The U.S. Treasury’s financing decisions are not something most people need to pay much attention to unless their profession requires they pay close attention to fixed income markets. Now that I am no longer involved in Treasury’s debt management I rarely pay attention to the Department’s Quarterly refunding announcements. However, recently it caught my attention that Treasury may be considering issuing green bonds. The Treasury Borrowing Advisory Committee recommended it as one of the innovations that Treasury should consider. (Here is a TBAC document where green bonds and other possible debt management innovations are discussed.)
The proceeds of green bonds are restricted to environmental
initiatives, which would need to be defined. The rationale for issuing these
bonds would be that it would broaden the market for Treasury securities to
entities which have restrictions on their investments. The TBAC document
suggests that green bonds may have a lower yield than regular Treasury
securities, but they are unsure about that.
The issuance of green bonds would be a significant departure
from the way Treasury debt management has been conducted. Treasury does not
issue securities to the public to fund particular expenditures. In determining
its planned issuance, Treasury makes estimates of the daily cash inflows and
outflows for the month or so ahead, and sells enough securities so that its
cash balance at the Federal Reserve does not go negative. It may have targets
for a particular amount of cash. If Treasury issued green bonds, it would need
to segregate those funds somehow to meet the expenditure requirements. If
Treasury set up a trust fund for green expenditures, the result would be a lot
of accounting with little real effect. Treasury would issue green bonds, the
funds would be credited to a trust fund. Treasury could then issue
non-marketable securities to the trust fund and spend the money. Alternatively,
it could not invest the money in the trust fund. In either case, the funds
raised by the issuance of green bonds would actually go into Treasury’s account
at the Fed and would be spent. Since money is fungible, there would be no
determination on what the initial money raised was spent on. The press would
presumably explain all this, and green bond investors would likely not be
happy.
Given the issues with a trust fund, another option would be for the Treasury to deposit the proceeds from the green bonds into a fund at the Fed separate from its general account. Then the Treasury could tell the Fed to transfer the funds to the general account when it needed them for green expenditures. This arrangement would probably satisfy green bond investors.
However, note that even using the Fed option, this does
nothing to increase green expenditures. Treasury cannot affect government
expenditures by using debt management. Congress must appropriate the
expenditures. In fact, all this accounting does not accomplish anything, except
presumably make some investors happy that their money is not being used to
finance expenditures they do not like. However, since money is fungible,
nothing has really been accomplished here except to make debt management more
complicated.
