List of References
Broaddus, J.A., and M. Goodfriend, 2000, “What Assets Should the Federal Reserve Buy?” in Federal Reserve Bank of Richmond Annual Report 2000.
Dupont, D. and B. Sack, 1999, “The Treasury Securities Market: Overview and Recent Developments” Federal Reserve Bulletin, 785:806, December 1999.
European Central Bank, 1998, “The Single Monetary Policy in Stage Three: General Documentation on ESCB Monetary Policy Instruments and Procedures,” September.
Fleming, M., 2000a, “The Benchmark U.S. Treasury Market: Recent Performance and Possible Alternatives” Federal Reserve Bank of New York Economic Review, April, 129–144.
Fleming, M., 2000b, “Financial Market Implications of the Federal Debt Paydown” Brookings Papers on Economic Activity, 2:2000, 221:251.
Fleming, M., G. Hall and S. Krieger, 2000, “The Macroeconomic and Financial Market Implications of the Pending Debt Paydown” Brookings conference paper, September 2000.
Fung, B., and R. McCauley, 2001, “How Active are Central Banks in Managing Their U.S. Dollar Reserve Portfolios?” BIS Quarterly Review, March, pp. 31–32.
Fung, B., and R. McCauley, 2000, “Composition of U.S. Dollar Foreign Exchange Reserves by Instrument,” BIS Quarterly Review, November, pp. 59–60.
Gertler, M., 2000, Comments and Discussion on Fleming, Hall, and Krieger, Brookings Papers on Economic Activity, 2, pp. 290–296.
Greenspan, A., 2001b, Federal Reserve Board’s semiannual monetary policy report to the Congress, Testimony Before Committee on Banking, Housing, and Urban Affairs, U.S. Senate, February 13, 2001.
Greenspan, A., 2001c, The Paydown of Federal Debt, Remarks before the Bond Market Association, White Sulphur Springs, West Virginia, April 27.
Hall, G. and S. Krieger, 2000, “The Tax Smoothing Implications of the Federal Debt Paydown,” Brookings Papers on Economic Activity, 2, pp. 253–284.
Meltzer, A., 2001, “Running Out of Debt,” Paper presented at the American Enterprise Institute conference on Is It Really Good Policy to Pay Off the Publicly Held Treasury Debt, February.
Reinhart, V. and B. Sack, 2000, “The Economic Consequences of Disappearing Government Debt,” Brookings Papers on Economic Activity, 2, pp. 163–219.
Schinasi, G., C. Kramer, and T. Smith, 2001, “Financial Implications of the Shrinking Supply of U.S. Treasury Securities,” IMF Working Paper WP/01/61.
Zamsky, S., 2000, “Diminishing Treasury Supply: Implications and Benchmark Alternatives,” Business Economics, October, pp. 25–32.
Prepared by Vivek Arora and Rodolfo Luzio.
The U.S. fiscal year starts October 1.
Agency securities are securities issued by Government Sponsored Enterprises (GSE)—the largest of which are the Federal National Mortgage Association (or Fannie Mae) and the Federal Home Loan Mortgage Association (or Freddie Mac)—and federal agencies, such as the Government National Mortgage Association (or Ginne Mae).
Marketable securities can be traded after their initial purchase. New marketable securities are regularly issued in maturities ranging from 13 weeks to 30 years. They comprise bills (with initial maturity of one year or less), notes (initial maturity of 1–10 years), and bonds (over 10 years). Notes account for almost half the marketable debt outstanding, with the rest roughly evenly split between bills and bonds. Nearly all marketable debt is nominally denominated (with coupon and principal fixed in dollar terms), although the Treasury has issued some inflation-indexed debt since 1997. Most of the marketable debt is non-callable. Non-marketable securities, which cannot be traded, are mostly held in U.S. government accounts (mainly in the Social Security trust funds); a portion is held by private investors in the form of U.S. savings bonds.
The remaining, “non-redeemable” debt would comprise debt that had not yet reached maturity, was held in non-marketable forms (e.g., savings bonds), or whose repurchase would require a premium that the Treasury may consider too high.
Under the Federal Reserve Act, the Federal Reserve is also allowed to buy agency securities, some municipal securities, foreign exchange, and sovereign debt.
These temporary measures initially extended through January 2001, at which time they were renewed.
The revision was not, however, made in response to the falling stock of Treasuries, but rather was in response to a decline in banks’ reserve deposits at the Federal Reserve, which led to a reduction in permissible assets to back currency issuance.
As noted, the Federal Reserve has statutory authority under the Federal Reserve Act to transact in these assets, but it has traditionally not used them in open market operations.
The most important instruments are refinancing operations in the form of reverse transactions, which are conducted on the basis of either repurchase agreements or collateralized loans. In addition to refinancing operations, the ESCB may use outright transactions, issuance of debt certificates, foreign exchange swaps, and collection of fixed-term deposits. However, these additional instruments have not yet been used. For details, see European Central Bank (1998).
The Federal Reserve also transacted in gold, since the United States was on the gold standard at the time. See Meltzer (2001).
The effects on the Federal Reserve’s balance sheet would be mitigated to some extent by marking to market of collateral. The Federal Reserve has noted in addition that the use of private securities in open market operations raises risk management and accounting questions that need to be studied further, as well as the question of whether their introduction should be incremental or rapid.
See Broaddus and Goodfriend (2001).
If the supply of Treasuries declines substantially, these investors may simply need to manage greater mismatches between their assets and liabilities.
The one-year Treasury bill stopped being issued in February 2001.
The change in spreads between Treasuries and other fixed-income securities partly reflects the failure of Long-Term Capital Management in 1998 which led market participants to re-evaluate financial transactions.
Steps that would widen the tradability and accessibility of swaps could include the establishment of a clearing house as well as of a swap futures market.
The foreign official demand for Treasuries could be smaller than this, especially if foreigners remain willing to move into other dollar-demonimated instruments.
The choice of assets in which to invest such proceeds is a separate policy issue, which is discussed in Chapter V of the selected issues paper.