Office of Debt Manageme

Fiscal Year 2013 Q2 Report
Table of Contents

I. Fiscal

A. Quarterly Tax Receipts p. B. Monthly Receipt Levels p. C. Ten Largest Outlays p. D. Treasury Net Nonmarketable Borrowing p. E. Cumulative Budget Deficits p. F. Deficit and Borrowing Estimates p. G. Budget Surplus/Deficit p. 

II. Financing

A. Sources of Financing p. B. OMB’s Projections of Borrowing from the Public p. C. Interest Rate Assumptions p. D. Net Marketable Borrowing on “Auto Pilot” Versus Deficit Forecasts p. 

III. Portfolio Metrics

A. Weighted Average Maturity of Marketable Debt Outstanding with Projections p. B. Recent and Projected Maturity Profile p. 

IV. Demand

A. Summary Statistics p. B. Bid-to-Cover Ratios p. C. Investor Class Auction Awards p. D. Foreign Awards at Auction p. E. Primary Dealer Awards at Auction p. 
Section I:

Fiscal
Sept. 2002 year over year % change data point excluded from corporate taxes due to 9-11 impacts on data.

-50%-25%

0%

25%50%75%

Sep-02

Dec-02

Mar-03

Jun-03

Sep-03

Dec-03

Mar-04

Jun-04

Sep-04

Dec-04

Mar-05

Jun-05

Sep-05

Dec-05

Mar-06

Jun-06

Sep-06

Dec-06

Mar-07

Jun-07

Sep-07

Dec-07

Mar-08

Jun-08

Sep-08

Dec-08

Mar-09

Jun-09

Sep-09

Dec-09

Mar-10

Jun-10

Sep-10

Dec-10

Mar-11

Jun-11

Sep-11

D11

Year over Year % Change

Quarterly Tax Receipts

Corporate Taxes Non-Withheld Taxes (incl SECA) Withheld Taxes (incl FICA
 -

 20 40 60 80

 100 120

Sep-02

Dec-02

Mar-03

Jun-03

Sep-03

Dec-03

Mar-04

Jun-04

Sep-04

Dec-04

Mar-05

Jun-05

Sep-05

Dec-05

Mar-06

Jun-06

Sep-06

Dec-06

Mar-07

Jun-07

Sep-07

Dec-07

Mar-08

Jun-08

Sep-08

Dec-08

Mar-09

Jun-09

Sep-09

Dec-09

Mar-10

Jun-10

Sep-10

Dec-10

Mar-11

Jun-11

Sep-11

$ bn

Monthly Receipt Levels

(12-Month Moving Average)

Individual Income Taxes Corporation Income Taxes Social Insurance Taxes 

Individual Income Taxes include withheld and non-withheld. Social Insurance Taxes include FICA, SECA, RRTA, UTF deposits, 

RUIA. Other includes excise taxes, estate and gift taxes, customs duties and miscellaneous receipts.
0

50

100150200250300350400450500

HHS

SSA

Defense

Treasury

Agriculture

Labor

VA

Transportation

OPM

Education

$ bn

Eleven Largest Outlays

Oct-Mar FY 2012 Oct-Mar FY 2013
-30-20-10

0

102030

Q4-02

Q1-03

Q2-03

Q3-03

Q4-03

Q1-04

Q2-04

Q3-04

Q4-04

Q1-05

Q2-05

Q3-05

Q4-05

Q1-06

Q2-06

Q3-06

Q4-06

Q1-07

Q2-07

Q3-07

Q4-07

Q1-08

Q2-08

Q3-08

Q4-08

Q1-09

Q2-09

Q3-09

Q4-09

Q1-10

Q2-10

Q3-10

Q4-10

Q1-11

Q2-11

Q3-11

Q4-11

Q112

$ bn

Fiscal Quarter

Treasury Net Nonmarketable Borrowing

Foreign Series State and Local Govt. Series (SLGS) Savings Bonds
0

200400600800

1,0001,2001,400

October

November

December

January

February

March

April

May

June

July

$ bn

Cumulative Budget Deficits by Fiscal Year

FY2011 FY2012 FY2013
Primary

Dealers1 CBO2 

FY 2013 Deficit Estimate 857 845 FY 2014 Deficit Estimate 711 616 FY 2015 Deficit Estimate 583 430 FY 2013 Deficit Range 660-960FY 2014 Deficit Range 582-900FY 2015 Deficit Range 430-850FY 2013 Net Marketable Borrowing Estimate 915 949 FY 2014 Net Marketable Borrowing Estimate 757 708 FY 2015 Net Marketable Borrowing Estimate 642 525 FY 2013 Net Marketable Borrowing Range 792-1,000FY 2014 Net Marketable Borrowing Range 564-890FY 2015 Net Marketable Borrowing Range 450-835Estimates as of: Apr-13 Feb-13 FY 2013-2015 Deficits and Net Marketable Borrowing Estimates 

1Based on primary dealer feedback on April 22, 2013. Estimates above are averages. 2Table 1-1 and 1-6 from "The Budget and Economic Outlook: Fiscal Years 2013 to 2023" 3Table S-5 and S-13 of the "Fiscal Year 2014 Budget of the US Government"
(2,500)(2,000)(1,500)(1,000)

(500)

0

500

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

$ bn

Fiscal Year

Budget Surplus/Deficit

Surplus/Deficit in $ bn-(L) Surplus/Deficit as a % of GDP-(R)

OMB’s Projection

Projections are from Table S-5 and S-13 of the “Fiscal Year 2014 Budget of the US Government.” 
Section II:

Financing
Sources of Financing in Fiscal Year 2013 Q2

Beginning Cash Balance 93 Issuance Gross Maturing Net Gr

Ending Cash Balance 79 Bills 4-Week 535 515 20 1,0

Subtotal: Funding from Drawdown of Cash 14 Bills 13-Week 437 416 21 8

Bills 26-Week 378 360 18 7

Net Bill Issuance 162 Bills 52-Week 75 77 (2) 1

Net Coupon Issuance 187 Bills CMBs 105 0 105 2

Subtotal: Net Marketable Borrowing 349 Bill Subtotal 1,530 1,368 162 2,9

Net Required Funding for FY 2013 Q2 362

Issue Gross Maturing Net Gr

COUPO

N 2-Year 70 73 (3) 2

COUPO

N 3-Year 96 127 (31) 1

COUPO

N 5-Year 70 33 37 2

COUPO

N 7-Year 58 0 58 1

COUPO

N 10-Year 66 19 47 1

COUPO

N 30-Year 42 0 42 8

TIPS CO

U 5-Year TIPS 0 0 0 1

TIPS CO

U 10-Year TIPS 28 0 28 4

TIPS CO

U 30-Year TIPS 9 0 9 1

Coupon Subtotal 439 252 187 1,0

Total 1,969 1,620 349 4,0

Coupon Issuance

January-March 2013 January-March 2013 

Bill Issuance

January-March 2013 
Sources of Financing in Fiscal Year 2013 Q3

Assuming Constant Issuance Sizes as of 3/29/2013

*Financing Estimates released by the Treasury can be found via the following url: http://www.treasury.gov/resource-center/dacenter/quarterly-refunding/Pages/Latest.aspx**Keeping issuance sizes and patterns, as of 3/29/2013, constant for all securities.

Net Required Funding for FY 2013 Q3 (31) Issuance Gross Maturing Net 

4-Week 585 585 (0) 

Met with: 13-Week 455 437 18 

26-Week 390 364 26 

Beginning Cash Balance 79 52-Week 100 102 (2) 

Treasury Annouced Estimate: Ending Cash Balance* 75 CMBs 0 105 (105) 

Subtotal: Funding from Drawdown of Cash 4 Bill Subtotal 1,530 1,593 (63) 

Assuming Constant Issuance Sizes as of 3/29/2013**:

Net Bill Issuance (63)

Net Coupon Issuance 210 Issue Gross Maturing Net 

Subtotal: Net Marketable Borrowing 147 2-Year 105 112 (7) 

3-Year 96 120 (24) 

Treasury Announced Estimate: Net Marketable Borrowing* (35) 5-Year 105 62 43 

Implied: Decrease In FY 2013 Q3 Net Issuances (182) 7-Year 87 0 87 

10-Year 66 18 48 30-Year 42 0 42 

5‐Year 5-Year TIPS 18 16 2 10‐Year 10-Year TIPS 13 0 13 30‐Year 30-Year TIPS 7 0 7 

Coupon Subtotal 539 329 210 

Total 2,069 1,922 147 

Coupon Issuance

April-June 2013 April-June 2013 

Bill Issuance

April-June 2013 
1,123

892

736

682

630 610

629

629

624

63

(400)(200)

0

200400600800

1,0001,2001,400

2013 2014 2015 2016 2017 2018 2019 2020 2021 202

$ bn

Fiscal Year

OMB's Projections of Borrowing from the Public 

Primary Deficit Net Interest Other Data Labels: Annual Change in

Debt Held by Public

OMB’s projections of borrowing from the public are from Table S-4 and S-13 of the “Fiscal Year 2014 Budget of the US Governmelabels represent the change in debt held by the public in $ billions. “Other” represents borrowing from the public to provide direguaranteed loans, in addition to TARP activity. Data labels represent the annual change in debt held by the public.

Annual Change in Debt Held by the Public

$ bn 

Primary Deficit 1,116 

Net Interest 5,127 Other 1,506 

Total 7,749

FY 2013 - 
1.5

2

2.5

3

3.5

4

4.5

5

5.5

2013 2014 2015 2016 2017 2018 2019 2020 2021 202

10-Year Treasury Note Rate, %

Fiscal Year

Interest Rate Assumptions

OMB FY 2014 Implied Forward

Rates as of 3/29/2013

OMB’s economic assumption of the 10-year Treasury note rates are from the Table S-12 of the “Fiscal Year 2014 Budget of the US The implied 10-Year Treasury note forward rates are the averages for each fiscal year.

10-Year Treasury Rate, 1.955%, as of 3/29/2013
(500)

0

500

1,0001,5002,000

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

$ bn

End of Fiscal Year

Historical Net Marketable Borrowing and Projected Net 

Borrowing Assuming Future Issuance Remains Constant

Bills 2/3/5 7/10/30 TIPS Historical Net Marketable

Borrowing/Projected Net Borrowing

(data labels at bottom)

OMB’s Proje

Borrowing fr

Portfolio & SOMA holdings as of 3/29/2013 and estimated projections of the Large Scale Asset Purchase program announced on by the Federal Reserve assumed to last for about 1 year. This assumption is based on the Federal Reserve’s March 2013 primary dAssumes issuance sizes for Bills, Nominal Coupons and TIPS are unchanged from 3/29/2013 levels, along with SOMA reinvestmprincipal on the TIPS securities were accreted to each projection date based on market ZCIS levels. No attempt was made to matfinancing needs. OMB’s projections of borrowing from the public projections are from Table S-5 and S-13 of the “Fiscal Year 2014 

US Government.”Data labels represent historical net marketable borrowing and projected net borrowing assuming future issuance remains constan

sizes. See table on the following page for details.

