Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The rise in long-term rates around the world is causing concern for finance ministries and Treasury departments. Higher rates not only make servicing the rising public and private debt burdens more costly but also put economic growth at risk.
Independent central banks are hesitant to intervene by resuming past quantitative programs of buying long-term bonds or even cutting benchmark policy rates due to above-target inflation in many leading economies. As a result, backdoor quantitative easing through new forms of public debt management has emerged as an option for financial ministries.
During Joe Biden’s administration, the US Treasury Department began to alter the composition of public debt issuance with more short-term offerings. This strategy, labeled as Activist Treasury Issuance (ATI), is a variant of the Operation Twist implemented after the financial crisis. Instead of the Federal Reserve pushing rates on longer-term bonds lower by purchasing them and selling shorter-term debt simultaneously, the Treasury is pushing down long-term debt by selling less of it.
Critics, including former colleague Stephen Miran and Treasury Secretary Scott Bessent, have raised concerns about ATI, considering it an encroachment on monetary policy by fiscal authorities. Despite these concerns, ATI continues to be implemented to prevent a sharp increase in long rates.
The US is not the only country utilizing ATI; Japan is also considering a similar program due to the normalization of policy rates by the Bank of Japan and rising public debt ratios. The Japanese Ministry of Finance is reportedly contemplating an ATI program to issue less longer-term bonds and more short-term debt.
This trend of ATI is spreading globally, with the UK being a potential candidate given its unstable fiscal position. However, the Eurozone is unlikely to adopt ATI as the European Central Bank has emergency facilities to resume quantitative easing if needed.
As the world moves away from central banks supporting the financing of large deficits, fiscal authorities are tempted to implement policies like ATI to control long-term bond yields. While this may seem like a solution, it carries risks of interfering with monetary policy and causing inconsistencies between monetary and fiscal authorities, leading to moral hazard and inflation.
In conclusion, measures like ATI can lead to looser financial conditions when central banks are striving for price stability, potentially opening the door for a more politically influenced business cycle. It is crucial for policymakers to carefully consider the implications of such strategies to maintain economic stability and growth.
