Presentation to the Treasury Bor

Advisory Committee

U.S. Department 

Office of De

J
Office of Debt Management

Fiscal Perspectives
Office of Debt Management

Recent US economic performance has been strong
Office of Debt Management

Corporate and individual tax receipts remain 

Corporation Taxes

0

102030405060708090

100

Jan-03

Apr-03

Jul-03

Oct-03

Jan-04

Apr-04

Jul-04

Oct-04

Jan-05

Apr-05

Jul-05

Oct-05

Jan-06

Apr-06

Jul-06

Oct-06

$ Billions

0102030405060708090

$ Billions 100

Major Corporate Tax Dates 

Record $88.3 billion

Fiscal 2006 Y-O-Y growth = 24.8%

Individual Taxes

0

50

100150200250

Jan-03

Apr-03

Jul-03

Oct-03

Jan-04

Apr-04

Jul-04

Oct-04

Jan-05

Apr-05

$ Billions

Fiscal 2006 Y-O-Y growth = 11.4%

Major Individual Tax Dates 
Office of Debt Management

Corporate profits and equity markets continu

S&P 500 Index

650750850950

10501150125013501450

Jan-03

Apr-03

Jul-03

Oct-03

Jan-04

Apr-04

Jul-04

Nov-04

Feb-05

May-05

Aug-05

13.6% rise in 2006

Source: Haver Analytics

After-tax Corporate Profits

0.00.20.40.60.81.01.21.41.6

Q1-03

Q1-04

Q1-05

Q1-06

$ Trillions

0.00.20.40.60.81.01.21.4

$ Trillions 1.6

Source: Haver Analytics
Office of Debt Management

Nonfarm payrolls continue to post gains while the unemployment rate remains low

Change in Nonfarm Payrolls (SA, Thousands) and the Civilian Unemployment Rat

-300-200-100

0

100200300400

Jan-03

Jul-03

Jan-04

Jul-04

Jan-05

Jul-05

Jan-06

Jl06

M-O-M Change in Nonfarm Payrolls Civilian Unemployment Rate
Office of Debt Management

Treasury continues to monitor other trends
Office of Debt Management

Housing market trends appear uneven, and energy while moderating, remain volatile

Median Sales Price of Existing Single-Family Homes and Year-Over-Year Change 

-10%

-5%

0%5%

10%15%20%

Jan-03

Jan-04

Jan-05

Jan-06

-252575125175225

$ Thousands 275

Y-O-Y Change Median Sales Price

Source: Haver Analytics West Texas Intermediate Crud

0

102030405060708090

Jan-03

Apr-03

Jul-03

Oct-03

Jan-04

Apr-04

Aug-04

Nov-04

Feb-05

May-05

$/barrel

Source: Haver Analytics
Office of Debt Management

And while deficits have been declining, governmeexpenditures continue to outpace receipts

Federal Deficit/Surplus as a Percentage of GDP

-4.0-3.0-2.0-1.0

0.01.02.03.0

95 96 97 98 99 00 01 02 03 04 05 06

Fiscal Year

Percent

-4.0-3.0-2.0-1.00.01.02.03.0

Percent

Federal Receipts and Outlays as a Perce

14.015.016.017.018.019.020.021.022.0

95 96 97 98 99 00 01 02 

Fiscal Year

Percent

Receipts Outlays
Office of Debt Management

Given recent trends, we would like tCommittee’s views on the following:

 What is the Committee's view on the 

outlook in 2007 and beyond?

 Is Treasury’s issuance calendar 

adequately placed to address its futufunding needs?
Office of Debt Management

Competitiveness of t

US Treasury Marke
Office of Debt Management

The US Treasury market is the most government debt market in the world
Office of Debt Management

Among major sovereign debt markets, average davolume is highest in the US Treasury market

Average Daily Debt Trading Volume

0

100200300400500600

2000

2001

2002

2003

2004

2005

blns $ US Japan UK

Source: FR2004 Primary Dealer, Japanese Securities Association, UK DM O
Office of Debt Management

Treasury market liquidity remains healthy

 Primary auction demand is deep and continues to evolve Average daily trading volume in the on-the-run US Treasuries co

grow

 Bid-ask spreads remain narrow Average trade sizes in the secondary market are growing Growth of the US inflation-linked market has surpassed that of a

major inflation-linked debt issuers
Office of Debt Management

Features of the US Treasury market

 Transparency Regular and predictable issuance Minimal regulatory burden
Office of Debt Management

Secretary Paulson’s Principles on CompetitivenesCapital Markets

Treasury remains committed to strengthenot only the Treasury market but also US markets as a whole.

