Pr

Treasury Borrowing Adv

U.S. Depa

Offic
Office of Debt Management

Volatility across credit market sectors continue 

5

10152025303540

Aug-06

Oct-06

1-Month TED (Treasury - Eurodollar) Spread

0.000.501.001.502.002.503.003.50

Aug-06

Sep-06

Nov-06

Dec-06

Feb-07

Mar-07

Apr-07

Jun-07

Jul-07

Aug-07

Oct-07

Nov-07

Jan-08

Feb-08

Mar-08

May-08

Jun-08

Asset Backed Commercial Paper Outstanding

 (SA, Bil$) 

500600700800900

1000110012001300

01-Oct-03W

24-Mar-04W

15-Sep-04W

09-Mar-05W

31-Aug-05W

22-Feb-06W

16-Aug-06W

07-Feb-07W

01-Aug-07W

23-Jan-08W

16-Jul-08W

Moody's Seasoned Baa/Aaa Corporate Bond Spread

0.751.001.251.501.75

Aug-06

Oct-06

Nov-06

Jan-07

Feb-07

Apr-07

May-07

Jul-07

Aug-07

Oct-07

Nov-07

Jan-08

Feb-08

Apr-08

May-08

Jul-08

3 Month L

0

20406080

100120

04/01/07

05/01/07

06/01/07

07/01/07

08/01/07

09/01/07

10/01/07

LIBOR - OIS Spread in bps
Office of Debt Management

But Treasury settlement fails have fallen from their A

Primary Dealer Treasury Security Settlem

Interest Rate Environment

0

50

100150200250300350

1/4/1995

7/4/1995

1/4/1996

7/4/1996

1/4/1997

7/4/1997

1/4/1998

7/4/1998

1/4/1999

7/4/1999

1/4/2000

7/4/2000

1/4/2001

7/4/2001

1/4/2002

7/4/2002

1/4/2003

7/4/2003

1/4/2004

7/4/2004

1/4/2005

7/4/2005

$ Billions

Weekly Effective Fed Funds Rate

Average Daily Fails to Receive

Source: FRBNY FR2004 Settlement Fails Data & FRB H.15
Office of Debt Management

The private sector continues to make progress on inTreasury security fails

Since the May refunding, SIFMA and the Treasury Mar(TMPG) jointly are addressing:

 Fails Best Practices: SIFMA/TMPG plan to issue a fina

August 2008.

 Fails Monitoring Committee: Operational in August 200

Practices are issued. 

 Mini-Closeout Provisions for the MRA: To be issued th

 SIFMA's buy-in procedures - Engaged in discussions w

new cash settlement feature. 

 Prompt Delivery Trading Practices and Negative Rate R

are available, but not used frequently. SIFMA plans 3 mrecommendations. 

 Fails Margining: Operationally possible for repos, but c

margining of cash fails. 
Office of Debt Management

From a fiscal perspective, borrowing requirements hthe beginning of the year

Fiscal Year to Date Deficits

(monthly data) 