1,786 1,483 1,104 1,115 1,044 754 635 666 503 631 544 394 286 
Portfolio & SOMA holdings as of 3/29/2013 and estimated projections of the Large Scale Asset Purchase program announced on 

by the Federal Reserve assumed to last for about 1 year. This assumption is based on the Federal Reserve’s March 2013 primary dAssumes issuance sizes for Bills, Nominal Coupons and TIPS are unchanged from 3/29/2013 levels, along with SOMA reinvestmprincipal on the TIPS securities were accreted to each projection date based on market ZCIS levels. No attempt was made to matfinancing needs. OMB’s projections of borrowing from the public projections are from Table S-5 and S-13 of the “Fiscal Year 2014 

US Government.”

Historical Net Marketable Borrowing and Projected Net Borro

Assuming Future Issuance Remains Constant, $ Billion

End of Fiscal 

Year

Bills 2/3/5 7/10/30 TIPS

Historical Net 

Marketable 

Borrowing/Projected Net 

Borrowing Capacity

O

2009 503 732 514 38 1,7862010 (204) 869 783 35 1,4832011 (311) 576 751 88 1,1042012 139 148 738 90 1,1152013 124 90 720 111 1,044 2014 0 (5) 672 87 754 2015 0 (92) 641 86 635 2016 0 90 498 77 666 2017 0 100 326 76 503 2018 0 159 390 82 631 2019 0 165 300 78 544 2020 0 75 275 44 394 2021 0 5 268 12 286 2022 0 0 279 (3) 276 

2023 0 (34) 220 (9) 177 
Section III:

Portfolio Metrics
40

455055606570758085

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

Weighted Average Maturity (Months)

Calendar Year

Weighted Average Maturity of Marketable Debt Outstandi

Historical Adjust Nominal Coupons to Match Financing Needs Historical Average from 1

Portfolio & SOMA holdings as of 3/29/2013 and estimated projections of the Large Scale Asset Purchase program announced on the Federal Reserve assumed to last for about 1 year. This assumption is based on the Federal Reserve’s March 2013 primary dea

match OMB’s projected borrowing from the public for the next 10 years, nominal coupon securities (2-, 3-, 5-, 7-, 10-, and 30-year) by the same percentage. OMB’s projections of borrowing from the public are from Table S-5 and S-13 of the “Fiscal Year 2014 Bu

Government.” The principal on the TIPS securities were accreted to each projection date based on market ZCIS levels. This scenrepresent any particular course of action that Treasury is expected to follow. Instead, it is intended to demonstrate the basic trajec

maturity absent changes to the mix of securities issued by Treasury.

64.3 months on 3/29/2013

5(Hfr
Portfolio & SOMA holdings as of 3/29/2013 and estimated projections of the Large Scale Asset Purchase program announced on the Federal Reserve assumed to last for about 1 year. This assumption is based on the Federal Reserve’s March 2013 primary dea

match OMB’s projected borrowing from the public for the next 10 years, nominal coupon securities (2-, 3-, 5-, 7-, 10-, and 30-year) by the same percentage. OMB’s projections of borrowing from the public are from Table S-5 and S-13 of the “Fiscal Year 2014 Bu

Government.” The principal on the TIPS securities were accreted to each projection date based on market ZCIS levels. This scen

represent any particular course of action that Treasury is expected to follow. Instead, it is intended to demonstrate the basic trajec

maturity absent changes to the mix of securities issued by Treasury. See table on the following page for details.Maturity distribution by original issuance type and term can be found in the appendix (slide 43).

02468

101214161820

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

$ tr

End of Fiscal Year

Recent and Future Maturity Profile, $ Trillion

< 1yr [1, 2) [2, 3) [3, 5) [5, 7) [7, 10) >= 10yr
Recent and Future Maturity Profile, $ Billion

Portfolio & SOMA holdings as of 3/29/2013 and estimated projections of the Large Scale Asset Purchase program announced on the Federal Reserve assumed to last for about 1 year. This assumption is based on the Federal Reserve’s March 2013 primary dea

match OMB’s projected borrowing from the public for the next 10 years, nominal coupon securities (2-, 3-, 5-, 7-, 10-, and 30-year) by the same percentage. OMB’s projections of borrowing from the public are from Table S-5 and S-13 of the “Fiscal Year 2014 Bu

Government.” The principal on the TIPS securities were accreted to each projection date based on market ZCIS levels. This scen

represent any particular course of action that Treasury is expected to follow. Instead, it is intended to demonstrate the basic trajec

maturity absent changes to the mix of securities issued by Treasury.Maturity distribution by original issuance type and term can be found in the appendix (slide 43).

End of Fiscal 

Year < 1yr [1, 2) [2, 3) [3, 5) [5, 7) [7, 10) >= 10yr T

2007 1,581 663 341 545 267 480 557 4

2008 2,152 711 280 653 310 499 617 52009 2,702 774 663 962 529 672 695 62010 2,563 1,141 869 1,299 907 856 853 82011 2,620 1,272 1,002 1,516 1,136 1,053 1,017 92012 2,889 1,395 1,109 1,847 1,214 1,108 1,181 12013 3,150 1,542 1,193 2,045 1,439 1,180 1,340 12014 3,283 1,605 1,486 2,252 1,447 1,177 1,550 12015 3,347 1,896 1,474 2,385 1,563 1,206 1,694 12016 3,535 1,918 1,692 2,496 1,556 1,222 1,861 12017 3,661 2,087 1,680 2,600 1,597 1,278 2,045 12018 3,830 2,194 1,716 2,700 1,653 1,319 2,188 12019 3,829 2,240 1,878 2,738 1,772 1,458 2,363 12020 3,986 2,377 1,857 2,888 1,770 1,457 2,623 12021 4,121 2,360 1,965 2,989 1,806 1,505 2,887 12022 4,105 2,480 2,108 3,049 1,901 1,495 3,186 12023 4,225 2,657 2,044 3,087 1,980 1,464 3,483 1
Portfolio & SOMA holdings as of 3/29/2013 and estimated projections of the Large Scale Asset Purchase program announced on the Federal Reserve assumed to last for about 1 year. This assumption is based on the Federal Reserve’s March 2013 primary dea

match OMB’s projected borrowing from the public for the next 10 years, nominal coupon securities (2-, 3-, 5-, 7-, 10-, and 30-year) by the same percentage. OMB’s projections of borrowing from the public are from Table S-5 and S-13 of the “Fiscal Year 2014 Bu

Government.” The principal on the TIPS securities were accreted to each projection date based on market ZCIS levels. This scen

represent any particular course of action that Treasury is expected to follow. Instead, it is intended to demonstrate the basic trajec

maturity absent changes to the mix of securities issued by Treasury. See table on the following page for details.Maturity distribution by original issuance type and term can be found in the appendix (slide 43).

0%

10%20%30%40%50%60%70%80%90%

100%

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

End of Fiscal Year

Recent and Future Maturity Profile, Percent

< 1yr [1, 2) [2, 3) [3, 5) [5, 7) [7, 10) >= 10yr
Recent and Future Maturity Profile, Percent

Portfolio & SOMA holdings as of 3/29/2013 and estimated projections of the Large Scale Asset Purchase program announced on the Federal Reserve assumed to last for about 1 year. This assumption is based on the Federal Reserve’s March 2013 primary dea

match OMB’s projected borrowing from the public for the next 10 years, nominal coupon securities (2-, 3-, 5-, 7-, 10-, and 30-year) by the same percentage. OMB’s projections of borrowing from the public are from Table S-5 and S-13 of the “Fiscal Year 2014 Bu

Government.” The principal on the TIPS securities were accreted to each projection date based on market ZCIS levels. This scenrepresent any particular course of action that Treasury is expected to follow. Instead, it is intended to demonstrate the basic trajec

maturity absent changes to the mix of securities issued by Treasury.Maturity distribution by original issuance type and term can be found in the appendix (slide 43).

End of Fiscal 

Year < 1yr [1, 2) [2, 3) [3, 5) [5, 7) [7, 10) >= 10yr [

2007 35.7% 15.0% 7.7% 12.3% 6.0% 10.8% 12.6% 5

2008 41.2% 13.6% 5.4% 12.5% 5.9% 9.6% 11.8% 62009 38.6% 11.1% 9.5% 13.7% 7.6% 9.6% 9.9% 52010 30.2% 13.4% 10.2% 15.3% 10.7% 10.1% 10.0% 532011 27.2% 13.2% 10.4% 15.8% 11.8% 10.9% 10.6% 52012 26.9% 13.0% 10.3% 17.2% 11.3% 10.3% 11.0% 52013 26.5% 13.0% 10.0% 17.2% 12.1% 9.9% 11.3% 42014 25.6% 12.5% 11.6% 17.6% 11.3% 9.2% 12.1% 42015 24.7% 14.0% 10.9% 17.6% 11.5% 8.9% 12.5% 42016 24.8% 13.4% 11.8% 17.5% 10.9% 8.6% 13.0% 52017 24.5% 14.0% 11.2% 17.4% 10.7% 8.5% 13.7% 42018 24.6% 14.1% 11.0% 17.3% 10.6% 8.5% 14.0% 42019 23.5% 13.8% 11.5% 16.8% 10.9% 9.0% 14.5% 42020 23.5% 14.0% 11.0% 17.0% 10.4% 8.6% 15.5% 42021 23.4% 13.4% 11.1% 17.0% 10.2% 8.5% 16.4% 42022 22.4% 13.5% 11.5% 16.6% 10.4% 8.2% 17.4% 42023 22.3% 14.0% 10.8% 16.3% 10.5% 7.7% 18.4% 4
Section IV:

Demand
*Weighted averages of Competitive Awards.**Approximated using prices at settlement and includes both Competitive and Non-Competitive Awards. For TIPS’ 10-Year Equ

constant auction BEI is used as the inflation assumption.

