In this interview, Garbade explains how govt started predictable debt issuances. What is debt issuance? Well, govt issues bonds to meet its expenses. One way to borrow is whenever govt is short of funds, it announces it will borrow via so and so bond. This is the unpredictable bit which will create problems in markets. Govt is the prime borrower and any such sudden announcement will lead to scrapping of funds. If the market is facing crunch it will lead to higher interest rate for the govt itself.
A better way is that the govt forecasts its borrowing well in advance based on estimate of its income and expenses. It then uses the borrowing figure to work out a predictable calendar of borrowing in the coming quarters/years. This way market is well prepared to work out the funds available and plan accordingly.
But how did this thinking on predictable issuance start in US? This is what Garbade tells us:
Q: To many people, the Treasury market seems obscure. What makes it so worthy of study?
A: The Treasury market provides the U.S. government with its principal means of funding federal budget deficits. It’s also an important source of liquidity for investors who generally need to invest over predictable intervals but whose needs may change before their investments mature. And, of course, it’s the principal locus of Federal Reserve open market operations.
Q: Your new book looks at the evolution of a particular Treasury practice—the issuance of securities in predictable amounts at regular intervals. Those who follow Treasury auctions might assume that Treasury securities were always issued in this way. But as you show in your book, this was not always the case.
A: That’s right. The Treasury initiated regular auction offerings with weekly 13-week bill auctions in 1937, and moved to regular auctions of 26-week and 1-year bills in the late 1950s. However, until the 1970s, it issued notes and bonds—its longer-term obligations—through fixed-price subscription offerings on an “as needed” basis. The Treasury scheduled the offerings to meet its funding requirements but offered maturities that investors were interested in buying at the time.
Q: What drove the Treasury to adopt regular and predictable issuance of notes and bonds in the 1970s?
A: The lack of predictability left many intermediate- and long-term investors with little incentive to accumulate funds in anticipation of an offering at a desirable maturity—who knew when it might come to market? The uncertainty also placed a significant underwriting burden on primary dealers.
When interest rates became more volatile in the early 1970s—and as the size of the federal deficit and the frequency and size of Treasury offerings began to grow—Under Secretary of the Treasury Paul Volcker, who would later become the president of our Bank and then chairman of the Board of Governors, realized that it would be less costly to issue notes, and later bonds, on a regular and predictable basis and to auction those securities as it auctioned bills. Regularity meant that investors could plan ahead; auctions reduced the risk that an offering would fail to attract adequate interest.
Q: If the Treasury had many years of experience auctioning bills on a regular and predictable basis, why did it take so long to extend the practice to notes and bonds?
A: My best guess, and it’s only a guess, is that change and innovation are uncomfortable in the absence of a demonstrated need. The changed conditions of the 1970s produced the requisite need. The fresh outlook of a new Treasury under secretary undoubtedly helped as well.
Amazing. It took nearly forty years for predictable notes and bonds.
I guess in India also its started first with T-bills given they are easier to project. Eventually, the learning must have led to a calendar for bonds as well. Now, all these things have pretty much been institutionalized. T-bill calendar looks like this (issued on a quarterly basis) and Bond calendar looks like this (on a semi annual basis).
Though, not sure when did these start. Most likely all this would have only started post 1997 as till then govt could just borrow whenever using ad hoc t-bills.
But then there is a possibility that in colonial times we had some kind of a calendar as well. Something worth exploring.