-49

-80

-162

-258

-81

-148

-121

-157

-274

-163

-56

-154

-106

-88

-42

-122

-263

-350-300-250-200-150-100

-50

0

Oct-06

Nov-06

Dec-06

Jan-07

Feb-07

Mar-07

Apr-07

May-07

Jun-07

Jul-07

Aug-07

Sep-07

Oct-07

Nov-07

Dec-07

Jan-08

Feb-08

$ Billions

2007 2008 Y-O-Y % Change
Office of Debt Management

Year-over-year growth in receipts is weaker than last outlays continues

Individual and Corporate Tax Receipts 

Fiscal Year to Date

0

200400600800

10001200140016001800

Oct Nov Dec Jan Feb Mar Apr May Jun Jul 

$ billions

2004 2005 2006 2007 2008

4.9% 21.0% 17.2% 11.4% -4.3%

Year-Over-Year Growth in Cumulative

End of FY Q3

Individual and Corporate Tax Receipts 

Total Outlays

Fiscal Year to Date

0

500

10001500200025003000

Oct Nov Dec Jan Feb Mar Apr May Jun Jul 

$ billions

2004 2005 2006 2007 2008

6.7% 7.0% 8.8% 2.5% 6.6%

Year-Over-Year Growth in Cumulative Outlays 

End of FY Q3
Office of Debt Management

Withheld tax growth appears to be following trends i

Rolling 12-Month Growth Rates

-30%-20%-10%

0%

10%20%30%40%

Dec-81 Dec-84 Dec-87 Dec-90 Dec-93 Dec-96 Dec-99 Dec-02 D

Period ending

Corp Taxes WH Tax

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

-300-200-100

0

100200300400

Jan-03 Jun-03 Nov-03 Apr-04 Sep-04 Feb-05 Jul-05 Dec-05 May-06 Oct-06 Mar-07 

Monthly Change in Nonfarm Payrolls (LHS) Civilian Unemployme
Office of Debt Management

Primary Dealer Estimates for the FY 2008 deficit avervirtually unchanged from $414 billion in November 2

FY 08 Deficit Estimates 

Primary Dealers* 

Current: 413 

Range based on average absolute forecast error 375-451 

Estimates as of: July 08 

Note: Ranges based on errorsfrom2003-2007.* Primary Dealers reflect average estimate.
Office of Debt Management

Large SLGS redemptions increase marketable borrow

State and Local Governments (SLGS)

Calendar Year

-20-10

0

10203040

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 

$ Billions
Office of Debt Management

Since the beginning of FY2008, the Fed’s holdings of declined by $300 billion as new liquidity tools have b

S O M A H o ld in g s o f B ills , N o m in a l C o u p o n s a n d T IP S

$ 0

$100$200$300$400$500$600$700$800$900

12/18/2002

2/18/2003

4/18/2003

6/18/2003

8/18/2003

10/18/2003

12/18/2003

2/18/2004

4/18/2004

6/18/2004

8/18/2004

10/18/2004

12/18/2004

2/18/2005

4/18/2005

6/18/2005

8/18/2005

10/18/2005

12/18/2005

2/18/2006

4/18/2006

6/18/2006

8/18/2006

10/18/2006

12/18/2006

2/18/2007

W ee k E n din g

SOMA Portfolio (Billions)

T IP S ( M il, $ ) N o m in a l C o u p o n s (M il, $ ) B ills (M il, $ )

October November December January February March April May 

TAF 0 0 0 44 60 70 100 125 PDCF 0 0 0 0 0 23* 27 15 Discount Window 0 0 3 2 0 0 9 14 28-day RPs** 0 0 0 0 0 60 80 80 Authorized Currency Swaps 0 0 18 24 36 36 36 62 TSLF 0 0 0 0 0 0 118 128 

Total 0 0 21 68 96 189 370 424 

Outright Treasury Holdings 780 780 770 728 713 682 559 514 * 2-week average ** Outstanding end of month

Liquidity Tools

(Monthly Averages, $ Billions)

Federal Reserve Liquidity Tools and Oughtright Treasury Holdings
Office of Debt Management

Treasury has made over $90 billion in stimulus paym

$ billions

Cumulative 2008 Fiscal Stimulus Paymen

0

102030405060708090

100

4/22 5/6 5/20 6/3 6/17 7/1 7/15 7/29 8/12 8/26 9/9 9/23 10/7 1

$ billions

YTD 7/26: $93.7 billion

FY08: $95.7 B FY09

Total 
Office of Debt Management

Mitigating volatility in cash balances resulting from nredemptions, and other factors remains challenging

Treasury Daily Operating Cash Balanc

0

255075

100125150

Oct Nov Dec Jan Feb Mar Apr May Jun 

$ billions

Note: Data 
Office of Debt Management

Growth in marketable financing needs has led to incrcash management bills with some extending over fis

$ billions

Cash Management Bill Issuance

(FY 2006 - FY 2008)