Summary Statistics for Fiscal Year 2013 Q2 Auctions

Security

Type Term

Stop Out Rate

(%)*

Bid‐to‐Cover

Ratio*

Competitive

Awards($ bn)

% Primary

Dealer* % Direct* % Indirect*

Non‐Competitive

Awards($ bn)

Bill 4-Week 0.081 4.4 530.3 64.1% 8.0% 27.8% 3.7 Bill 13-Week 0.087 4.7 426.7 71.5% 7.1% 21.4% 6.6 Bill 26-Week 0.114 4.9 364.5 61.5% 7.1% 31.4% 5.8 Bill 52-Week 0.145 4.8 74.4 68.9% 6.9% 24.1% 0.5 

Bill CMBs 0.111 4.6 105.0 76.4% 8.1% 15.5% 0.0 

Coupon 2-Year 0.272 3.5 69.5 49.2% 30.8% 20.0% 0.3 

Coupon 3-Year 0.402 3.6 95.6 52.1% 25.5% 22.3% 0.1 

Coupon 5-Year 0.833 2.9 69.9 43.7% 15.6% 40.7% 0.1 

Coupon 7-Year 1.338 2.6 58.0 45.2% 19.0% 35.8% 0.0 

Coupon 10-Year 1.982 2.9 65.9 42.5% 23.1% 34.4% 0.1 

Coupon 30-Year 3.167 2.7 42.0 49.3% 12.2% 38.6% 0.0 

TIPS 5-YearTIPS 10-Year (0.617) 2.7 27.9 38.9% 8.7% 52.4% 0.1 TIPS 30-Year 0.639 2.5 9.0 31.6% 14.0% 54.5% 0.0 

Total Bills 0.096 4.6 1,500.9 66.7% 7.5% 25.8% 16.6 

Total Coupons 1.140 3.1 400.9 47.3% 22.0% 30.8% 0.6 

Total TIPS (0.311) 2.7 36.9 37.1% 10.0% 52.9% 0.1 
1.5

2

2.5

3

3.5

4

4.5

5

5.5

6

Mar-03

Mar-04

Mar-05

Mar-06

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Bid-to-Cover Ratio

Bid-to-Cover Ratios for Treasury Bills

4-Week (13-week moving average) 13-Week (13-week moving average)26-Week (13-week moving average) 52-Week (6-month moving average)
1.5

2

2.5

3

3.5

4

Mar-08

Jun-08

Sep-08

Dec-08

Mar-09

Jun-09

Sep-09

Dec-09

Mar-10

Jun-10

Sep-10

Dec-10

Mar-11

Jun-11

Sep-11

Dec-11

Mar-12

Jun-12

Bid-to-Cover Ratio

Bid-to-Cover Ratios for 2-, 3-, and 5-Year Nominal Securiti

(6-Month Moving Average)

2-Year 3-Year 5-Year
2

2.22.42.62.8

3

3.23.4

Mar-08

Jun-08

Sep-08

Dec-08

Mar-09

Jun-09

Sep-09

Dec-09

Mar-10

Jun-10

Sep-10

Dec-10

Mar-11

Jun-11

Sep-11

Dec-11

Mar-12

Jun-12

S12

Bid-to-Cover Ratio

Bid-to-Cover Ratios for 7-, 10-, and 30-Year Nominal Securit

(6-Month Moving Average)

7-Year 10-Year 30-Year
1

1.5

2

2.5

3

3.5

Sep-00

Sep-01

Sep-02

Sep-03

Sep-04

Sep-05

Sep-06

Sep-07

Sep-08

Sep-09

Sep-10

Bid-to-Cover Ratio

Bid-to-Cover Ratios for TIPS

5-Year 10-Year (6-month moving average) 20-Year 30-Year
Excludes SOMA add-ons. The “Other” category includes categories that are each less than 2%, which include Depository InstitutPension and Insurance.

Primary

Dealers

65.4%

Other Dealers

& Brokers

7.6%

Investment

Funds

12.9%

Foreign &

International

10.1%

Other

4.0%

Investor Class Auction Awards: Bills

Fiscal Year 2013-Q2
Excludes SOMA add-ons. The “Other” category includes categories that are each less than 2%, which include Depository InstitutPension and Insurance. These results may include seasonal effects.“Previous 4 Quarters” = Total Awards for the previous 4 quarters divided by Total Auction Awards of the previous 4 quarters

-0.8%-0.6%-0.4%-0.2%

0.0%0.2%0.4%0.6%0.8%

Primary

Dealers

Other Dealers

& Brokers

Investment

Funds

Foreign &

International

Change from Previous 4 Quarters

Change in Demand Over the Last Year in Bills, Auction Awa

by Investor Class

2013-Q1 less Previous 4 Quarters Most Recent Quarter (FY 2013-Q2)

less Previous 4 Quarters
Excludes SOMA add-ons. The “Other” category includes categories that are each less than 2%, which include Depository InstitutPension and Insurance.

Primary

Dealers

48.2%

Other 

Dealers

& Brokers

8.1%

Investment

Funds

28.4%

Foreign &

International

14.2%

Other

1.1%

Investor Class Auction Awards:

2-, 3-, and 5-Year Nominal Securities

Fiscal Year 2013-Q2

Other 

Dealers

& Brokers

6.1%

Investment

Funds

35.6%

Foreign &

International

11.9%

Other

1.2%

Investor Class Auctio

7-, 10-, and 30-Year Nom

Fiscal Year 201
Excludes SOMA add-ons. The “Other” category includes categories that are each less than 2%, which include Depository InstitutPension and Insurance. These results may include seasonal effects.“Previous 4 Quarters” = Total Awards for the previous 4 quarters divided by Total Auction Awards of the previous 4 quarters

-10%

-5%

0%5%

10%15%

Primary

Dealers

Other Dealers

& Brokers

Investment

Funds

Foreign &

International

Change from Previous 4 Quarters

Change in Demand Over the Last Year in 2-, 3-, 5-Year Nomi

Securities, Auction Awards by Investor Class

2013-Q1 less Previous 4 Quarters Most Recent Quarter (FY 2013-Q2)

less Previous 4 Quarters
Excludes SOMA add-ons. The “Other” category includes categories that are each less than 2%, which include Depository InstitutPension and Insurance. These results may include seasonal effects.“Previous 4 Quarters” = Total Awards for the previous 4 quarters divided by Total Auction Awards of the previous 4 quarters

-10%

-5%

0%5%

10%15%

Primary

Dealers

Other Dealers

& Brokers

Investment

Funds

Foreign &

International

Change from Previous 4 Quarters

Change in Demand Over the Last Year in 7-, 10-, 30-Year 

Nominal Securities, Auction Awards by Investor Class

2013-Q1 less Previous 4 Quarters Most Recent Quarter (FY 2013-Q2)

less Previous 4 Quarters
Excludes SOMA add-ons. The “Other” category includes categories that are each less than 2%, which include Depository InstitutPension and Insurance.

Primary

Dealers

37.0%

Other Dealers

& Brokers

1.6%

Investment

Funds

50.7%

Foreign &

International

10.3%

Other

0.4%

Investor Class Auction Awards:

TIPS

Fiscal Year 2013-Q2
Excludes SOMA add-ons. The “Other” category includes categories that are each less than 2%, which include Depository InstitutPension and Insurance. These results may include seasonal effects.“Previous 4 Quarters” = Total Awards for the previous 4 quarters divided by Total Auction Awards of the previous 4 quarters

-8%-6%-4%-2%

0%2%4%6%8%

10%

Primary

Dealers

Other Dealers

& Brokers

Investment

Funds

Foreign &

International

Change from Previous 4 Quarters

Change in Demand Over the Last Year in TIPS, Auction Awa

by Investor Class

2013-Q1 less Previous 4 Quarters Most Recent Quarter (FY 2013-Q2)

less Previous 4 Quarters
Foreign includes both private sector and official institutions.

0

20406080

100120140160180200

Jun-09

Sep-09

Dec-09

Mar-10

Jun-10

Sep-10

Dec-10

Mar-11

Jun-11

Sep-11

Dec-11

Mar-12

Jun-12

Sep-12

Monthly Private Award ($bn)

Total Foreign Awards of Treasuries at Auction, $ Billion

Bills 2/3/5 7/10/30 TIPS
Excludes SOMA add-ons. Foreign includes both private sector and official institutions.

0%5%

10%15%20%25%

Jun-09

Sep-09

Dec-09

Mar-10

Jun-10

Sep-10

Dec-10

Mar-11

Jun-11

Sep-11

Dec-11

Mar-12

Jun-12

Sep-12

% Awarded to Foreign Investors

Foreign Awards of Bills at Auction, Percent
Excludes SOMA add-ons. Foreign includes both private sector and official institutions.

0%5%

10%15%20%25%30%35%40%45%50%

Jun-09

Sep-09

Dec-09

Mar-10

Jun-10

Sep-10

Dec-10

Mar-11

Jun-11

Sep-11

Dec-11

Mar-12

Jun-12

Sep-12

% Awarded to Foreign Investors

Foreign Awards of Nominal Coupons at Auction, Percent

2/3/5 7/10/30
Excludes SOMA add-ons. Foreign includes both private sector and official institutions.

0%5%

10%15%20%25%

Jun-09

Sep-09

Dec-09

Mar-10

Jun-10

Sep-10

Dec-10

Mar-11

Jun-11

Sep-11

Dec-11

Mar-12

Jun-12

Sep-12

% Awarded to Foreign Investors

Foreign Awards of TIPS at Auction, Percent

5-Year 10-Year 20-Year 30-Year
35%40%45%50%55%60%65%70%75%

Jun-09

Sep-09

Dec-09

Mar-10

Jun-10

Sep-10

Dec-10

Mar-11

Jun-11

Sep-11

Dec-11

Mar-12

Jun-12

Sep-12

% of Total Competitive Amount Awarded

Primary Dealer Awards at Auction, Percent

4/13/26-Week (13-week moving average) 52-Week (6-month moving average)2/3/5 (6-month moving average) 7/10/30 (6-month moving average)TIPS (6-month moving average)
Appendix
0%

10%20%30%40%50%60%70%80%90%

100%

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

% of Portfolio

End of Fiscal Year

Recent and Future Portfolio Composition by Issuance Typ

Percent

Bills 2/3/5 7/10/30 TIPS (principal accreted to projection date)

Portfolio & SOMA holdings as of 3/29/2013 and estimated projections of the Large Scale Asset Purchase program announced on the Federal Reserve assumed to last for about 1 year. This assumption is based on the Federal Reserve’s most recent primary dea

match OMB’s projected borrowing from the public for the next 10 years, nominal coupon securities (2-, 3-, 5-, 7-, 10-, and 30-year) by the same percentage. OMB’s projections of borrowing from the public are from Table S-5 and S-13 of the “Fiscal Year 2014 Bu

Government.” The principal on the TIPS securities were accreted to each projection date based on market ZCIS levels. This scenrepresent any particular course of action that Treasury is expected to follow. Instead, it is intended to demonstrate the basic trajec

maturity absent changes to the mix of securities issued by Treasury. See table on the following page for details.
End of Fiscal Year Bills 2-, 3-, 5-Year 

Nominal Coupons

7-, 10-, 30-Year 

Nominal Coupons

Total Nominal 

Coupons

T

p

2006 21.3% 40.5% 29.0% 69.5% 2007 21.6% 38.9% 29.2% 68.1% 2008 28.5% 34.5% 26.9% 61.4% 2009 28.5% 36.2% 27.4% 63.6% 2010 21.1% 40.1% 31.8% 71.9% 2011 15.4% 41.4% 35.9% 77.3% 2012 15.0% 38.4% 39.0% 77.4% 2013 14.6% 35.9% 41.6% 77.4% 2014 13.6% 33.9% 44.3% 78.2% 2015 12.8% 31.7% 46.9% 78.6% 2016 12.2% 30.7% 48.2% 78.9% 2017 11.6% 30.4% 48.7% 79.1% 2018 11.2% 29.9% 49.2% 79.2% 2019 10.7% 29.8% 49.4% 79.3% 2020 10.3% 29.8% 49.7% 79.5% 2021 9.9% 29.8% 50.2% 80.0% 2022 9.5% 29.6% 50.8% 80.4% 2023 9.2% 29.5% 51.4% 80.8% 

Recent and Future Portfolio Composition by Issuance Type, P

Portfolio & SOMA holdings as of 3/29/2013 and estimated projections of the Large Scale Asset Purchase program announced on the Federal Reserve assumed to last for about 1 year. This assumption is based on the Federal Reserve’s most recent primary dea

match OMB’s projected borrowing from the public for the next 10 years, nominal coupon securities (2-, 3-, 5-, 7-, 10-, and 30-year) by the same percentage. OMB’s projections of borrowing from the public are from Table S-5 and S-13 of the “Fiscal Year 2014 Bu

Government.” The principal on the TIPS securities were accreted to each projection date based on market ZCIS levels. This scenrepresent any particular course of action that Treasury is expected to follow. Instead, it is intended to demonstrate the basic trajec

maturity absent changes to the mix of securities issued by Treasury.
*Weighted averages of Competitive Awards. 

