# Presentation: 267441

## 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

## 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

## 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

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

## 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

## 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

**Deep, Liquid Markets Promote Capital Flows**

## 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

## Transparency and PredictabilityLeads to Greater Investor Participation over the Long Run

- Source: FRB-NY

- Average 2007 Daily Trading Volume = $565 Billion

## 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

## 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)

## Composition of Marketable Debt

**Composition of Marketable Debt**

## Composition of Non-Marketable Debt

**Composition of Non-Marketable Debt**

## Composition of Total Debt Outstanding

- $9.4 trillion outstanding

## Interest Costs on Marketable Debt

## 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)

## ...And, Volatility in Cash Balances 

_**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

_**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

## 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**

**Corporate Taxes**
**Individual Taxes**
**Excise Taxes**
**Estate and Gift Taxes**
**Customs Duties**

**Defense Spending**
**Education Expenses**
**Social Security **
**Medicare/Medicaid**
**Federal employee payroll**
**ETC...**

**=**

**FY2008 $2.52 trillion**

**FY2008 ($2.93 trillion)**

**FY2008 ($410 billion)**

**+**

**=**

- Based on OMB’s Budget of the United States Government FY2009

## Average Absolute Federal Budget Forecast ErrorsFY 1997-2006

- *Average Error for FY 1997 – 2006 based on forecasts by CBO, OMB, and Primary Dealers

## Debt Management Policy Tools

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

## IV.  International Investments

## Foreign Holdings as a Percent of Total Marketable Debt

## 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.

## Additional Information

- Office of Debt Management
- _[http://www.treas.gov/offices/domestic-finance/debt-management/](http://www.treas.gov/offices/domestic-finance/debt-management/)_
- Federal Reserve Information
- _[http://www.newyorkfed.org/](http://www.newyorkfed.org/)_
- _[http://](http://www.federalreserve.gov/)__[www.federalreserve.gov](http://www.federalreserve.gov/)__[/](http://www.federalreserve.gov/)_