FY08

0

50

100150200250300350

10/1 10/31 11/30 12/30 1/29 2/28 3/29 4/28 5/28 

$ billions
Office of Debt Management

In addition, nominal coupon security issuance has bresponse to borrowing needs

Coupon Issuance in 2007-2008

$10.00$15.00$20.00$25.00$30.00$35.00

4/2/2007

5/2/2007

6/2/2007

7/2/2007

8/2/2007

9/2/2007

10/2/2007

11/2/2007

12/2/2007

1/2/2008

2/2/2008

3/2/2008

Size of Last Offering (billions)
Office of Debt Management

The 2-year to 5-year sector continue to raise cash in 

borrowing needs

FY Cash Raised 2-Yr

(100)

(50)

-

50

100150

Oct-05 Oct-06 Oct-07 Oct-08

Billions of dollars

FY Cash Raised 

(150)(100)

(50)

-

50

100150

Oct-05 Oct-06 Oct-07 

Billions of dollars

FY Cash Raised 5-Yr

(50)

-

50

100150

Oct-05 Oct-06 Oct-07 Oct-08 Oct-09

Billions of dollars

FY Cash Raised 2-5 

(100)

(50)

-

50

100150

Oct-05 Oct-06 Oct-07 

Billions of dollars

Forecasts of cash raised in future months assume that offering amounts will remain the same 
Office of Debt Management

Note though that in FY 2009, maturing 3-yr notes and sizable redemptions

Coupons Maturing*

July 31, 2008-February 15, 2038

0

1020304050607080

31-JUL-2008

15-AUG-2008

31-AUG-2008

15-SEP-2008

30-SEP-2008

15-OCT-2008

31-OCT-2008

15-NOV-2008

30-NOV-2008

15-DEC-2008

31-DEC-2008

15-JAN-2009

31-JAN-2009

15-FEB-2009

28-FEB-2009

15-MAR-2009

31-MAR-2009

15-APR-2009

30-APR-2009

15-MAY-2009

31-MAY-2009

15-JUN-2009

30-JUN-2009

15-JUL-2009

31-JUL-2009

15-AUG-2009

31-AUG-2009

15-SEP-2009

30-SEP-2009

15-OCT-2009

31-OCT-2009

15-NOV-2009

30-NOV-2009

15-DEC-2009

31-DEC-2009

15-JAN-2010

31-JAN-2010

15-FEB-2010

28-FEB-2010

15-MAR-2010

31-MAR-2010

15-APR-2010

30-APR-2010

15-MAY-2010

31-MAY-2010

15-JUN-2010

30-JUN-2010

15-JUL-2010

15-AUG-2010

15-SEP-2010

15-OCT-2010

15-NOV-2010

15-DEC-2010

15-JAN-2011

15-FEB-2011

28-FEB-2011

31-MAR-2011

15-APR-2011

30-APR-2011

31-MAY-2011

30-JUN-2011

31-JUL-2011

15-AUG-2011

31-AUG-2011

30-SEP-2011

31-OCT-2011

30-NOV-2011

31-DEC-2011

15-JAN-2012

31-JAN-2012

15-FEB-2012

29-FEB-2012

31-MAR-2012

15-APR-2012

30-APR-2012

31-MAY-2012

30-JUN-2012

15-JUL-2012

31-JUL-2012

15-AUG-2012

31-AUG-2012

30-SEP-2012

31-OCT-2012

15-NOV-2012

30-NOV-2012

31-DEC-2012

31-JAN-2013

15-FEB-2013

28-FEB-2013

31-MAR-2013

15-APR-2013

30-APR-2013

15-MAY-2013

31-MAY-2013

30-JUN-2013

15-JUL-2013

15-AUG-2013

15-NOV-2013

15-JAN-2014

15-FEB-2014

15-MAY-2014

15-JUL-2014

15-AUG-2014

15-NOV-2014

15-JAN-2015

15-FEB-2015

15-MAY-2015

15-JUL-2015

15-AUG-2015

15-NOV-2015

15-JAN-2016

15-FEB-2016

15-MAY-2016

15-JUL-2016

15-AUG-2016

15-NOV-2016

15-JAN-2017

15FEB2017

$ Billions

10 YR IIS NOTE 10 YR NOTE 20 YR IIS BOND 3 YR NOTE 30 YR IIS BOND 5 YR IIS NOTE 

*Based on coupon securities outstanding as of July 31, 2008.
Office of Debt Management