**Approximated using prices at settlement and includes both Competitive and Non-Competitive Awards.

Issue Settle Date

Stop Out

Rate (%)*

Bid‐to‐Cover

Ratio*

Competitive

Awards($ bn)

% Primary

Dealer* % Direct* % Indirect*

Non‐Competitive

Awards($ bn)

SOMA Add

Ons($ bn)

4‐Week 1/3/2013 0.075 4.40 39.65 65.8% 5.7% 28.5% 0.25 0.00 4‐Week 1/10/2013 0.055 4.50 39.72 64.0% 7.5% 28.5% 0.28 0.00 4‐Week 1/17/2013 0.095 4.44 34.64 59.5% 9.2% 31.3% 0.36 0.00 4‐Week 1/24/2013 0.060 4.86 29.70 61.7% 9.7% 28.5% 0.30 0.00 4‐Week 1/31/2013 0.035 4.58 29.51 74.4% 11.2% 14.4% 0.24 0.00 4‐Week 2/7/2013 0.065 4.65 44.73 58.4% 6.9% 34.7% 0.27 0.00 4‐Week 2/14/2013 0.080 4.19 44.68 66.4% 8.0% 25.6% 0.32 0.00 4‐Week 2/21/2013 0.115 4.35 44.70 52.5% 4.4% 43.2% 0.30 0.00 4‐Week 2/28/2013 0.110 4.18 44.73 66.3% 8.3% 25.4% 0.27 0.00 4‐Week 3/7/2013 0.085 4.40 44.74 71.7% 9.3% 19.0% 0.26 0.00 4‐Week 3/14/2013 0.100 4.40 44.70 64.6% 8.2% 27.2% 0.30 0.00 4‐Week 3/21/2013 0.080 4.39 44.69 60.0% 9.9% 30.1% 0.31 0.00 4‐Week 3/28/2013 0.075 4.10 44.06 70.3% 7.5% 22.2% 0.25 0.00 

13‐Week 1/3/2013 0.075 4.54 31.34 75.1% 7.2% 17.7% 0.51 0.00 13‐Week 1/10/2013 0.065 4.80 31.35 68.3% 9.0% 22.6% 0.50 0.00 

13‐Week 1/17/2013 0.075 4.53 31.38 67.8% 6.2% 26.1% 0.52 0.00 13‐Week 1/24/2013 0.075 4.68 31.49 85.0% 7.6% 7.4% 0.51 0.00 13‐Week 1/31/2013 0.075 4.98 30.61 66.1% 6.2% 27.7% 0.45 0.00 13‐Week 2/7/2013 0.070 4.72 31.39 62.1% 6.8% 31.0% 0.51 0.00 13‐Week 2/14/2013 0.085 4.73 34.38 65.5% 5.7% 28.9% 0.52 0.00 13‐Week 2/21/2013 0.115 4.62 34.38 74.1% 7.5% 18.4% 0.52 0.00 13‐Week 2/28/2013 0.125 4.46 33.67 73.0% 6.8% 20.1% 0.52 0.00 13‐Week 3/7/2013 0.110 4.59 34.21 76.9% 6.1% 17.0% 0.49 0.00 13‐Week 3/14/2013 0.095 4.49 34.47 79.6% 6.2% 14.2% 0.53 0.00 13‐Week 3/21/2013 0.085 4.92 34.40 65.4% 9.9% 24.7% 0.50 0.00 13‐Week 3/28/2013 0.075 4.53 33.66 69.6% 7.3% 23.1% 0.53 0.00 26‐Week 1/3/2013 0.120 4.98 26.72 60.0% 10.0% 30.0% 0.46 0.00 26‐Week 1/10/2013 0.105 5.21 26.92 57.8% 7.2% 35.0% 0.46 0.00 26‐Week 1/17/2013 0.105 4.95 27.14 57.2% 7.5% 35.3% 0.46 0.00 26‐Week 1/24/2013 0.095 4.94 27.08 62.6% 7.7% 29.7% 0.52 0.00 26‐Week 1/31/2013 0.110 5.01 26.55 66.3% 8.0% 25.7% 0.45 0.00 26‐Week 2/7/2013 0.110 4.92 27.01 60.1% 8.4% 31.5% 0.49 0.00 26‐Week 2/14/2013 0.120 4.60 28.91 74.5% 5.5% 20.1% 0.49 0.00 26‐Week 2/21/2013 0.130 5.12 29.06 56.8% 6.4% 36.8% 0.46 0.00 26‐Week 2/28/2013 0.135 4.50 28.66 67.4% 5.0% 27.6% 0.39 0.00 26‐Week 3/7/2013 0.120 5.18 29.20 41.8% 4.3% 54.0% 0.40 0.00 26‐Week 3/14/2013 0.115 4.81 29.20 73.3% 6.2% 20.5% 0.40 0.00 26‐Week 3/21/2013 0.110 5.00 29.31 70.6% 8.5% 20.9% 0.38 0.00 26‐Week 3/28/2013 0.105 4.85 28.78 50.9% 7.7% 41.3% 0.43 0.00 52‐Week 1/10/2013 0.140 4.72 24.84 83.0% 7.0% 10.0% 0.16 0.00 52‐Week 2/7/2013 0.145 4.56 24.75 67.3% 6.4% 26.3% 0.15 0.00 52‐Week 3/7/2013 0.150 4.98 24.85 56.4% 7.4% 36.2% 0.15 0.00 

CMBs 2/13/2013 0.100 4.27 40.00 81.8% 8.9% 9.3% 0.00 0.00 CMBs 2/20/2013 0.130 4.58 34.99 84.2% 6.8% 9.0% 0.01 0.00 CMBs 3/6/2013 0.105 5.05 30.00 60.3% 8.5% 31.2% 0.00 0.00 

Bill Issues
*Weighted averages of Competitive Awards.**Approximated using prices at settlement and includes both Competitive and Non-Competitive Awards. For TIPS’ 10-Year Equ

constant auction BEI is used as the inflation assumption.

Issue Settle Date

Stop Out

Rate (%)*

Bid‐to‐Cover

Ratio*

Competitive

Awards ($ bn)

% Primary

Dealer* % Direct* % Indirect*

Non‐Competitive

Awards ($ bn)

SO

O

2‐Year 1/31/2013 0.288 3.77 34.73 52.0% 30.0% 18.0% 0.17 2‐Year 2/28/2013 0.257 3.33 34.75 46.4% 31.6% 22.0% 0.15 2‐Year 4/1/2013 0.255 3.27 34.70 57.6% 21.8% 20.6% 0.17 3‐Year 1/15/2013 0.385 3.62 31.87 45.2% 26.4% 28.4% 0.03 3‐Year 2/15/2013 0.411 3.59 31.86 55.1% 26.9% 18.0% 0.04 3‐Year 3/15/2013 0.411 3.51 31.85 56.0% 23.4% 20.6% 0.05 5‐Year 1/31/2013 0.889 2.88 34.97 43.5% 16.8% 39.7% 0.03 5‐Year 2/28/2013 0.777 2.85 34.98 44.0% 14.3% 41.7% 0.02 5‐Year 4/1/2013 0.760 2.73 34.98 37.1% 16.8% 46.1% 0.02 7‐Year 1/31/2013 1.416 2.60 28.99 42.0% 19.7% 38.2% 0.01 7‐Year 2/28/2013 1.260 2.65 28.99 48.4% 18.2% 33.4% 0.01 7‐Year 4/1/2013 1.248 2.56 28.99 45.0% 19.5% 35.5% 0.01 

10‐Year 1/15/2013 1.863 2.83 20.99 56.7% 14.8% 28.5% 0.01 10‐Year 2/15/2013 2.046 2.68 23.96 47.7% 24.2% 28.0% 0.04 10‐Year 3/15/2013 2.029 3.19 20.98 22.3% 30.0% 47.7% 0.02 

30‐Year 1/15/2013 3.070 2.77 12.99 45.5% 16.7% 37.8% 0.01 30‐Year 2/15/2013 3.180 2.74 15.98 49.1% 14.5% 36.4% 0.02 30‐Year 3/15/2013 3.248 2.43 12.99 53.1% 4.9% 42.0% 0.01 

Issue Settle Date

Stop Out

Rate (%)*

Bid‐to‐Cover

Ratio*

Competitive

Awards ($ bn)

% Primary

Dealer* % Direct* % Indirect*

Non‐Competitive

Awards ($ bn)

SO

O

10‐Year 1/31/2013 (0.630) 2.71 14.93 35.4% 11.3% 53.3% 0.07 10‐Year 3/28/2013 (0.602) 2.74 12.99 43.0% 5.7% 51.3% 0.01 30‐Year 2/28/2013 0.639 2.47 8.98 31.6% 14.0% 54.5% 0.02 

Nominal Coupon Securities

TIPS
DRAFT – Preliminary and Subject to Change 

TREASURY FLOATING RATE NOTE TERM SHEET 

I. ISSUER United States Treasury 

II. ISSUE DATE The last Friday of a calendar month. 

III. MATURITY DATE Last calendar day of the month two years after the issue 

date. 

IV. MATURITY PAYMENT Principal will be paid on the last business day of the 

maturity month unless that day is not a business day, then 

interest is paid on the following business day. 

V.INTEREST DATES Quarterly from the Issue Date, to and including the 

Maturity Date, on the last calendar day of a month. 

VI. INTEREST PAYMENTS Interest will be paid on the last business day of the month 

unless that day is not a business day, then interest is paid on 

the following business day. 

VII. INTEREST: 

A. ACCRUAL PERIOD From and including the Issue Date or last Interest Date to, 

but excluding, the next Interest Date. 

