like our issuance of nominal securities, our long-term commitment to you is to issue TIPS in regular cycles and in predictable quantities.
We believe this commitment has already benefited the TIPS market. The stability of the bid to cover ratio in recent auctions suggests that auction participants appear to be getting better at gauging aggregate demand. While auctions still represent significant liquidity events, the trend in liquidity at other times suggests that the market is developing healthy momentum. And, given the small size of the TIPS market relative to the nominal Treasury market, there is substantial room for growth in issuance. As with the nominal market, we are committed to supplying TIPS in regular intervals and in predictable quantities.
We recognize that a high degree of certainty about the size and timing of TIPS auctions has a theoretical cost – conceivably we could reduce costs by issuing only when real rates are low and break-evens are high. Aside from the cost of uncertainty that this alternative would impose on our lenders, there is an assumption that we at Treasury could identify and act when favorable rates occur. We flatly believe that we do not have this ability, not only due to lack of resources but also because of our size.
In any given week, we may have $50 billion to $100 billion of debt maturing. On any given day, we may have obligations of $4 billion to $40 billion in fiscal outlays and we may receive up to $50 billion in tax receipts. These kinds of fiscal demands virtually require a high level of regularity in issuance. Our predecessors who developed the policy of regular issuance in predictable quantities were leaning with the wind. Our hope is that you will come to see the TIPS market as having the same reliability of supply that the nominal Treasury market has.
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REPORTS