Given Treasury’s financing needs in the coming ycurrent and medium-term trends in the economic the Committee’s thoughts on Treasury’s debt issuIn particular, we would like the Committee’s advicrecent adjustments to the financing schedule provsufficient debt management tools to handle a widbudgetary and financing outcomes, or if additionashould be considered.
Credit Market Conditions

Treasury Borrowing Advisory Com

Presentation to the U.S. Treasu

July 28, 2008
I. Funding Strains & Libor/OIS SpreadsII. Assessing the New Fed FacilitiesIII. Investor Activity
• I. Funding Strains & Libor/OIS Spr
Libor/OIS spreads

• Funding strains in Money Markets quickly escalated during August 2007 as interbank 

Bank demand for USD increased. 75bps of easing in the FF target level by Novembend funding pressure saw that narrowing reverse with Libor/OIS spreads reaching a 

• The introduction of TAF on Dec 12, 2007 quickly improved conditions as the market a

provided via the US TAF would ease funding strains into year-end. 

• A further increase in the size of TAF announced on January 4, 2008 sent spreads to 

however, disruption to global equity markets unwound this in January. 

• Since then, further TAF size increases and the introduction of the TSLF and PDCF h

premium in 1-month money, while 3-month money trades persistently in a 60-80bps s

• TAF and its subsequent increases appear to have had the largest impact on Libor/OI

monrh TAF would likely help to narrow the gap between 1-month and 3-month Libor.

Spot Libor / OIS spreads

0

20406080

100120

May-07 Jul-07 Sep -07 Nov-07 Jan-08 Mar-08 May-08

spread (bps)

Spot 3mL - Spot 3m OIS Spot 1mL - Spot 1m OIS

1 firse

3- frorepauc

4- au

5- 6- to 

1

34

5 6

2
Libor/OIS in Perspective

• While the volatility a

Libor/OIS swaps arstandards, it is difficexplanatory factor.

• Before the launch o

spread between 3-mmonth TSY repo exvariation in Libor/OIis even less correlain Libor/OIS spreaddynamic combinatiopressures, liquidity an embedded marka general preferenclending.

Libor/OIS in P ers pec tive

0

20406080

100120

Feb-02 Feb-03 Feb-04 Feb-05 Feb-06 Feb-07 Feb-08

spread (in bps)

Spot 3mL - 3m OIS Spot 1mL - 1m OIS

Libor/OIS, Funding & CDS

0

50

100150200

May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08

Value (bps)

Spot 3mL - 3m OIS 3mo mbs -tsy repo US Bank 5yr CDS

* Bank CDS index wtd avg of BOA, Citi, JP M Chase, Wacho via, Wells Fargo
• II. Assessing the New Fed Facil
Assessing TAF

• Early TAF results were w

trade much closer to inteMarch. At the same timefixing process understate

the interbank market westopped above 1-month 

7th. We think that the pre

stigma might have had a interbank market as bansecure money away from 

• On May 2nd, the size of 

150b from 100b, which rOIS and brought the bid

• Recent stability in clearin

the number of participati150b is an appropriate athe market at this time. month/3-month Libor indpremium for longer dated reduced by a longer teno

TAF Results

1.752.252.753.253.754.254.75

12/17/07

12/31/07

1/14/08

1/28/08

2/11/08

2/25/08

3/10/08

3/24/08

4/7/08

4/21/08

5/5/08

5/19/08

6/2/08

6/16/08

6/30/08

7/14/08

Rate (in %)

Min Bid Stop 1mo L fix Discount Rate

TAF Bid-to-Cover & Participating Institutions

0

0.5

1

1.5

2

2.5

3

3.5

12/17/07

12/31/07

1/14/08

1/28/08

2/11/08

2/25/08

3/10/08

3/24/08

4/7/08

4/21/08

5/5/08

5/19/08

6/2/08

6/16/08

6/30/08

7/14/08

Bid-to-Cover

0102030405060708090100

# Part. Inst.

bid:cover (LHS) # inst. (RHS) A uction Size (RHS)
Assessing TSLF

• The TSLF was not as pop

community as TAF was fogiven that TSLF is a collaless value-added vs. TAFmore restrictive and is an instead of cash.

