Mnuchin to See Early If Treasury’s Spotlight Flatters or Blinds

  • Early decisions include U.S. debt issuance, Puerto Rico crisis
  • Trump transition efforts under way at Treasury Department

Steven Mnuchin: First Priority Is the Tax Plan

U.S. Treasury Secretary-nominee Steven Mnuchin says he’s qualified for the job based on years of success in the world of private finance. Entering the public stage, where unforgiving global markets and partisan wrangling await him, the political newcomer will find out within his first few days whether he’s ready.

Mnuchin will be a key cabinet member charged with executing President-elect Donald Trump’s campaign pledges to tackle tax reform, trade deals, infrastructure investment and the Chinese government’s role in the currency market. Before Mnuchin starts on such big policy moves, a slew of decisions involving the day-to-day operations of the department will confront the former Goldman Sachs Group Inc. partner.

Here’s a snapshot of some deadlines Mnuchin and his team will face soon after Trump’s inauguration on Jan. 20:

  • Jan. 30: Treasury’s domestic finance office is scheduled to release borrowing estimates
  • Feb. 1: The same office is slated to announce quarterly refunding plans, which are released after consultation with investors and bankers who form the Treasury Borrowing Advisory Committee
  • Feb. 15: A moratorium sheltering Puerto Rico from bondholder lawsuits expires. The island territory is facing a significant restructuring as a federal oversight board sets out to revive the economy and restructure the island’s $70 billion debt load. The Treasury has been providing technical assistance.
  • March 16: The debt limit suspension expires. With a Republican-controlled Congress, the issue may be resolved with fewer hiccups than the Obama administration’s debt-ceiling showdowns. The total government debt outstanding is approaching $20 trillion.

Trump’s transition efforts are under way inside the Treasury, with about half a dozen team members assigned to start working with political appointees and career staff at the department’s headquarters next door to the White House. The agency has roughly 300 political jobs.

If he’s confirmed by the Senate, Mnuchin will help oversee the world’s deepest and most liquid debt market that happens to be undergoing an evolution. In such an environment, his words will matter even before he’s sworn in because markets full of uncertainty about the Trump administration’s policies will be fast to adjust.

Upset Markets

Even experienced bureaucrats can inadvertently upset financial markets. Timothy Geithner, Treasury secretary from 2009 to 2013, sent stocks plunging in February 2009 after his first major speech announcing the government’s response to the financial crisis. Paul O’Neill, the first Treasury chief under President George W. Bush, jolted the dollar on his first official trip abroad after raising questions about his adherence to the strong-dollar policy.

Awaiting Mnuchin is the dawn of high-speed trading that has tested market resiliency and spiked volatility, baffling investors, the Federal Reserve and Treasury officials across the globe. Some investors expect more turbulence ahead. The $13.8 trillion Treasuries market is now more than double since during the last presidential transition.

Regulators continue to grapple over how to prevent, or even decipher what exactly triggered, an unprecedented swing in Treasury yield on Oct. 15, 2014, in what is dubbed the “flash rally.” With a larger share of dealings in the Treasury market now running through electronic trading firms, many see the risk of repeat episodes.

“You’ve got to expect more flash events and be able to look through these when they happen,” Mihir Worah, managing director at Pacific Investment Management Co., said in October during a conference on the Treasuries market at the Federal Reserve Bank of New York.

Outsized Reactions

That backdrop also raises the stakes for the new Treasury chief to not surprise investors with any steps he takes because the reaction could be outsized. The decline in the market depth -- or the ability to trade large volumes of debt -- has made it about 50 percent more sensitive to price swings than it was five years ago, according to JPMorgan Chase & Co. research.

Mnuchin is already moving markets. Just hours after the announcement of his nomination on Wednesday, he said on Fox Business Network that Fannie Mae and Freddie Mac should exit government control, stopping short of saying they should be wound down or eliminated. His words sent the shares of both mortgage finance companies surging 46 percent.

He’ll need precise rhetoric to be effective in domestic politics and international economic arenas where he’ll be center stage. Trump has indicated the U.S. will take a tougher position with China, unleash as much as $1 trillion in infrastructure spending and rethink trade relationships.

Investors have already expressed concern over the steeper increase in debt issuance that may occur if Trump’s policies worsen the deficit at an even faster pace that the Congressional Budget Office already predicts. Long-term Treasury yields rose sharply after Mnuchin on Wednesday said he would consider extending the maturities of Treasuries beyond 30 years, which he would do through consultation with the borrowing advisory committee.

Debt Crisis

It remains unclear how high Puerto Rico’s debt crisis -- a key concern in municipal debt markets -- will be on Mnuchin’s agenda. The department’s role has been to provide technical assistance as the commonwealth’s government and the oversight board Congress created come up with reforms and a fiscal plan that allow it to gain access to the bond market and move toward economic recovery.

Mnuchin will have the help of career staff and political appointees who have been directed by President Barack Obama to ensure a smooth transition of power. Mnuchin can also draw on the experience of Trump adviser David Malpass, who served as deputy assistant Treasury secretary under President Ronald Reagan.

“It is difficult to predict exactly what the Trump administration will do or how those things will impact the market. What we do know is that he’s going to come up with surprises,” said Irvine, California-based Putri Pascualy, portfolio manager at Pacific Alternative Asset Management Co., which manages $10 billion in assets. “It’s a tough environment, especially because it’s going to be unpredictable.”

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