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Overview of U.S. Treasury Debt Management. Karthik Ramanathan Director Office of Debt Management June 2008. Contents. Overview and Objectives Composition of Portfolio Determinants of Borrowing Needs and Policy Tools International Investments Overview of TIPS Program.

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Overview of u s treasury debt management l.jpg

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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Lowest Cost over Time Implies a Diversified Debt Portfolio Deficit

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 Deficit

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 don’t over regulate

  • Don’t interfere with price discovery

  • Let bond market participants develop trading practices

  • Let market participants work through problems—don’t overreact.

  • Encourage solutions and innovation through market based, private working groups


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    Treasury Issuance Outcomes Deficit

    Policy Outcomes

    • We are regular market participants, not market timers -- “Regular and predictable”

    • We don’t react to interest rate levels

    • We need flexibility

    • We strive for transparency


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    Transparency and Predictability Deficit Leads 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 Deficit

    • 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 Deficit

    • 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 Total Debt Outstanding Deficit

    $9.4 trillion outstanding



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    III. Determinants of Borrowing Needs and Policy Tools Deficit

    • 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 Deficit

    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 Deficit

    • 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 OMB’s Budget of the United States Government FY2009


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    Average Absolute Federal Budget Forecast Errors Deficit FY 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 Deficit

    • Auction Sizes

    • Auction Frequency

    • Security Offering Menu

    • Auction Regulations

    • Market monitoring, consultation, and surveillance




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    V. Overview of TIPS Program Deficit

    • 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 31,2008TIPS market capitalization totaled over $494 billion; or about 11% of marketable Treasuries outstanding.

    • Average daily trading volume in 2008 is near $10billion 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 Deficit

    • Office of Debt Management

      • http://www.treas.gov/offices/domestic-finance/debt-management/

    • Federal Reserve Information

      • http://www.newyorkfed.org/

      • http://www.federalreserve.gov/


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