• The amount of TSY in the 

via TSLF and the sterilizaplatforms (approx 430bn) tremendous amount.

• Overnight TSY repo had 

150bp spread to FF effeccheapened to 2-5bps by m

narrowed the funding sprclasses, which rendered t

• In late July, widening in th

the Schedule 1 TSLF garbecame an attractive met

1mo MBS vs 1mo TSY Repo

0

102030405060708090

Mar-08 Apr-08 May-08 May-08 Jun-08 Jul-08

spread (in bps)

1mo mbs - tsy repo

TSLF Bid-to-Cover

0

0.20.40.60.8

1

1.21.41.61.8

2

2.2

3/27/08

4/3/08

4/10/08

4/17/08

4/24/08

5/1/08

5/8/08

5/15/08

5/22/08

5/29/08

6/5/08

6/12/08

6/19/08

6/26/08

7/3/08

7/10/08

7/17/08

Schedule 1 bid:cover Schedule 2 bid:cover
The impact on TSY repo

• The cheapening of 

caused by the sterilliquidity platforms aTSLF decreased threpo. 

• The Fed’s outright s

disruption to relative near-term increased securities.

• As a result the num

special declined as SOMA borrowings, 20bn in both March continue to trade spends, but the increahas broadly cheape

Relative Value of TSYs

0123456

May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08

Rate (%)

1mo OIS 1mo tsy repo

SOMA Daily Borrowings (MM)

0

5,000

10,00015,00020,00025,000

Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08

amt (mm)

Daily Borrow ing Amount (MM)
Assessing the 28-day Repo Operatio

• The Fed’s 28-day 

operations continthan the Fed’s Scbecause primary to receiving cash 

• As the spread be

repo narrowed duof money bid for declined suggestconditions & liquiclasses was imprlatest GSE inspirhas made the 28attractive alternatfunding. 

1m o M B S vs 1m o TS Y R epo

0

102030405060708090

Mar-08 A pr-08 May -08 May -08 Jun-08 Jul-08

spread (in bps)

1mo mbs - tsy repo

28-day Single Tranche Repo Operations

0.000.501.001.502.002.503.00

Mar-08 Apr-08 May-08 Jun-08 Jul-08

Rate (in %)

0102030405060708090

$ amt in bn

Stop (LHS) 1mo OIS (LHS) $ bid for (RHS)
Assessing the PDCF

• The PDCF and Pri

Window borrowingthe dealer communimproving while the needs have stabiliz

• The introduction of 

immediate contracspreads in late Madown concerns conspreads widened oTAF size increase lasting impact on Lthe PDCF. Yet, it ithe presence of the prevented Libor/OIwidening back to th

Average Daily PDCF and Dis count Window Borrowings

05

10152025303540

3/26/08

4/2/08

4/9/08

4/16/08

4/23/08

4/30/08

5/7/08

5/14/08

5/21/08

5/28/08

6/4/08

6/11/08

6/18/08

6/25/08

7/2/08

7/9/08

7/16/08

7/23/08

$ amt in bn

PDCF Primary Credit Discount Window
Risk Premium in T-Bills and Repo

• The sterilization of the Fed’s liquidity platforms and th

TSLF have brought approximately 400bn in TSY sup

addition to this, Treasury issuance remains at record served to cheapen T-Bills and TSY repo dramatically and June (3-month T-Bills traded at a 12bp sprerepo at flat to OIS). 

• That being said, the most recent wave of flight-to-qua

of uncertainty over the GSE’s has seen T-Bills and THowever, we currently trade at levels far cheaper thaalso at levels that are not extremely rich versus 2006array of liquidity provisions that the Fed has instituted 

stabilize the market. Conditions generally feel better March despite the fact that the GSE issue has the polarger and more complicated in scope than the Bear 
Risk Premium in T-Bills and Repo

200300400500600700800900

Nov Dec Jan Feb 

Swap LinesPDCFTerm Auction Facility28-Day ReposOther Repurchase AgreeTSLF (Part of Securities 

Billions of dollars 

Source: Federal Reserve Board.

