Today, officials of the U.S. Treasury held one of their quarterly meetings with the Treasury Borrowing Advisory Committee (“TBAC”), a group of bond dealers and institutional investors. TBAC had previously been asked whether the Treasury should cause the weighted average maturity (“WAM”) of its debt to lengthen more quickly than it does currently. According to the minutes of the meeting, one member of the committee noted that:
given the current maturity structure of new issuance, WAM will naturally extend to about 80 months by 2022. [emphasis added]
In their charts for the meeting, TBAC asserted that:
WAM extension is not due to extending WAM of new issuance. WAM extends as maturing securities are reissued as longer maturity notes/bonds. [pdf page 82]
As the portfolio matures, the maturing securities are reissued at longer maturities out the curve. This means that the WAM of the portfolio can be extended, even if the WAM of new issuance is below the WAM of the overall portfolio. [pdf page 105]
I have made similar observations in GARP Presentation on Interest Rate Risk and the Treasury, Is the Treasury Really Going Long?, and QWAFAFEW Talk on the National Debt: The Slides.
Last year, in the comments section of an economist’s blog, I wrote:
Almost everyone believes that the Treasury is actively lengthening the average maturity of its debt. This is not true. Treasury has actually been selling almost all of its debt with very short maturities. So why has the average maturity been increasing? The average maturity grows “naturally” because the expiration of maturing debt removes downward pressure on the average.
The economist, who can remain nameless, was kind enough to respond:
The average maturity of outstanding Treasury debt increases or decreases depending on the maturity structure of debt newly issued by the Treasury. To say that a continual increase in average maturity of outstanding Treasury debt is “natural” is complete nonsense.
The charm offensive continued from there. You get the idea.
At the time, it seemed like the point I made, that the average maturity can lengthen even if new issuance is short, was not even on the same planet as the conventional wisdom. The concept is still absent from every article I’ve read on the topic, including this Wall Street Journal report on today’s meeting.
However, I was encouraged to see the bond professionals make a similar point today. At least the idea is on the radar now.
Galileo faced the Inquisition. I was merely flamed by an economist.