A recent study by Hudson Bay Capital Management has stirred a debate in the bond market, suggesting that the U.S. Treasury may have provided an economic stimulus last year by moderating long-dated bond sales. This claim, however, has been firmly denied by the U.S. Treasury.
The controversy began when the Treasury announced in November that it would slow the pace of auction size increases for long-dated debt securities. This decision came as a relief to bond markets, which had been unsettled by earlier increases in long-term debt supply. According to the study authored by Nouriel Roubini, a senior economic advisor known for predicting the global credit crisis, and Stephen Miran, a former advisor at the U.S. Department of the Treasury, this move was equivalent to an economic stimulus akin to a one percentage point reduction in the Federal Reserve’s policy rate.
Roubini stated that while the Fed was raising interest rates to curb economic growth, the Treasury’s actions effectively pushed long-term yields lower. This situation, he suggested, could result in economic growth persistently exceeding potential, leading to what he described as a “no landing zone.”
The study also echoed concerns from Republican senators who had previously suggested that the Treasury might have deliberately increased short-term Treasury bill issuance to give the economy a temporary boost before elections. However, these claims have been denied by the U.S. Treasury. Treasury Secretary Janet Yellen assured that there was no strategy intended to ease financial conditions, describing such suggestions as unfounded.
Assistant Secretary for Financial Markets Joshua Frost also addressed misconceptions about Treasury issuance, noting that the reduction in long-dated debt increases last year was modest and not part of a broader strategy to influence the economy.
While some bond market analysts, like Gennadiy Goldberg of TD Securities USA, believe the move may have kept rates marginally lower, they agree that this aligns with the Treasury’s goal of securing the best funding for taxpayers rather than manipulating monetary policy. Jonathan Cohn of Nomura Securities International added that while the Treasury might not be a market timer, it is also not indifferent to market conditions, especially during periods of volatility.
The debate highlights the complex interplay between government policies and market reactions, underscoring the sensitivity of financial markets to changes in debt issuance and economic strategies.
