Biden's Treasury accused of trying to juice U.S. economy pre-election

The big picture: The Treasury tries to borrow money at the lowest cost to taxpayers and in the most boring, least attention-grabbing way possible.

• Now Republican lawmakers and at least one renowned economist say its strategy of late has been at odds with the Fed's goal of slowing the economy.

How it works: The Treasury conducts regular bond market auctions to sell debt, fund the annual budget deficit, and roll over existing bonds that are maturing.

• For the past year, short-term debt — or Treasury bills — have been about 20% of all outstanding debt.
• That's at the high end of the old suggested range. Last week the range was updated to say that 20% should be the average, not the cap.

The accusation: Short-term debt is becoming a rising share of all outstanding debt, while the share of long-term debt, like 10-year or 30-year bonds, stays flat. In turn, critics say the lower supply is preventing long-term interest rates from going up. Those rates influence borrowing costs across the economy.

• Lower rates mean stronger economic activity — the opposite of what the Fed has been trying to achieve by setting overnight interest rates at a high level.
• Of course, if you believe the Fed has been behind the curve and has waited too long to cut rates, then the Treasury has been helping the economic cause rather than hurting it.

What they're saying: "Some people, including myself, believe this is being done to artificially stimulate markets in the run-up to the election," Sen. Bill Hagerty (R-Tenn.) said at a hearing last month.

• Two former Treasury advisers — prominent economists Nouriel Roubini and Stephen Miran — write in a new paper published by investment firm Hudson Bay Capital that officials are manipulating financial conditions and the economy, "usurping core functions of the Federal Reserve."
• "While we have no smoking gun, I would say if it walks and quacks like a duck, it must be a duck," Roubini tells Axios.

The other side: Treasury Secretary Janet Yellen said the paper "suggests a strategy that is intended to ease financial conditions, and I can assure you 100% that there is no such strategy. We have never, ever discussed anything of the sort."

Reality check: Treasury officials charged with debt management act not as politicians but as technocrats. A committee of private sector banks and liquidity providers meets quarterly to provide recommendations.

• The rise of money-market funds means more demand for short-term debt, and specifically Treasury bills. Treasury also needs to refill coffers drained by prolonged debt ceiling negotiations last year.

"There isn't malicious intent, but rather Treasury trying to prevent a full-blown bond market meltdown by issuing too much in the wrong spot and pushing interest rates sharply higher in the process," TD Securities rates strategist Gennadiy Goldberg tells Axios.

Follow the money: The yield curve is inverted, meaning short-term debt yields more than longer-term bonds. Right now it's therefore pricier to issue bills.

• In theory, it would be advantageous for the Treasury to issue more long-term bonds, Goldberg says, but that assumes there would be as much demand for, say, $1 trillion worth of 30-year bonds as there would be for the same amount of three-month bills.

The bottom line: Toss theories of malicious intent on the part of Treasury officials to the side. It still leaves the interesting question of whether its issuance is impacting the economy.

• Miran and Roubini say the issuance strategy has pushed down the yield on the 10-year Treasury bond by a quarter of a percentage point over the last year.
• According to the two economists, the economic effect of the lower rates is similar to that of a 1-point interest rate cut by the Fed.
• "It is a backdoor form of quantitative easing," Roubini says. "You are achieving the same result of reducing long-term interest rates the way the Fed was doing — by manipulating not the demand for long-term bonds, but the supply of them."