2007 2008

Securities Held Outright

• Where are the 

– YoY T– TSLF – Steriliz

TO

Regular Weekly T-Bill Outstanding (does not include CM Bills)

700800900

1000110012001300

Aug-06 Dec-06 Apr-07 Aug-07 Dec-07 Apr-08

amount (bn)

Regular Weekly T-Bill Outstanding

Relative Value of T-Bills & Tsy Repo vs OIS

-200-180-160-140-120-100

-80-60-40-20

0

Dec-05 Apr-06 Aug-06 Dec-06 Apr-07 Aug-07 Dec-07 Apr-08

spread (in bps)

 3mo T-Bill - 3mo OIS 3mo Tsy Repo - 3mo OIS
Demand for USD

• Lastly, the euro/

demonstrates thmeasures are heUSD financing mswap has tightenincreased in Mathe latest round in TSY. (This is which you can leat Libor flat – a nindicates stronge

1mo Euro / USD basis swap

-65-55-45-35-25-15

-5

5

15

Jul-06

Sep-06

Nov-06

Jan-07

Mar-07

May-07

Jul-07

Sep-07

Nov-07

Jan-08

Mar-08

May-08

Jul-08

basis (in bps)

1mo Euro / USD basis sw ap
• III. Investor Activity
Investor Activity : Repo

• The general trend has been for clients to assess thei

to act in a more deliberate, if not conservative, fashio

• In Repo, we have seen a variety of reactions from ou

» Business as usual» Execution of term repo to capture larger sp» Shortening repo duration» Shying away from certain asset types» Increasing haircuts on certain asset types
Issues Surrounding Tri-Party Repo

• In our opinion, the recent concern over the potential for t

systemic failure is a bit misplaced as a sensible approacpractices for liquidity management’ would counter-act th

• The main issue is that the tri-party clearing agents bear 

against their clients which could cause problems if one ounable to roll their funding or if one of the agents themseliquidity problem. 

• This implies that the issue can be resolved if the clearing 

their analysis of and willingness to provide intra-day cred

• Assessing the Net-Free Equity position of a client, hair-c

the collateral type and credit quality of the counterpart, amaturity dates (i.e. staggering maturities across various 

the risks that the clearing agents are assuming.

• The benefits of the financing liquidity provided by the tri-

maintained and safe-guarded by employing a conservatmanagement.
Investor Activity : T-Bills

• In T-Bills, we saw flight-to-qua

including Central Banks, MonCorporations. As cash poureallocated to All-Government Fvs. OIS last August. As All-Grecord levels, a significant bid 

• The sterilization of the Fed’s L

issuance began to weigh on tTSY repo cheapened the negalso a driving force behind theabsorbed the supply increase renewed flight-to-quality buyinpreferred to invest in 3-month their WAMs between 35 – 40 trade cheaper vs. OIS. Duratnew 1yr T-Bill to be largely deinterest. 

• Re-distribution of Money Fund 

and TSY issuance levels will valuations going forward. In abacking of GSE debt could ca

Discount Notes could drive prThe final theme that is likely t

will be TSY buy-backs. If the platforms the T-Bill market wibuy-backs. 

T-Bills & Tsy Repo vs OIS in Perspective

-200-180-160-140-120-100

-80-60-40-20

0

Dec-05 Apr-06 Aug-06 Dec-06 Apr-07 Aug-07 Dec-07 Apr-08

spread (in bps)

 3mo T-Bill - 3mo OIS 3mo Tsy Repo - 3mo OIS

Money Fund Assets 

250750

125017502250

May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08

size (bn)

Govt Funds Prime Funds *Prime Funds include holdings of ABCP, TSY, 

Repo, time deposits, dom. & for. obligations, 

CP and FRNs
Investor Activity : Discount Notes

• The ongoing theme i

year was supply as FFHLMC all reached rFHLB issuance rose increasing RMBS funsheet constraints. 