B. INTEREST ACCRUAL In general, accrued interest for a particular calendar day in 

an Accrual Period shall be the Index Rate from the most 

recent auction of 13-week Treasury bills that took place 

before the accrual day, plus the Spread, divided by 360, 

subject to a minimum of zero. 

 However, for purposes of calculating FRN auction 

settlement amounts and quarterly FRN interest payments, a 

13-week bill auction that takes place in the two business 

day Lock-Out Period prior to the FRN auction settlement 

date or FRN Interest Date shall be excluded from the 

calculation of accrued interest for purposes of that 

settlement amount or interest payment. 

C. INDEX RATE The High Rate from a 13-week Treasury bill auction as 

announced by the Bureau of the Public Debt, converted to a 

simple-interest money market yield on an actual/360 basis. 

D. SPREAD As determined in the security’s initial auction; expressed in 

tenths of a basis point. 

47
DRAFT – Preliminary and Subject to Change 

E. MINIMUM DAILY 

INTEREST ACCRUAL 0.000 percent 

F. RESET FREQUENCY Daily, if not a Business Day then the preceding Business 

Day. 

G. DAY COUNT 

CONVENTION actual/360 

H. LOCK-OUT PERIOD The two business days preceding an FRN auction Issue 

date or an FRN Interest Date. 

VIII. BUSINESS DAY Any day other than a Saturday, a Sunday, or a day on 

which the Federal Reserve Bank of New York is closed. 

IX. STRIPS ELIGIBLE No 

X. CALCULATION AGENT United States Treasury 

XI. ORIGINAL ISSUE PRICE Determined at auction 

XII. AUCTION TECHNIQUE A single price auction format in which each competitive 

tender specifies a Discount Margin (which can be positive, 

zero, or negative, expressed in tenths of a basis point). 

 Treasury will first accept in full all noncompetitive tenders 

up to $5 million per submitter received by the closing time 

specified in the offering announcement. 

 Competitive tenders will be accepted in order of Discount 

Margin, starting from the lowest Discount Margin, up to 

the Discount Margin needed to fill the public offering. 

 The usual Treasury proration rules will apply if the amount 

of tenders indicating the highest accepted Discount Margin 

exceeds the amount of the public offering remaining. 

The Spread on a floating rate note offered in an original 

issue auction will be set at the highest accepted Discount 

Margin in that auction. 

 

The Spread on a floating rate note offered in a reopening 

auction will be as set in the note’s original issue auction. 

48
DRAFT – Preliminary and Subject to Change 

XIII. MINIMUM AND 

 MULTIPLES TO BID, 

 HOLD AND TRANSFER The minimum to bid, hold and transfer is $100 

 original principal value. Larger amounts must be in 

 multiples of $100. 

XIV. MAXIMUM 

 NONCOMPETITIVE 

 AWARD $5 million 

49
Committee Charge 

Presentation to the Treasur

Availability of High-Quality Collateral

A variety of market, regulatory, and policy developments have increas

potential to increase, demand for high-quality fixed income securities. 

the impact of these developments on Treasury market functioning, Tre

and interest rates more broadly. Please consider the impact of both d

international developments.
Availability of High-Quality Col

Confidential
Table of Contents

I. Market Definitions of High Quality Collateral (HQC)II. Supply and Demand for HQC

a. Demand for HQCb. Supply of HQCc. Supply/Demand Conclusions

III. Policy and Macro Considerations
I. Market Definitions of High Quality Collateral

Five definitions, based on history and current observations:High quality collateral is ...1. Hard currency cash. ISDA Survey of OTC Col

Source: ISDA
High Quality Collateral is...

Duration Risk

Liquidity Risk Credit Risk

Cash10 year TreasuryIGABS

2. Money-like assets (assets with low credit risk, low duration rlow liquidity risk 

If these risks are credibly hedged, the asset holder has a quasi 
High Quality Collateral is...

3. Whatever the central bank dictates

 The Fed’s Commercia

Funding Facility restooutstanding commercpaper to high quality sby creating a public sfunding facility 

Source: Thomson Reuters DataStream, Federal Reserve Board
High Quality Collateral is...

4. An asset not expected to depreciate

 During the housing boom, homes 

became a key source of collateral for households and backed trillions in highly rates private label MBS

 During the 1920s stock mark

borrowing against equities fufurther price appreciation befaccelerating the collapse

Source: Thomson Reuters DataStream
High Quality Collateral is...

5. Low haircut securities. 

Indicative market levels Repo Haircuts over time (%)
In Summary

High-Quality Collateral can be defined as cash or fungible stcan be used to rapidly secure cash borrowings at minimal hai

“High Quality” “Low Qualit

Domestic Sovereign Credit

Cash

US Treasury Bills

US Treasury Notes

US Treasury Bonds

Strips / TIPS

IG Domestic Corporates

NIG Domestic Corporates

IG Foreign Corporates

NIG Domestic Corporates

M

Ph

S

“Foreign” Cash / Sovereign

Non-USD Sovereign Bills

Non-USD Sovereign Notes

Non-USD Sovereign Bonds

Non-USD Linkers

Domestic Rates

Government Agencies

Mortgage-Backed Securities

Certain Guaranteed ABS
II. Supply and Demand Considerations
II(a). Demand for Collateral
High-Quality Collateral – Demand Drivers Overview

Incremental HQC Demand Drivers

 Incremental drivers of demand for high quality collateral inc

following: 

 New regulation could significantly increase pro-cyclical d

HQC (dynamic IM calculations for derivative clearing and pbilateral margin requirements)

Incremental HQC 

Demand1

1. Prudential Regulation 2. Market Regulation (Derivative Clearing) 3. Market Regulation (Bilateral Margin) 

=

+ +

+ Increased prudential liquidity requirements Increased IM requirements for cleared derivatives Increased IM requirements for non-cleared derivatives 

$1.0-2.5tt2 • $0.8-2.0tt (normal)3

• $1.8-4.6tt (stressed)3

• $0.8-1.2tt (normal)4• $1.8-4.1tt (stressed)4

1. Estimates only; market assumptions vary widely and a vast number of uncertainties make accurate quantification impossible; potential impacts are dire2. Sources: BIS, The Clearing House Organization3. Sources: TABB Group, ISDA, DTCC, CME, WFE4. Sources: ISDA

V

Total “phased-in” potential incremental HQC demand (normal market conditions): Total “phased-in” potential incremental HQC demand (stressed market conditions): 

Flows
High-Quality Collateral Demand – Prudential Regulation

Impact of Prudential Regulatory Requirements

 New prudential regulation requiring increased capital (primarily) 

increase the demand for cash and non-cash HQC

 Basel III (“B3”) Liquidity Coverage Ratio (“LCR”) requirem

most (first-order) impactful

 Cash and 0% RWA assets are (in most markets) efficient in m

requirements, and therefore will incrementally add to bank HQ

 Beyond first-order demand impacts, increasing prudential requirem

have follow-on credit / collateral creation effects 

 Banks less-willing to create risky assets under new prude

= pro-cyclical impact

1. Prudential Regulation

Sample Impact Estimation1 HQC Relevance Phase-In Period 

$1.0 – 2.5tt2

Mandatory increases in HQC 

holdings under B3 LCR 

requirements; can additionally 

limit new collateral / credit 

creation 

2013 – 2019

• Bank in

change

• Regula• LCR as

1. Estimates only; market assumptions vary widely and a vast number of uncertainties make accurate quantification impossible; potential impacts are dire2. Sources: BIS, The Clearing House Organization
High-Quality Collateral Demand – Derivative Clearing

Impact of Derivative Clearing Requirements

 Clearing of standardized derivatives will increase HQC Initia

(“IM”) requirements and preclude rehypothecation

 This will require “the system” to segregate HQC, el

its velocity entirely (i.e. precluding its re-use)

 Due to exchange risk netting and portfolio margining, IM req

will most affect large net-long or net-short standardized der

 Most-affected: ALM hedgers (insurance, pension, etc.)

(insurance); credit funds

 Least-affected: dealers, long / short single asset class 

2. Market Regulation (Derivative Clearing)

Sample Impact Estimation1 HQC Relevance Phase-In Period Un

• $0.8-2.0tt (normal)2• $1.8-4.6tt (stressed)2

Quantum of new IM and stringent 

eligible collateral requirements for 

IM and VM; pro-cyclical considering 

dynamic IM modeling

2013+ (USA)

2014+ (ROW)

• Regulation 

transaction exchange

• Eligible co• Derivative 

1. Estimates only; market assumptions vary widely and a vast number of uncertainties make accurate quantification impossible; potential impacts are dire2. Sources: TABB Group, ISDA, DTCC, CME, WFE
High-Quality Collateral Demand – Bilateral Margin

Impact of Bilateral Margin Requirements

 Bilateral margin requirements for non-centrally-cleared derivatives 

increased HQC IM requirements and preclude rehypothecation1

 This will further require “the system” to segregate HQC, e

its velocity entirely 

 During bilateral margin requirement phase-in, dealers will like

directly-affected than with clearing-related margin requiremenmismatches and inability to net – for example between (bilateand (exchange-cleared) swap hedges

 Most-affected: ALM hedgers (insurance, pension, etc.); VA he

(insurance); dealers (during phase-in period)

3. Market Regulation (Bilateral Margin)

Sample Impact Estimation2 HQC Relevance Phase-In Period U

• $0.8-1.2tt (normal)3• $1.8-4.1tt (stressed)3

Stringent Eligible Collateral 

requirements for IM and VM. 