 Global view Evolving and responsive regulatory str Rules based on sound principles Risk-based approach to regulation Enforcement to deter bad behavior, no

innovation or responsible risk taking
Office of Debt Management

We welcome the Committee’s views the following:

 How does the competitiveness of the 

Treasury market compare to that of bond markets?

 Are there steps that we should unde

to ensure that the Treasury market remains the preeminent debt market
PAGE 1

Treasury Borrowing Advisory Committee Presentation to the 

January 30, 2007

A Review of Short-Term Debt Issuance as it Relates to Short-Term Borrow
PAGE 2

Outlays and Receipts Rising 

Outlays and Receipts, Fiscal Year Totals

0

0.5

1

1.5

2

2.5

3

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

$Trillions

Receipts Outlays

`

Source: US Department of Treasury
PAGE 3

The question before this committee, and the investment comlarge, is whether the steps taken by the Treasury and others sufficient to withstand a future wide scale disruption, or whethadditional measures should be considered and implemented time.This report will touch upon the following:

Current borrowing need volatilityThe factors that will contribute to further volatility in borrowing neThe effectiveness of short-term debt securities in the current envTreasury’s effectiveness of managing high cash balances (TT<ax and Loan and the TIO--Term Investment Option, a pilot progto TT&L participants)If the market were to face a large scale disruption at a time when cash balances were low, is the Treasury well placed to handle sucontingency event? Is Wall Street Prepared?Review the suggestions presented to Congress by the GAO; botand negativeAdditional tools or issues the Treasury should consider at this tim
PAGE 4

Volatility of Borrowing Needs in Dollar Terms

Source: US Department of Treasury

80 85 90 

billions

-300-200-100

0

100200300 Receipts Q/Q $B 

80 85 90 95 00 05

billions

-300-200-100

0

100200300

Outlays Q/Q $b (+/- 1 SD)

Source: US Department of Treasury

PAGE 6

Borrowing Have Been Trending Lower, Despite Volatility in Outlays & Rec

Fiscal Year Budget Budget % GDP

2003 -$375 3.4%2004 -$411 3.5%2005 -$321 2.5%2006 -$248 1.9%

2007 Estimates Budget Budget % GDP

OMB -$339 -2.4%CBO -$172 -1.3%Primary Dealers -$275 -2.0%$Billions

Source: US Department of Treasury
PAGE 7

Contributing Factors to Forecast Errors: Reviewing the Obvious

Cyclical InfluencesPrice of OilSupplemental AppropriationsAging PopulationTax Provisions


PAGE 10

Contributing Factors: Supplemental Appropriations

Year $Millions Informal Title

2000 $16,952 Military Construction

Defense

2001 $27,479 Emergency Supplemental and Resc. 

Recovery Response to Terrorist Acts

2002 $45,317 Defense

Emergency Supplemental and Resc. 

2003 $81,107 Emergency Wartime Supplemental Appropriations

Emergency Supplemental Appropriations for Disaster Relief ActLegislative Branch

2004 $117,703 Supp for Defense/Iraq/Afghanistan

Defense 20052004 Emergency Disaster Relief Supp.