• In May, 3-month and 

cheapened 30bps vsuncertainty over the substantial widening 

• Very recent indicatio

Government backing prompted Dealers, MBanks to buy; tightenbeen difficult to place have seen better issAs such, the Agencieaccumulating larger 

Agency Discount Note Outstandings

100150200250300350400450

Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08

Size (bn)

FHLB FNMA FHLMC

Agency Discount Note Spreads vs. OIS

-5

5

15253545556575

5/5/08 5/19/08 6/2/08 6/16/08 6/30/08 7/14/08

Spread in Bps

6 Month 3 Month
Investor Activity : Credit

• The defining theme in credit has been spread widening 

In 1yr paper, top-tier banks now trade as much as 75bnames (L+25 vs. L+100). Many investors went through building and reducing their ‘approved lists’ while generover financials. 

• Securities Lenders with SIVs exposure are maintaining 

compensate for potential withdrawals. This has shifted into 1-month and shorter investments. As the 2- and 3extra funding demand rolled down the curve to meet smthereby widening spreads. 

• As we look forward, expanding ‘approved lists’, increas

back to focusing on returns will help to normalize short
Investor Activity : Credit

Weekly Outstandings : AA 

A

0

200400600800

10001200

May-07 Jul-07 Sep-07 No

size (bn)

AA Non-Financial 

 Credit Differentiation Amongst Industrials: 

Spread Between A1/P1 Non-Financials and A2/P2 Non-Financials

0

20406080

100120140160

Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08

Spread in bps 

1mo A2/P2 Non-Fin - 1mo A1/P1 Non-Fin

Financial, Non-Financial, and Asset-Backed CP 

Spreads to 1mo Libor

-100

-80-60-40-20

0

20406080

100120

Aug-07 Oct -07 Dec-07 Feb-08 Apr-08 Jun-08

Spread in bps to 1mo L

1mo AA Non-Financial CP 1mo AA Financial CP 1mo ABCP

Tier-1 vs Tier-2 W

0

200400600800

100012001400160018002000

May-07 Jul-07 Sep-07 No

Size (bn)

Tier-1 CP (
Conclusions

• Increasing TAF to 150bn narrowed the 1-month Libor/O

approximately 40bps; stabilizing 1-month spreads and a 3-month TAF would likely facilitate tightening in 1-mospreads and 3-month Libor/OIS.

• Liquidity in T-Bills and TSY repo has improved dramati

months, in large part due to the increase in supply. 

• In addition, a decline in the volatility of the daily Fed Fu

also made it easier to price OIS based money-market pTSY repo.

• A gradual shift towards a focus on returns will further n

In the meantime, the Fed’s new facilities, their sterilizat

T-Bill issuance have all helped to bring needed stability risk-free assets: T-Bills and TSY repo. 
TIPS and Inflation Trends

Treasury Borrowing Advisory Com

Presentation to the U.S. Treasu

July 28, 2008
Headline CPI, y oy

01234567

1988 1993 1998 2003 2008

Core 

Housing 

Medical Care Education and communication 

Food and beverages 

Energy 

-40%-20%

0%

20%40%60%80%

Jul 93 Jul 96 J

S&P GSCI 

Commodity prices have increased significantly ove

bringing headline inflation to a pace last seen in 

Crude oil and gold prices 1-year rolling percentage chang

Headline yoy CPI-U nsa (%)

Components of headline CPI versCPI yoy

0

20406080

100120140160

Aug 93 Aug 96 Aug 99 Aug 02 Aug 05 Aug 08

020040060080010001200

Gold

Crude Oil
02468

1012

1978 1985 

Impact on inflation expectations 

(% points)

Driver Chg in driver 1Y forward 5Y forwardOil price 10% 0.08 0.00Realized inflation (yoy) 1% point 0.43 0.08

Survey based inflation measures are surging, but 

that these measures are more reactive than 

1- and 5-year University of Michig

 Near term inflation expectations have historically increased as realized infla

prices have risen

 Long term forward survey based inflation expectations are sticky, reacting to 

...

