Overview of U'S' Treasury Debt Management

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Overview of U.S. Treasury Debt Management
Karthik RamanathanDirector Office of Debt
ManagementJune 2008
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Contents

• Overview and Objectives
• Composition of Portfolio
• Determinants of Borrowing Needs and Policy Tools
• International Investments
• Overview of TIPS Program

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I. Overview and Objectives

• Size of Operations is Hard to Grasp
• 4.4 trillion issued in 219 auctions in FY 2007
• 238 billion paid in net interest in FY 2007
• represented 8.7 of Government expenditures
• More than 1 trillion moved between accounts on
  NBES daily
• More than 565 billion traded daily (primary
  dealers)
• For comparison total global equity trading is
  under 420 billion daily
• 4.6 trillion in marketable debt outstanding as
  of May 31, 2008
• represents roughly a quarter of U.S. credit
  markets
• includes holdings by the Federal Reserve

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Treasury Issuance Objectives and Constraints

• Our Objective
• Lowest cost of financing over time
• Constraints
• Uncertainty Forecast errors, legislation, etc.
  all create uncertainty in deficit forecasts, debt
  limit problems
• Size Treasury is too large to behave
  opportunistically
• Fluctuations in non-marketable debt Savings
  Bonds, State and Local Government Securities
• Short-term balances Adequate cash balances to
  cover expenses

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Flexibility is Key as a Result of Large Swings in
the Deficit
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Lowest Cost over Time Implies a Diversified Debt
Portfolio

• Spread debt across maturities to
• Reduce risk
• Diversify the investor base
• Improve cash management
• Facilitate regular and predictable issuance

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Deep, Liquid Markets Promote Capital Flows

• Promote market transparency
• Provide a structured framework for investor
  participation
• Be available to customers for feedback and
  guidance
• Listen and be credible
• Ensure regulation
• Broadly speaking, to protect investors
• Establish consistent, fair practices across
  markets
• Create a level playing field
• Instill investor confidence in markets
• But dont over regulate
• Dont interfere with price discovery
• Let bond market participants develop trading
  practices
• Let market participants work through
  problemsdont overreact.
• Encourage solutions and innovation through
  market based, private working groups

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Treasury Issuance Outcomes

• Policy Outcomes
• We are regular market participants, not market
  timers -- Regular and predictable
• We dont react to interest rate levels
• We need flexibility
• We strive for transparency

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Transparency and PredictabilityLeads to Greater
Investor Participation over the Long Run
Average 2007 Daily Trading Volume 565 Billion
Source FRB-NY
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II. Composition of Portfolio

• Marketable Debt
• 4.6 trillion outstanding, can be traded in the
  secondary market
• Sold at auction, rates set via competitive
  bidding
• Non-Marketable Debt
• 515 billion outstanding
• Can only be sold to Treasury
• Sold by subscription, rates set administratively
• Savings bonds, State and Local Government Series
  (SLGS)
• Government Account Series
• Approximately 4.2 trillion (mostly special
  non-marketables) in 135 funds
• Federal Old Age Survivors Fund 2.1 trillion
• Civil Service Retirement Fund 679 billion
• Hospital Insurance Trust Fund 323 billion

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Non-Marketable Treasury Securities

• State and Local Government Series (SLGS)
• 280 billion outstanding
• Special securities issued to municipalities to
  assist them with compliance on arbitrage-rebate
  regulations
• U.S. Savings Bonds
• 195 billion outstanding
• Both Series E and Series I (inflation protected)
• Targeted at small retail investors
• Foreign Government Series and Other (ex Govt
  Acct)
• 40 billion, (e.g., Brady bond zeros)

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Composition of Marketable Debt
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Composition of Non-Marketable Debt
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Composition of Total Debt Outstanding
9.4 trillion outstanding
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Interest Costs on Marketable Debt
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III. Determinants of Borrowing Needs and Policy
Tools

• Changes in Cash Balance
• Budget Deficit/Surplus
• Economic Outlook
• Volume of Maturing Issues (rollover of existing
  issues)

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And, Volatility in Cash Balances
Key Outlay Dates 1st of each month Medicare,
SSI, VA, CSRDF 3rd of each month Main Social
Security payments 2nd/3rd/4th Wed of each month
Soc. Sec. cycle payments Feb. 15, May 15, Aug.
15, Nov. 15 Interest payment dates Feb 1 - April
15 Individual tax refunds
Key Receipt Dates 1st of Month Individual
withheld taxes Mar. 15, Jun. 15, Sept. 15, Dec.
15- Corporate Taxes Jan. 15, Apr. 15, Jun. 15,
Sept. 15 Individual Non-withheld Taxes
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Estimating Financing Needs

• Each morning, the Office of Fiscal Projections
  (OFP) updates its forecasts for government
  financing using the latest available data

Revenues
Outlays
(Deficit)/ Surplus

Defense Spending Education Expenses Social
Security Medicare/Medicaid Federal employee
payroll ETC
Corporate Taxes Individual Taxes Excise
Taxes Estate and Gift Taxes Customs Duties

FY2008 2.52 trillion
FY2008 (2.93 trillion)
FY2008 (410 billion)

Based on OMBs Budget of the United States
Government FY2009
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Average Absolute Federal Budget Forecast
ErrorsFY 1997-2006
Average Error for FY 1997 2006 based on
forecasts by CBO, OMB, and Primary Dealers
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Debt Management Policy Tools

• Auction Sizes
• Auction Frequency
• Security Offering Menu
• Auction Regulations
• Market monitoring, consultation, and surveillance

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IV. International Investments
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Foreign Holdings as a Percent of Total Marketable
Debt
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V. Overview of TIPS Program

• First TIPS were issued in January 1997. Treasury
  now is the largest issuer of inflation linked
  bonds globally.
• 26 issues ranging from 2009 to 2032. The TIPS
  curve is complete out to 10 years.
• To date only three TIPS issues have matured in
  July 2002, January 2007, and January 2008.
• As of May 31, 2008 TIPS market capitalization
  totaled over 494 billion or about 11 of
  marketable Treasuries outstanding.
• Average daily trading volume in 2008 is near 10
  billion according to primary dealer estimates .
• There is a higher concentration of dealer volume
  relative to nominal Treasuries. TIPS ownership is
  also more concentrated.

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Additional Information

• Office of Debt Management
• http//www.treas.gov/offices/domestic-finance/debt
  -management/
• Federal Reserve Information
• http//www.newyorkfed.org/
• http//www.federalreserve.gov/