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In a recent blog post, former Treasury official Amar Reganti challenged the notion that the US Treasury’s actions during the pandemic were a blunder, asserting that a tactical approach akin to a company’s strategy would have adversely affected bond markets and the dollar.
Reganti countered billionaire investor Stan Druckenmiller’s criticism of Treasury Secretary Janet Yellen’s alleged failure to capitalize on low-interest rates during the pandemic. Druckenmiller had deemed it the “biggest blunder in the history” of the department, suggesting that the US could have locked in low borrowing costs for an extended period, similar to homeowners refinancing their mortgages.
According to Reganti, increasing long-term borrowing would have destabilized debt markets. He argued that selling more long-term bonds would have led to fewer short-term Treasury bills in circulation, compromising the liquidity of short-duration debt crucial for maintaining the US dollar as a reserve currency. This, in turn, would have made it more susceptible to volatile price changes.
Moreover, Reganti highlighted that the demand for longer-term US debt might not have increased significantly, given the higher interest-rate risk associated with these securities. He pointed out that the decision not to issue 50-year or 100-year securities was rooted in investors’ reluctance to take on excessive interest-rate risk.
Reganti cautioned against working at cross purposes with monetary policy, emphasizing that dumping duration into the market while the Federal Reserve was buying would have been counterproductive.
The sheer size of the US debt load, exceeding $23 trillion in marketable debt, also factored into the decision. Reganti noted that altering the duration of such a substantial debt load would be a lengthy process, especially considering that a significant portion comes due annually.
Highlighting the benefits of being a regular and predictable issuer, Reganti argued that the predictability makes US securities more liquid. This predictability, he contended, contributes to lower financing costs through interest-rate cycles compared to a less consistent issuance strategy.
In response to these critiques, Treasury Secretary Janet Yellen stated that the US Treasury has been lengthening the average maturity of its bond portfolio. She noted that its duration is currently close to the longest it has been in decades. Yellen emphasized ongoing discussions with Wall Street professionals who consistently stress the importance of maintaining deep and liquid markets for US securities across the yield curve.