 ... but eventually rise 1-for-1 with near term inflation expectations The University of Michigan 5-year forward inflation expectations lagged the 1

the way up as well as down in the 1980 experience, but reached similar peak 

1-year and 5-year Univ. of Michigan inflation expectations regressed against realized yoy headline CPI over past year and 6-month percentage change in oil prices
4%6%8%

10%12%14%16%

1998 2000 20

Nominals

02468

10

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

1.0%1.5%2.0%2.5%3.0%3.5%

Av g daily trading v olume, $bn

TIPS traded v olume as % ofdebt oustanding

TIPS trading volumes versus nominals

Average daily trading volume in TIPS ($bn) versus daily trading volume as percentage of TIPS outstanding

* 2008 numbers till May

Source: SIFMA

Average daily trading volume outstanding (Right axis) versnominals as percentage of no

 Trading volumes in TIPS seem to have reached a plateau, despite a contin

in the size of the market indicating that TIPS is more of an investor’s martrader’s market

 Daily turnover in the TIPS market as a percentage of total outstandings is 

approximately 13% that of nominals
Inflation linked market landscape

60708090

100110120130140150

Jul 07 Oct 07 

5s/20s breaOil prices

 TIPS allow investors to diversify inflation risk in 

their fixed income portfolios 

 Additionally, the TIPS curve allows investors to 

express views on realized inflation as well as longer term inflation expectations

 The key residual risk in TIPS is illiquidity and 

associated premiums

TIPS have not realized the same benefit of flight to quality that nominal Treasuries have

 Private issuers have not embraced inflation linked 

funding due to lack of depth in demand and FAS 133-related issues

 TIPS can help reduce Treasury borrowing costs, 

especially in an environment where inflation expectations increase

 Diversifies the investor base for Treasuries

5s/20s par breakeven curve 

Liquidity premium** in TIPS 

** we use the TIPS asset-swap 

asset swap spread differentPositive number denotes coversus nominals, assuming 

0

1020304050607080

2004 2005 

5-y ear10-y ear20-y ear
-30-25-20-15-10

-5

05

1015202530

1997 1999 2001 2003 

Adjusted ex cess TIPS 

ex pense 

0

20406080

100120140

Jan-97 Jul-98 Jan-00 Jul-01 Jan-03 Jul-04 Jan-06 Jul-07

Cumu. nominal ex penseCumu. TIPS ex pense

The aggregate cost of the TIPS program has increas

primarily because realized inflation has been higher 

Estimated cumulative expense till July 2008 on all TIPS issued ($bn) versus estimated cumulative expense if similar maturity nominals had been issued instead ($bn)

Estimated excess cumulative expensversus nominals ($bn, left axis) versexpense/ total TIPS expense by year 

Estimated annual expense on TIPS versus nominals as attributed to liquidity* and the difference between realized inflation and inflation expectations ($bn)

Estimated cumulative excess expennominals that may be attributed to TIPS and the difference between rebreakevens

* We use the TIPS asset-swap spread versus maturity matched nominal asset swap spread differential at time of issue as a metric for the liqu

we use the 2004-2008 average for asset swap differential. ** 2008 numbers have been calculated through July 15, and are not annualized. 

Inflation v s. 

ex pectations

78%

-9-8-7-6-5-4-3-2-1

012

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Inflation v s. breakev ensEx cess liquidity cost

 **
0%5%

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

<2y 2y to 5y 5y to 1

0%5%

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

<2y 2y to 5y 5y to 1

Maturity profile of the TIPS market versus 

Current maturity profile of TIPS versu

Projected* maturity profile of TIPS ver($bn)

* Assuming that the Treasury keeps current issuance calendar unchanged, but increases size of the 2-year nominal auction by $1bn, 5and 30-year by $1bn. Sizes are assumed to be unchanged for TIPS. 

Average and standard deviation of auction tails since 2006 by maturity ($bn)

 A balance of nominal and TIPS issuance should, in 

the long run, reduce Treasury’s borrowing costs

The maturity profile of TIPS issuance should approximate that of nominals, and it currently largely does

 Auction statistics suggest that demand for 20-year 

TIPS is driven by a small number of investors and it would be difficult to significantly increase borrowing at the long end of the TIPS curve

0.00.51.01.52.02.53.03.54.0

5 YR 10 YR 20 YR

Av erage tailStandard dev iation