Pro-cyclical impact considering 

dynamic IM modeling and 

thresholds

2015 – 20191

• Cleared 

expansi

• Eligible • Derivati

1. Note that IOSCO has only proposed its “near-final” requirements, i.e. international guidance on the rules and their regional implementation are not fina2. Estimates only; market assumptions vary widely and a vast number of uncertainties make accurate quantification impossible; potential impacts are dire3. Sources: ISDA
High-Quality Collateral Demand – Economic Uncertainty

Impact of Economic Uncertainty

 Flight-to-Quality (“FTQ”) flows may dominate in crisis when 

with the “new” pro-cyclical regulatory-driven HQC demand

 FTQ flows coupled with pro-cyclical regulatory-driven d

could amplify HQC scarcities at precisely the “wrong tim

 FTQ flows are event / scenario-specific, and therefore globa

quantitative estimates of hypothetical scenarios have little m

 Sample – between Q4 2007 and Q4 2012, FDIC-Insure

Commercial Banks and Savings Institutions increased HLiquid Assets (“HQLA”) by ~$1tt1

4. Economic Environment / Uncertainty

Sample Impact Estimation HQC Relevance Phase-In Period U

• Varies• Sample: HQLA increase of 

~$1tt at FDIC banks since Q4 20071

FTQ flows typically to HQC in 

distress / crisis – exacerbating 

potential HQC disequilibrium 

during those times

NA • All mark

1. Source: FDIC
II(b). Supply of Collateral
High-Quality Collateral – Supply Drivers Overview

Incremental HQC Supply Drivers

 HQC supply must be considered with reference to increme

of supply (primary issuance) and “new” restrictions on supp

 These new “restrictions” relate to lack of rehypothecatio

HQC to be posted to exchange or as bilateral margin re

 QE is a transformation of non-cash HQC to cash HQC

Incremental HQC 

Supply1

1. Primary Creation 2. Lack of Rehypothecation (cle

= High-quality collateral creation by AAA / AA sovereigns

+ Lack of rehypothecation 

Currently ~$2.0tt per annum2 • -($1.4 to 2.8tt) (normal)3, aft

• -($3.2 to 7.6tt) (stressed)3, a

1. The potential impacts are estimates only; market assumptions vary widely and a vast number of uncertainties make accurate quantification of incremen

2. Sources: IMF3. Sources: TABB Group, ISDA, DTCC, CME, WFE, IMF
High-Quality Collateral Supply – Primary Creation

Impact of Primary HQC Creation

 “Primary Creation” is AAA / AA net issuance created by the 

sector Includes AAA / AA sovereign and sovereign guaranteissuance, projected at $2.225tt for 20131 

 Once issued, assume 35% of this amount is re-use

average 2.5 times

2

 Note also that Primary Creation is of course not “increm

to new regulation, but is important nonetheless to frame potential impact of incremental HQC supply / demand d

 Primary HQC Creation is flexible (to a practical extent, i.e. n

deficits) and therefore a highly variable supply factor

1. “Primary Creation”

Sample Impact Estimation3 HQC Relevance Phase-In Period U

Currently ~$2.0tt per annum2

Increase in quantum of HQC 

supply irrespective of other 

incremental or transitory supply 

/ demand effects

NA

• Deficit r• Potentia• Regiona

(change

• Re-use 

1. Estimates include Japan, USA, France, Canada, UK, the Netherlands, Germany, Australia, European SSAs and other USD issuance (MBS, GSE, SSA2. Sources: IMF3. Estimates only; market assumptions vary especially in relation to public issuance and deficit policy, this impact can vary rapidly and significantly 
High-Quality Collateral Supply – Rehypothecation

Impact of Rehypothecation on Supply

 Derivatives clearing and bilateral margin requirements not only aff

demand, but because rehypothecation is precluded, it impacts sup

 HQC posted as IM to exchange by definition has a re-use pro

velocity of zero; this reduces (private sector) HQC “new” colla

 Consequently, there are dual pro-cyclical effects caused by IM req

derivative clearing and bilateral margining:

 Increased quantum of IM demand in volatile markets caused 

required dynamic IM margin models

 Decreased incremental supply caused by the “opportunity cos

additional, non-rehypothecable IM being posted to exchange

2. Lack of Rehypothecation (Clearing and Bilateral Margin)

Sample Impact Estimation1 HQC Relevance Phase-In Period U

• -($1.4 to 2.8tt) (normal)2• -($3.2 to 7.6tt) (stressed)2

No multiplicative effect of HQC 

lending-driven collateral 

expansion

2013+ (USA)

2014+ (ROW)

• Regulat• Eligible • Derivati• Clearing 

1. Estimates only; market assumptions vary especially in relation to public issuance and deficit policy, this impact can vary rapidly and significantly 2. Sources: TABB Group, ISDA, DTCC, CME, WFE, IMF
II(c). Supply and Demand Conclusions
Supply/Demand Conclusions

1. In non-stressed market environments, new regulatory requirelikely not create a macro shortage in HQC2. However, pro-cyclical demand for HQC in stressed markets cmajor macro market issues

 Incremental demand in stressed markets could approach 

considering clearing, bilateral margining, and FTQ flows

 This pro-cyclical impact will be greatest after “full phase-i

incremental regulation, i.e. 2020+

Incremental Aggregate HQC Demand 

Estimate by 2020 (“Normal Markets”)1

• Prudential Regulation: $1.0 to 2.5tt• Derivative Clearing: $0.8 to 2.0tt• Bilateral Margin: $0.8 to 1.2tt• Total: $2.6 to 5.7tt

Incremental Aggregate HQC Supply 

Estimate by 2020 (“Normal Markets”)1

• Primary Creation: $12tt+2• Rehypothecation Losses: -($1.4 to 2.8tt)• Total: $9.2-10.6tt
Supply/Demand Conclusions (con’t)

3. Certain market participants will be disproportionately-affected demand 

 Those with low HQC allocations and large net long or sho

portfolios (for example, insurers)

 Non-directional derivative users and dealers will likely be 

affected

4. Market development and financial innovation may help to fill 

HQC demand

 Collateral transformation, tri-party repo market developm

more custodial-held HQC assets, etc.
III. Policy and Macro Considerations
Policy Conclusion I: Collateral Cycles are Policy Re

Collateral moneyness is pro-cyclical, and has a major impact on demand and monetary equilibrium.  Policymakers must cautiously observe private shadow money 

during booms and busts 

 An asset which will not depreciate is good collateral, but marke

mistakenly make judgments of the likelihood of depreciation baextrapolating recent price trends rather than assessing historic

valuations.

 The moneyness of the stock of collateral is just as important o

amount of collateral or “usable collateral.”

 In a collateral shortage, some form of government or central b

would likely be needed to meet demand (e.g. Australia)
Household Money Demand and HELOCs

200300400500600700800

Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 D

HELOC Available Credit ($B) Household Money Balance(share of HH financial assets)

 As the moneyness of houses rose in the boom, households c

less cash. When moneyness fell, cash holdings rose abruptly

Source: Federal Reserve Flow of Funds, New York Fed
Measurement: Shadow Money

We define shadow money as the value of outstanding bonds timeminus the average repo haircut on those bonds.For example, a bond worth $100 with a 5% haircut is $95 of shadWe calculate public shadow money (treasuries, agencies, agencprivate shadow money (IG and HY corporates, non-agency MBSCMBS) using estimated average repo haircuts for each type of dPrivate shadow money grew sharply before 2007 but collapsed bin 2008 as haircuts rose, net issuance fell, and debt values slumrecovered with haircuts, but trend growth remains elusive. Public shadow money has grown sharply, reflecting large deficits public provision of safe liquid moneylike collateral. 
Private Shadow Money vs. Public Shadow Money

Source: The BLOOMBERG PROFESSIONALTM service; Thomson Reuters DataStream
US Money Stock Estimates

 Effective money = shadow money + M2. Broad concep

have grown modestly more than NGDP since the crisis

Source: The BLOOMBERG PROFESSIONALTM service; Thomson Reuters DataStream
G3+ 10yr Nominal Yield

1.52.53.54.55.56.57.5

Jan 93 Jan 95 Jan 97 Jan 99 Jan 01 Jan 03 Jan 05 Jan 07 Jan 09 

 Low long term interest rates hints that the demand for 

liquid assets remains strong and inflationary pressure low

Source: The BLOOMBERG PROFESSIONALTM service; Thomson Reuters DataStream
Policy Conclusion 2: Liquid Private Collateral is a G

(usually)

Private sector generation of moneylike collateral helps policymlong periods by:  Slowly reducing the demand for money Increasing financial deepening Supporting financial globalizationThe more restricted the private sector’s ability to create safe, moneylike collateral, the harder the public sector must work to through deficits and easy monetary policy. This too has risks!
US Financial and Government Debt

 When the private sector collateral generation broke, the public 

adjust. The sum of financial and government debt has an oddl

Source: Thomson Reuters DataStream, Federal Reserve Flow of Funds 
CLO Issuance and Spreads

 Securitization is an important technology for private sector co

creation. Its comeback has begun...

Source: Thomson Reuters DataStream, Federal Reserve Flow of Funds
Appendix Slides
Centrally-Cleared Trades Non-Centrally-Cleared 

Region US EMEA US 

Regulator(s) US Prudential (incl. CFTC, SEC)

EU Commission / Council, European 

Parliament ; European Supervisory 

Authorities, ESMA, EBA & EIOPA ; 

National Sec. & Banking Regulators

US Prudentials (OCC, Fed, FDIC, 

FCA, FHFA) 

Covered 

Entities

US Persons (Supra, End User 

Exemptions)

EU Financial counterparties; EU NonFinancial Counterparties exceeding 

threshold; Pensions exempt for 3y

Covered swap counterparties (enduser exemption char’s.) Al

exem

Timing Cat. 1 / 2 / 3 Phase-In (Mar-Sep 2013) Mid 2014 (some CCPs projecting earlier implementation) Unknown (likely before IOSCO) 2015 

(€1.5t

Covered 

Trade Scope

IRS, Basis Swaps, FRA, OIS, 

CDS (2013); more later

IRS, Basis Swaps, FRA, OIS, CDS 

(mid 2014); more later

All non-cleared swaps / security-based 

swaps for covered entities All no

IM Amount2 5d 99% VAR (dynamic, exchange- calc.) (~0.3-10.0% Notional) Follow Basel-IOSCO requirements: 5d 99.5% for OTC derivatives 2d 99.0% for Other Instruments • 10d 99% VAR (reg-approved); or • Standardized Schedule • 10

• St• Bo

IM Eligible 

Collateral

• Liquid collateral (cash / UST) 

given best terms

• Less liquid collateral limited / 

haircut

Cash, Financial Instruments, 

Commercial Bank Guarantee, Gold, 

Guarantee Issued by Central Bank

Cash, UST, GSEs

Dete

ex

sove

IM Treatment

• Bilateral, net (portfolio) basis• Segregated, not rehypothecated

• Bilateral, net (portfolio) basis• Segregated, not re-hypothecated• Agency concentration limits

• One-way (to covered swap entity) 

with varying thresholds

• Two-way bilateral (covered 

entities)

• Segregated, not re-hypothecated

• Bi• Se

VM Eligible 

Collateral • Cash, net basis Cash, net basis • Cash • UST 

VM Eligible 

Collateral

Treatment

• Bilateral, net (portfolio) basis• Re-hypothecation permitted

• Bilateral, net (portfolio) basis• Re-hypothecation permitted

• Bilateral, net basis• Re-hypothecation permitted

• Bi• Re

Bilateral Margin Requirements – Proposed Rules and Tim

Currently-Proposed Rules, Scope and Timing1

1. This is not meant as an exhaustive and “official” list of all new regulatory requirements. In fact, all information in this table is subject to change as reg

definitions, etc. are also fluid

2. In general, non-centrally-cleared amounts will be greater than analogous amounts for those for centrally-cleared amounts (net of thresholds)

3. Each January (starting 2015), 3m look-back on gross non-cleared derivative notional – if greater than threshold, new margin rules apply
Appendix – Centrally-Cleared IM Requirements

 Changes in the OTC derivative markets that result from Dodd-Frank 

regulation implementation will have a significant impact on those who use derivatives for investment or hedging purposes

 Beyond conduct and reporting rules, exchange clearing of 

standardized derivatives will play a major role in the new regulatory regime

 Mandatory clearing of many interest rate swaps, basis swaps, FRAs, 

overnight index swaps, and credit default swaps are scheduled to begin for certain participants in March of 2013

