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Prior to the 1970s, the U.S. Treasury sold new notes and bonds on a “tactical,” or offering-by-offering, basis, usually after surveying market participants to identify investor demand for different maturities.
This strategy proved problematic in 1975, when the Treasury had to finance an unusually rapid expansion of the federal deficit with a number of tactical offerings. Author Garbade explains that the timing and maturities of the offerings followed no predictable pattern, so investors were sometimes unprepared for the sales and the market was disrupted.
The 1975 experience led Treasury officials to revise the framework within which they selected the maturities of new notes and bonds, says Garbade. They embraced a more regularized program of “regular and predictable” issuance—a program the Treasury had been using for decades to auction bills.
By 1982, the Treasury had abandoned tactical issuance and was following a regular and predictable schedule of new note and bond offerings. The move, observes the author, was widely credited with reducing market uncertainty, facilitating investor planning, and lowering the Treasury’s borrowing costs.
According to Garbade, the emergence of regular and predictable as a Treasury debt management strategy has three important implications:
By minimizing marketing uncertainty and the Treasury’s borrowing costs, regular and predictable issuance has become a pillar of the modern Treasury securities market.
The circumstances that led to regular and predictable issuance illustrate the costs of tactical issuance, and the benefits of predictability, in an environment of large deficits.
The emergence of regular and predictable issuance shows how a change in the economic environment can induce policymakers to alter the practices of the institutions they manage.
About the Author
Kenneth D. Garbade is a vice president at the Federal Reserve Bank of New York.
The views expressed in this summary are those of the author and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System.