2005 $160,410 Emergency Supplemental for Hurrican Disasters Assistance Act, 200

Emerg. Supp. Approp. Act for Defense, Global War on Terror and TsuRelief, 2005Emerg. Supp. Approp. Act to Meet Immediate Needs Arising from Consequences of Hurrican Katrina, 2005Second Emergency Supp. Appropriations Act for Katrina, 2005

2006 $94,430 Defense Approp. Actm, includes Katrina, Avian Flu, and a-t-b

SBA disaster loans program accountAct for Defense, the Global War on Terror, and Hurrican Recovery

Source: CBO

Supplemental Appropriations: 2000-2006

Source: Congressional Budget Office (CBO)
PAGE 11

Contributing Factors: Aging Population

Source: The Board of Trustees, Federal Hospital Insurance and Federal Supplementary Medical 

0123456789

1011121314

1970 1990 1998 2002 2006 2010 2014 2030 2050 2070

% of GDP

Medicare Spending as a % of GDP

Forecast
PAGE 12

Contributing Factors: Tax Provisions

Long term borrowing needs rose substantially in the wake of round of Bush Tax cuts earlier this decade. OMB estimates borrowing needs will decline sharply once thoprovisions expire in 2010. Legislated tax changes since February decrease receipts 200then increase receipts in both 2010 and 2011. 


PAGE 15

A Review of the Effectiveness 

Short-Term Debt Instrumen
PAGE 16

Effectiveness of Short-Term Debt Instruments

Over the past several years the Treasury implemented the foinnovations in short term financing:

July 2001: Introduced 4-week bill program, reducing reliance management (CM) bills2001: 52 week bill issuance suspendedOctober 2003: Launched the Term Investment Option Progra2004: Eliminated compensating balancesIn line with Treasury’s mandate to maintain low cash balanceoperate with a direct pay for services modelMarch 2006: Launched repurchase agreement pilot program
PAGE 17

Effectiveness of Short-Term Debt Instruments: 4-Week Bills

$275

$164 $176

$235 $227

$346

$124

$175

$247 $268 

$0

$50

$100$150$200$250$300$350$400$450

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 

$Billions

Amount of CM Bill Issuance (Fiscal Years)

Source: US Department of Treasury
PAGE 18

Effectiveness of Short-Term Debt Instruments: CM Bills

0

20000400006000080000

100000120000140000

10/03 12/03 2/04 4/04 7/04 9/04 11/04 2/05 4/05 6/05 8/05 11/05 1/06 3/06 6/06 8/06 1

$Millions

Cash Balance CM Bill Issued

Source: US Department of Treasury
PAGE 19

Short-term debt instruments: Flexibility in Issuance

25

28

33

29

33

20

10 8 12 11 11

05

1015202530354045

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Number of Days

Weighted Average Term to Maturity of CM Bills (Fiscal

Source: US Department of Treasury

Fiscal Year

$92

$863 $880 $908

$742 $791

$0

$200$400$600$800

$1,000$1,200

2001 2002 2003 2004 2005 2006

$Billions

4-week Bill Issuance
PAGE 20

The Opposite End of the Spectr

Managing High Cash Balanc
PAGE 21

Managing High Cash Balances: TT&L Accounts

Treasury Tax and Loan (TT&L) Accounts

The TT&L accounts earn Fed Funds less 25 basis points, a rthe Treasury in 1978, not in line with current market rates. The interest earned on TT&L accounts creates a negative fuspread for the Treasury. It is insufficient to cover the cost of fshort-term debt instruments.In the late 1990s as financing rates became more transparenTreasury proposed to bring the interest rate in line with currerates, which would have increased the return on Treasury bamore than 20 basis points. TT&L participants met the Treasury’s suggestion with significresistance citing that the wider spread was appropriate compthe transaction. In response to the resistance from TT&L participants, and in reduce the negative funding spread, the Treasury introduced Investment Option pilot program in 2002.
PAGE 22

Managing High Cash Balances: TIO Accounts

Term Investment Option (TIO) 

The TIO pilot program proved successful and transitioned intpermanent program in October 2003.Over the first forty-two auctions, the difference between auctand what he Treasury would have earned had it left the balanTT&L Accounts (FF less 25bp) was uniformly positive and av17.3 basis points.1The Treasury has continued to successfully pursue new and ways to increase the interest earned on high cash balances: recently launching a pilot repo program. 70% of high cash balances that flow through TT&L accounts redirected into the TIO and Repo programs.