 One of the largest impacts to be felt once central clearing is enacted 

will be that generated from Initial Margin (“IM”) and Variation Margin (“VM”) requirements

 Many market participants unaccustomed to posting IM will now be 

forced to do so and may only use exchange-eligible collateral

 Additionally, while many large / active market participants already 

post VM, its composition for centrally-cleared transactions (cash only) may be vastly different from VM collateral composition in current bilateral OTC agreements

 Because IM will be based on the entire portfolio of counterparty 

transactions cleared on a specific exchange, offsetting transactions will reduce IM requirements based on the offsetting risks

 What this means is that those who typically carry derivative 

portfolios that are net long or net short for real business purposes (for example, ALM hedgers with net long positions) will be moreaffected by IM rules than those who may trade actively but in a tactical, offsetting fashion

Massive Market Changes to be Implemented

 IM requirements will change over time (

clearing counterparties methodologies) trailing 5-day VAR with a 99% confiden

Sources: CME and LCH; subject to change

Sample IRS IM Tables 

CME 

Currency Maturity Payer Receive

USD 2 0.39% 0.59% USD 5 1.41% 2.62% USD 10 3.09% 4.10% USD 30 9.56% 8.39% EUR 2 0.23% 0.32% EUR 5 1.00% 1.03% EUR 10 2.55% 2.25% EUR 30 9.97% 6.76% GBP 2 0.53% 0.60% GBP 5 1.16% 1.43% GBP 10 2.16% 2.28% GBP 30 6.37% 3.97% 

JPY 2 0.08% 0.08% JPY 5 0.25% 0.37% JPY 10 1.01% 1.17% JPY 30 6.06% 3.67% 
Appendix – Centrally-Cleared IM / VM Composition

 On top of the requirement for increased IM and standardized daily VM, central clearers must consider not just the requ

margin, but the relative stringencies applied to collateral-type eligibility and haircuts

 Most IM will need be composed of cash and high-grade government securities, while VM will need be composed of cash See below (and, more importantly, reference the footnote links to CME and LCH sample eligibility stipulations as requirem

been extremely fluid and remain subject to change and amendment)

Eligible Collateral Composition

CME1

Category 1

 Cash (USD, or 5% haircut on AUD / GBP / CAD / EUR / JPY / CHF) US Treasury bills / notes / bonds (0.5-6% haircut) Strips (11% haircut)

Category 2 (max 40% of core requirement)

 US Government Agencies (3.5-7.0% haircut) FNMA, FHLMC and GNMA MBS (11% haircut) TLGP Securities (10% haircut)

Category 3 (max if 40% of core requirement or USD 3bb)

 Gold (15% haircut) Foreign Sovereign Debt of Canada, France, Germany, Japan, Sweden 

and the United Kingdom (5.0%-10.5% haircut)

 Corporate Bonds (CME-approved, min A- rating, >USD 300mm 

outstanding, 20% haircut)

LCH2

 Cash (USD, GBP, EUR, CAD, CHF, JPY, SEK Government Securities of Australia, Austria, B

Denmark, Finland, France, Germany, Italy, JaNetherlands, Norway, Spain, Sweden, United States (0.1-13% haircut)

 US MBS (GNMA) (2.0-14% haircut) FNMA, FHLMC, FHLB (0.4% to 4.9% haircut) Euro Agencies (0.6-6.3% haircut) Government guaranteed bonds / CDs of Austr

Germany, Netherlands, Norway, Spain, SwedUnited States (0.1-2.9% haircut)

 Gold (14% haircut)

1. Source: CME. For additional details see http://www.cmegroup.com/clearing/financial-and-collateral-management/collateral-types-acceptedirs.html2. Source: LCH. For additional details see http://www.lchclearnet.com/risk_management/ltd/acceptable_collateral.asp
“There can be no doubt that besides the regular types of the 

medium, such as coin, notes and bank deposits, which are grecognised to be money or currency, and the quantity of whicregulated by some central authority or can at least be imaginregulated, there exist still other forms of media of exchange woccasionally or permanently do the service of money.Now while for certain practical purposes we are accustomed distinguish these forms of media of exchange from money prbeing mere substitutes for money, it is clear that, other things increase or decrease of these money substitutes will have exsame effects as an increase or decrease of the quantity of mand should therefore, for the purposes of theoretical analysisas money.”

Friedrich Hayek, Prices and Production 
Committee Charge 

Presentation to the Treasur

Potential Impacts of the Federal Reserve’s Exit Strategy on Treasu

We would like the Committee’s views regarding the expected timing of the Fede

strategy,” the steps that are expected to be taken, and any resulting impact on b

market and Treasury financing.
Presentation to TBAC

April 30th 2013
2

Executive summary: expect significant Treasury mark

● Treasury yield curve implies a very benign path of monetary tightening relative 

sector/FOMC forecasts 

● Treasury yields could reprice notably when the market is convinced that policy 

imminent 

● There is a risk that markets may overshoot to higher-than-fair yield levels due 

– Concerns about Fed portfolio unwind – Inadequate interest hedging in certain asset classes – Portfolio rebalancing by retail investors 
3

Executive summary: expect significant strain on public 

● Annual interest cost on public debt to increase more than 400% (from $205 bn 

bn in 2023) 

– Main driver : Increase in WAC from 1.7% to 4.3%– Secondary factor : ~ 65% increase in stock of debt

● Fed remittance decline is not likely to be dramatic

– assuming no asset sales, annual remittance rate to decline from $80 bn in 2012 to an a

2014 -2023 

– This is still higher than pre-2007 levels

● Fed asset sales have marginal effect on debt service and remittances. Relativ

– Total interest cost of public debt over 2014-2023 increases by $50 bn – Cumulative Fed remittances over 2014-2023 decline by $65 bn
4

Key recommendations

● Continue to extend the WAM of Treasury issuance as per current plan

● Assure markets of stable issuance pattern to prevent excessive build-up in ter

• Sharp increase in WAM will marginally increase cost of financing even assuming no c

forecasts

• The primary risk is for a significant increase in interest rates relative to our forecasts 
5

Agenda

● Market expectations of exit strategy● Implication of exit on rates markets● Implications of Fed exit for Treasury financing
6

Market expectations of exit strategy
7

Investor feedback suggest the following timeline...

● Q4 2013 : Fed begins to taper asset purchases● Q2 2014 : Fed stops asset purchases● Q2 2015 : Fed stops reinvesting paydowns● Q4 2015 : Fed starts increasing policy rate 

Notes: Based on investor surveys, Bloomberg Survey of Primary Dealers, April 23rd
8

0

50

100150200250300350400450

0 12 24 36 48 60 72 84 96 108 120

Months

Yield (bp)

Market forward curve Convexity adjusted Expected path of Fed Funds

Inferring the implied tightening path: deterministic rate 

Gradual pace of tightening starting 3 years out

Notes: Analysis date April 18th 2013. Instantaneous forward curve is inferred from constant maturity Treasury yields. Convexity 

current structure of short dated volatility. Convexity adjusted curve is adjusted lower to account for term premium. Term premiuestimates and adjusted for the current lower volatility structure (see appendix )
9

Constructing yield curves from probabilistic rate pathscurve is too high and steep

Avg. short rate (bp) Term premium & convexity adj. (bp) Model yield (%) Actual yield (%) Earliest hike (mo.) Median hike (mo.) Terminal rate (bp) 

Notes: Analysis date April 18th 2013. We assume equal probability for each hike date

0

50

100150200250300350400450

0 24 48 72 96 120

Months from current date

Fed Funds

Start hiking end 2014 Start hiking end 2015Start hiking end 2016 Average of possible rate paths

33%
10

Allowing a more uncertain tightening date flattens 5s1projected rates still too high

Avg. short rate (bp) Term premium & convexity adj. (bp) Model yield (%) Actual yield (%) Earliest hike (mo.) Median hike (mo.) Terminal rate (bp) 

0

50

100150200250300350400450

0 24 48 72 96 120

Months from current date

Fed Funds

Average of possible rate paths

20%

Notes: Analysis date April 18th 2013. We assume equal probability for each hike date
11

Lowering the terminal rate allows a better fit to 10-yea

Avg. short rate (bp) Term premium & convexity adj. (bp) Model yield (%) Actual yield (%) Earliest hike (mo.) Median hike (mo.) Terminal rate (bp) 

0

50

100150200250300350400450

0 24 48 72 96 120

Months from current date

Fed Funds

Average of possible rate paths

33%

Notes: Analysis date April 18th 2013. We assume equal probability for each hike date
12

A recipe for inferring market expectations of Fed tight

● Structure

– Par yields are a function of the Fed Funds rate path adjusted for term premium and con

– There is uncertainty as to the start of rate hikes and the terminal Funds rate

– Hiking cycle completed in three years

● We optimize over....

– The parameters of the probability distribution of first hike date (lognormal distribution)– The terminal Funds rate

● ....To fit the Treasury yield curve out to 10 years
13

Market pricing very delayed hiking cycle and 3.25% te

Analysis date April 18th 2013. We assume a 3-year hiking cycle and use historical term premium adjusted lower for current vola

estimate the probability of first hike date and terminal rate so as to fit the current Treasury curve out to ten years.

0.0%0.2%0.4%0.6%0.8%1.0%1.2%1.4%1.6%

0 12 24 36 48 60 72 84 96 108 120

Months until first rate hike

PDF

050100150200250300350

Short rate (bp)

Fitted lognormal pdf Average of possible rate paths

Avg. short rate (bTerm premium & convexity adj. Model yield (%) Actual yield (%) Mode hike date (Terminal rate (bp
14

Market implying benign tightening path relative to FOMC project

Source: Federal Reserve Economic Projections 20th 2013. Modeling methodology described in slide 12.

Fed projections – Rate hikes seen in 2015, terminal rate of 4%

Model output – most probable date of first hike is q1 2017, terminal rate of 3.25%

2y 5y 10y

Avg. short rate (bp) 25 42 121Term premium & convexity adj. (bp) 6 28 80Model yield (%) 0.32 0.67 1.79Actual yield (%) 0.23 0.69 1.70Mode hike date (months 48 (q1 2017)

Terminal rate (bp) 322
15

Implications of exit on rates markets
16

Baseline assumptions for rates scenarios

Notes: Parameter assumptions are consistent with the timeline suggested by investor surveys. By end 2013, the Fed has beguBy end 2014, the Fed is signaling an end to paydown reinvestment and markets price Fed tightening by end 2015. Structure of then similar to Q1 2010 when markets priced imminent Fed tightening.

Scenario date

Median time to first hike Terminal rate Volatility structure

Parameters consistent with April 18th market conditions q1 2018 3.25% current market levelsEnd 2013 q1 2017 3.60%

Average of current and Q1 2010

End 2014 q4 2015 4.00% Q1 2010End 2015 to End 2018

Deterministic rate path to terminal rate of 4% by end 2015. Q1 

2010 volatility structure. No asset sales.

