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Overview of U.S. Treasury Debt Management

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

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

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

  3. 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

  4. 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

  5. Flexibility is Key as a Result of Large Swings in the Deficit

  6. 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

  7. 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 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

  8. Treasury Issuance Outcomes 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

  9. Transparency and PredictabilityLeads to Greater Investor Participation over the Long Run Average 2007 Daily Trading Volume = $565 Billion Source: FRB-NY

  10. 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

  11. 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)

  12. Composition of Marketable Debt

  13. Composition of Non-Marketable Debt

  14. Composition of Total Debt Outstanding $9.4 trillion outstanding

  15. Interest Costs on Marketable Debt

  16. 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)

  17. …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

  18. 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 OMB’s Budget of the United States Government FY2009

  19. Average Absolute Federal Budget Forecast ErrorsFY 1997-2006 *Average Error for FY 1997 – 2006 based on forecasts by CBO, OMB, and Primary Dealers

  20. Debt Management Policy Tools • Auction Sizes • Auction Frequency • Security Offering Menu • Auction Regulations • Market monitoring, consultation, and surveillance

  21. IV. International Investments

  22. Foreign Holdings as a Percent of Total Marketable Debt

  23. 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 31,2008TIPS 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.

  24. 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/

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