1Federal Reserve, Recent Innovations in Cash Management, Volume 10, Number 11
PAGE 23

Managing High Cash Balances: Pilot Repurchase Agreement Pro

Repurchase Agreement Pilot Program (Repo)

Repurchase Agreement Pilot Program started in March 2006It operates on a DVP basis only with TT&L depositories. The pilot program currently earns a better funding rate than bTT&L and TIO accounts.1Since the Treasury launched the pilot Repurchase Agreemenover $206 billion TT&L funds have been invested.2

1GAO-06-02692216th Annual Government Financial Management Conference, Department of the Treasury
PAGE 24

Low Treasury Cash Balances 

Wide Scale Market Disruptio

The Implications
PAGE 26

GAO’s Recommendations to Congress, September 2006

Recommendation: examine the requirements for Treasury to line of credit.

Financial institutions, specifically large commercial banks, wobe willing and capable of lending money to Treasury in the aamount and time required by Treasury. Under Basel II, banks would incur 100% capital charges for uloans. Negotiations would have to consider how a collective ccharge in a high stress environment would impact the bankinand define the circumstances under which Base II could be wBecause the nature and impact of potential future wide-scale are unknown, uncertainty exists regarding the ability of particinstitutions to meet their obligations.

Recommendation: examine the ability of the Treasury to issumanagement bill for private placement. 

Institutions have ability and authority to purchase a CM bill thTreasury’s funding needs. Federal Reserve plays large role, by providing liquidity to depinstitutions. Clearing and settlement systems must function to complete t
PAGE 27

GAO’s Recommendations to Congress, September 2006

Recommendation: Congress should consider allowing the FeReserve to lend directly to the Treasury during a “wide-scale” disruption using a carefully crafted last resort funding option.

Severs the long standing independence of the Federal ReseWhat defines a “wide-scale” disruption? War? National disasmost carefully crafted bills are subject to revision. In the event the Federal Reserve lost independence, the cos

funding would likely increase to compensate for political unceThe amount of risk premium the market could demand is as ambiguous as predicting the future disruption.

Congress has provided the Federal Reserve with considerabfor independently exercising its best judgment as to what mopolicy should be. At the end of the day, it is public confidence 

central bank's most precious commodity in a democracy.1

1 McDonough: The Importance of Central Bank Independence in Achieving Price Stability, July 
PAGE 28

Tri-party Repurchase Agreemen

Consideration for Contingen

Planning
PAGE 29

Tri-Party Repurchase Agreements: A Contingency Planning Con

Execution

Treasury raises cash by issuing securities, e.g. T-Bills, appropriately staggering maturities.Treasury invests in open tri-party repurchase agreements at prevailing market rates with banks and primary dealers.In the event of a significant market disruption, the Treasury, aoption, may elect to close open tri-party trades and receive proceeds. Banks may return funds directly, primary dealers make funds available at the clearing banks, BoNY and ChasIn the event market participants require additional liquidity, thFederal Reserve, at its option, may perform open market operations and discount window transactions to maintain mastability.
PAGE 30

Tri-Party Repurchase Agreements: A Contingency Planning Con

Treasury issues additional

securities for emergencies

(say, $25b in 4-week bills.)

Market Event

Treasury executes

$25b of tri-party repo

with counterparties

on open

Trea

$25

Street and Banks need

additional liquidity in response

to market conditions.

FRBNY adds liquidity through

open market operations and

the discount window.
PAGE 31

Tri-Party Repurchase Agreements: A Contingency Planning ConAdvantages

Disintermediation of Fed and Treasury. Maintains credibility oReserve.If in the event the “auction/security grid” failed, the Treasury have cash on hand to fund liabilities. Flexibility to scale up auction size over time as social security expand. Reduces interest expense by eliminating the negative fundin

Funding Costs

Financially, the proposed structure may prove attractive baseversus overnight tri-party financing rates. Using current market rates, a 4 week bill with a bond equival4.98% compares favorably to the equivalent GC repo yieldinthis example Treasury would earn 18 basis points in positive 
PAGE 32

Tri-Party Repurchase Agreements: A Contingency Planning Con

Considerations

Transaction cost may outweigh potential spread advantage. Volatility of daily financing rates may be of concern. Repurchase agreements may not be adequate to cover emefunding needs. Explore private placement CM bills as a secoalternative or supplement to tri-party participation.