Parameter assumptions used in yield curve projections
17

Expect sharp repricing as market adjusts expectations

012345

2y 10y 30y Maturity

Yield (%)

Current - 19 Apr 2013 2013 2014 2015 2018

Enpri20

Enrepbe

Entig

Notes: Yield curve scenarios are generated based on pricing assumptions described in slide 16 consistent with investor survey

generated based on the methodology described in slides 9 through 12.

Year Ended

10-year rate 

forecast (%)

Forward

Rate (%)

Differe

(bp

2013 2.76 1.99 772014 3.88 2.22 1662015 4.27 2.45 1822016 4.58 2.65 1932017 4.77 2.82 1952018 4.83 3.10 173
18

Unhedged interest rate risk may exacerbate increases
19

While traditional agency MBS convexity risk is muted.

● Post-Crisis mortgage convexity risks are muted due to

– Reduced refinancing efficiency (less duration extension in a sell-off)– Shifting ownership to non-hedgers, notably the Fed– The smaller share of MBS in the overall fixed-income market as Treasury issuance s

● This was confirmed in the 100bp backup in 10yr Treasury yields in 2010, wh

have near the convexity hedging participation as 2003

Notes: MBS duration calculations are from Yield Book. Fed, overseas investors, banks and money managers are deemed non

Asset price effe

Episode 10-yr tsy (bp)

MBS Index duration (yrs)

Duration of active hedgers ($bn 10-yr equiv)

Duration extension as % of FI universe duration

10-yr swap spread (bp)

1im(b

June 24th '03 to Aug 1st '03 131 2.7 470 12% 34 

April 18th (Hypothetical) 100 1.7 284 3% ? 

A large shift in portfolio duration (change)
20

...there is unhedged interest rate risk in non-agency M

● Over last several years, empirical 

duration of mortgage credit has been correlated Treasury yields –suggesting a negatively convexity price profile

● However, thus far mortgage credit 

convexity flows have not occurred 

● This is likely because most postcrisis investors in mortgage credit 

have not hedged interest rate exposure at all

-10

-8-6-4-2

02

Aug 08 May 09 Feb 10 Nov 10 Aug 1

Empirical Duration (in years)

10yr Treasury 3mo Emp D

4045505560657075

Aug 08 May 09 Feb 10 Nov 10 Aug 1

$Px of MBS Credit

10yr Treasury Price 

Notes: ABX prices are used to proxy for the non-agency mortgage universe. Empirical duration computed as regression of daily prices changes on 10-yr yield changes over trailing 3-month window
21

... and in corporate credit

0

200400600800

1,0001,2001,400

Apr-96 Apr-98 Apr-00 Apr-02 Apr-04 Apr-06 Apr-08 Apr-10 Apr-12

Spread to treasury (bp)

0.02.04.06.08.010.012.014.016.0

Yield to worst (%)

BB Spread to Tsy (bp) BB yield to worst (%)

Source: Yield Book.

– Limited room for High Yield spreads to compress further suggesting that i

rate risk is increasing 
22

The risk from reversal of retail fixed-income f
23

Fixed-income inflows outstrip equities post crisis

Source: ICI

Cumulative mutual fund inflows

-500.0

0.0

500.0

1,000.01,500.02,000.0

Jan96 Jul- 97 Jan- 99 Jul- 00 Jan- 02 Jul- 03 Jan- 05 Jul- 06 Jan- 08 Jul- 09 Jan- 11 Jul- 12

Inflows (billions 

Bond funds (less HY) Equity funds
24

Hot money outflows could strain spread product 

● Inflow pattern suggests ‘return 

chasing’ behavior among retail investors

● Mutual fund assets have increased 

dramatically relative to dealer risk provision

500

1,0001,5002,0002,5003,0003,500

Jan-2002 Jan-2003 Jan-2004 Jan-2005 Jan-2006 Jan-2007 Jan-2008 Jan-2009 Jan-2010 Jan-2

Retail assets in taxable fixed-income ($Primary dealer corporate bond inventor

Notes: Quarterly data since 1996 is sorted by prior quthe CITI BIG index into four quartiles. Source: ICI, Yie

Return quartile

Returns in 

prior quarter 

on CITI BIG 

Index

Net quarte

inflows in

taxable fixe

income

1 -0.7% 0.3%2 0.8% 2.7%3 2.3% 1.0%4 3.8% 2.7%

Source: ICI, Federal Reserve 
25

Implications of exit on Treasury financing cosFed remittances
26

Higher marginal cost of financing will raise the averag

Notes:. We use CBO budget deficit estimates out to 2023 as published on February 2013. We maintain the current proportion o(15%) and maintain the current issuance pattern in coupons. Financing costs differ marginally from CBO estimates because of d

assumptions (projections summarized on slide 17)

1

1.5

2

2.5

3

3.5

4

4.5

5

2013 2014 2015 2016 2017 2018 2019 2020 2021 202

WAC (%)

WAC of new issuance Average WAC
27

Higher interest rates mainly drive the higher financing 

0

2,0004,0006,0008,000

10,00012,00014,00016,00018,00020,000

2013 2014 2015 2016 2017 2018 2019 2020 2021 202

Debt outstanding (USD bn)

Total debt outstanding Total cost of financing (USD bn, RHS) Weighted average cos

Notes:. We use CBO budget deficit estimates out to 2023 as published on February 2013. We maintain the current proportion o(15%) and maintain the current issuance pattern in coupons. Financing costs differ marginally from CBO estimates because of d

assumptions (projections summarized on slide 17)
28

Fed treasury redemptions would increase auctions by 

0

500

1,0001,5002,0002,5003,000

2016 2017 2018 2019

Total issuance (USD bn)

Treasury redemptions in SOMA portfolioCoupon issuance if Fed reinvests Tsy redemptions

Notes:. We use CBO budget deficit estimates out to 2023 as published on February 2013. We maintain the current proportion o(15%) and maintain the current issuance pattern in coupons. 
29

Projected evolution of Fed Balance Sheet : assumptio

● Assets 

– QE expected to continue a current pace until end 2013– Fed stops reinvesting paydowns by end 2014– In “no asset sales” scenario

• Fed balance sheet allowed to run-off until it reaches trend level in 2022

• Trend defined as 2006 level, adjusted for nominal GDP growth (5% in 2013/2014 and 

– In “asset sales” scenario

• Approximately $100 bn/year in MBS sales from 2016 to 2020

• Capital losses on sales reflect projected yield curves described on slide 17• Fed balance sheet reached trend level by 2020

● Liabilities

– Non-interest bearing liabilities (currency, vault cash) reach trend level (see above) by 2– Residual financing needs are met by interest bearing instruments (excess reserves, rep

● Funding cost

– IOER projected to begin increasing by end 2015– Reaches terminal 4% rate by end 2018
30

Limited asset sales required to restore Fed balance sheet to tren

● Expected portfolio runoff and trend growth 

in balance sheet suggests Fed balance sheet to be at trend level by 2022 without asset sales

● $100 bn/year of asset sales starting 2016 

would restore trend level by 2020 (much lower than rate of purchases)

Fed: Total financial assets

0

500

1,0001,5002,0002,5003,0003,5004,0004,500

19961998200020022004200620082010201220

($ bn)

MBS Sales No Sales 

Notes: Trend level of balance sheet projected to norninal GDP with 2016 as start date. MBS preusing Yield Book prepayment model and yield csummarized on slide 17.
31

Fed selling worth an additional 10bp in 10s and 30s

Notes: We estimate sales of $100 bn/year of MBS from years 2016 through 2020. MBS sold have an average duration of 7 yeasales based on Fed estimates of effect of purchases ($500bn/year worth 50 bp on the 10-year rate).

1.5

2

2.5

3

3.5

4

4.5

5

5.5

2Y 5Y 10Y 30Y

Yield (%)

2015 yield curve, base case 2015 yield curve, Fed begins selling

2y 5y 10y 30y

Base case 1.74 3.42 4.27 4.90Fed selling 1.77 3.47 4.37 5.00

2015 Yield curve projections
32

Fed asset sales to marginally increase debt interest b

Source: CBO. We use CBO budget deficit estimates out to 2023 (February 2013 projections). We maintain the current proportiototal public debt (15%) and maintain the current issuance pattern in coupons. Financing costs differ marginally from CBO estimainterest rate assumptions (ours are detailed on slide 17). Fed selling projected to increases yields by around 10 bp at the 10-yea

0

100200300400500600700800900

1,000

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 

Financing cost (USD bn)

Base case financing costs Fed selling financing costs Cumulative additional co
33

High proportion of currency financing limits effective Fed funding 

Fed: effective cost of finan

0.0%0.2%0.4%0.6%0.8%1.0%1.2%1.4%1.6%1.8%

2013 2015 2017 2019 

Percent of non-interest bearing liabilities in Fed 

Balance Sheet

20%30%40%50%60%70%80%90%

100%

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

Notes: Trend level of Fed’s currency liabilities projected to increase at rate of norninal GDP (with 2006 as start date). Fed assets evolve as described in slide 29.Difference between assets and currency financing assumed funded by interest bearing instruments (excess reserves/repos/deposits)

Notes: The blended cost of Fed borrowing; cureserves/repos at IOER. IOER projected to bend of 2015 and rise to 4% by end 2018.
34

Asset sales reduce but not eliminate Fed remittances 

0

20406080

100120

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 202

Fed remittances to Treasury ($ bn)

No asset sales Asset sales

Notes: Based on assumptions stated on slide 28. Slide 29 describes evolution of Fed assets and slide 32 of Fed liabilities. Excefinancing costs are remitted to the Treasury.
35

Extending average maturity of issuance increases po

0%5%

10%15%20%25%

2y 3y 5y 7y 10y 30y TIPS

Current issuance WAM extension

Notes: CBO estimates of deficits and our rate forecasts on slide 17 to determine future financing costs.

60708090

100110120

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Weighted avg. maturity (months)

050100150200250300350400450

Weighted avg. coupon (bp)

New portfolio WAM (mos.) Base case portfolio WAM (mos.)New portfolio WAC (bp) Base case portfolio WAC (bp)
36

WAM extension more costly than current issuance pa

Notes: CBO estimates of deficits and our rate forecasts on slide 17 to determine future financing costs.

1

1.5

2

2.5

3

3.5

4

4.5

5

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

WAC of new issuance (%)

WAC of new issuance under maturity extension WAC of new issuance under current issuance

0

200400600800

1000

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Financing cost (USD bn)Total cost of financing under WAM extension Total cost of financing base case Cumulative cost
37

Appendix
38

Historical yield premium adjusted lower given muted v

0

20406080

100120140

0 24 48 72 96 120

Maturity (months)

Premium (bp)

Historical yield premium Applied yield premium

Analysis date April 18th 2013. Historical yield premium is based on yield spreads from zero coupon curve since 1971, adjusted 

Federal Reserve.