Office of Debt Manageme

Fiscal Year 2013 Q1 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%

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

S11

Year over Year % Change

Quarterly Tax Receipts

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

 -

 20 40 60 80

 100 120

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

$ bn

Monthly Receipt Levels

(12-Month Moving Average)

Individual Income Taxes Corporation Income Taxes Social Insurance Taxes Other
 -

 50

 100 150 200 250

HHS

SSA

Defense

Treasury

Agriculture

Labor

VA

Transportation

OPM

$ bn

Ten Largest Outlays

FY 2012 Q1 FY 2013 Q1
-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

$ 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
FY 2013-2015 Deficits and Net Marketable Borrowing Estimates 

Primary Dealers1 CBO2 

FY 2013 Deficit Estimate 929 971 FY 2014 Deficit Estimate 790 741 FY 2015 Deficit Estimate 692 524 FY 2013 Deficit Range 843-1,037FY 2014 Deficit Range 639-950FY 2015 Deficit Range 402-850FY 2013 Net Marketable Borrowing Estimate 951 FY 2014 Net Marketable Borrowing Estimate 822 FY 2015 Net Marketable Borrowing Estimate 715 FY 2013 Net Marketable Borrowing Range 810-1,100FY 2014 Net Marketable Borrowing Range 645-1,050FY 2015 Net Marketable Borrowing Range 436-950Estimates as of: Jan-13 Jan-13 1Based on primary dealer feedback on January 28, 2013. Estimates above are averages. 2Table 1 from "An Update to the Budget and Economic Outlook: Fiscal Years 2012 to 2022" and changes

from the "H.R. 8, American Taxpayer Relief Act of 2012"

3Table S-5 and S-14 of the "Fiscal Year 2013 Mid-Session Review Budget of the US Government"CBO: see Budget and Economic Outlook: An Update
OMB’s Projection

Projections are from Table S-14 of the “Fiscal Year 2013 Mid-Session Review 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

Fiscal Year

Budget Surplus/Deficit

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

Financing
Sources of Financing in Fiscal Year 2013 Q1

*Includes $1.3 bn in SOMA redemptions.

Beginning Cash Balance 85 Issuance Gross Maturing Net Gr

Ending Cash Balance 93 4-Week 505 505 0 5

Subtotal: Funding from Drawdown of Cash (7) 13-Week 416 408 8 4

26-Week 364 359 5 3

Net Bill Issuance 13 52-Week 75 75 0 7

Net Coupon Issuance 282 CMBs 105 105 0 1

Subtotal: Net Marketable Borrowing 295* Bill Subtotal 1,465 1,452 13 1,4

Net Required Funding for FY 2013 Q1 288

Issue Gross Maturing Net Gr

2-Year 140 146 (6) 1

3-Year 96 124 (28) 95-Year 140 63 77 17-Year 116 0 116 1

10-Year 66 18 48 630-Year 42 0 42 4

5‐Year 5-Year TIPS 14 0 14 110‐Year 10-Year TIPS 13 0 13 130‐Year 30-Year TIPS 7 0 7 

Coupon Subtotal 634 352 282 6

Total 2,099 1,804 295 2,0

Coupon Issuance

October-December 2012 October-December 2012 

Bill Issuance

October-December 2012 
Sources of Financing in Fiscal Year 2013 Q2

Assuming Constant Issuance Sizes as of 12/31/2012

*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, as of 12/31/2012, constant for all Bills securities while maintaining the same issuance size and pattern f

Coupon and TIPS securities.

Net Required Funding for FY 2013 Q2 394 Issuance Gross Maturing Net 

4-Week 520 520 (0) 

Met with: 13-Week 416 416 0 

26-Week 364 360 4 

Beginning Cash Balance 93 52-Week 75 77 (2) 

Treasury Annouced Estimate: Ending Cash Balance* 30 CMBs 0 0 0 

Subtotal: Funding from Drawdown of Cash 63 Bill Subtotal 1,375 1,373 2 

Assuming Constant Issuance Sizes as of 12/31/2012**:

Net Bill Issuance 2

Net Coupon Issuance 187 Issue Gross Maturing Net 

Subtotal: Net Marketable Borrowing 189 2-Year 70 73 (3) 

3-Year 96 127 (31) 

Treasury Announced Estimate: Net Marketable Borrowing* 331 5-Year 70 33 37 

Implied: Increase In FY 2013 Q2 Net Issuances 142 7-Year 58 0 58 

10-Year 66 19 47 30-Year 42 0 42 

5‐Year 5-Year TIPS 0 0 0 10‐Year 10-Year TIPS 28 0 28 30‐Year 30-Year TIPS 9 0 9 

Coupon Subtotal 439 252 187 

Total 1,814 1,625 189 

Coupon Issuance

January-March 2013 January-March 2013 

Bill Issuance

January-March 2013 
1,158

803

736

749

696 657

684 699

723

(200)

0

200400600800

1,0001,200

2013

2014

2015

2016

2017

2018

2019

2020

2021

$ bn

Fiscal Year

OMB's Projections of Borrowing from the Public 

Primary Deficit Interest Other Data Labels: Annual Change in

Debt Held by Public

OMB’s projections of borrowing from the public are from Table S-5 and S-14 of the “Fiscal Year 2013 Mid-Session Review BudgeGovernment.” Data labels represent the change in debt held by the public in $ billions. “Other” represents borrowing from the p

provide direct and guaranteed loans, in addition to TARP activity. Data labels represent the annual change in debt held by the pu

Data Labels: Annual Change in Debt Held by the Public

FY 2013 ‐ 2022 Cu

$ bn 

Primary Deficit 1,160 

Interest 5,284 Other 1,212 Total 7,656
1

1.5

2

2.5

3

3.5

4

4.5

5

5.5

2013

2014

2015

2016

2017

2018

2019

2020

2021

10-Year Nominal Treasury Rate, %

Fiscal Year

Interest Rate Assumptions

Implied 10-Year ForwardTreasury Rates as of 12/31/2012

OMB as of June 2012

OMB’s economic assumption of the 10-Year Treasury rate is from Table 2 of the “Fiscal Year 2013 Mid-Session Review Budget of Government.” The implied 10-Year forward Treasury rates are the average of the four quarter-ends for each fiscal year.

10-Year Treasury Rate, 1.758%, as of 12/31/2012
(500)

0

500

1,0001,5002,000

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

$ 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 12/31/2012 and estimated projections of the Large Scale Asset Purchase program announced o

by the Federal Reserve assumed to last for about 1 year. This assumption is based on the Federal Reserve’s most recent primary d

Assumes issuance sizes for Bills, Nominal Coupons and TIPS are unchanged from 12/31/2012 levels, along with SOMA reinvestprincipal 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-14 of the “Fiscal Year 2013 Review Budget of the 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.

783 1,786 1,482 1,104 1,114 929 748 629 660 498 632 552 371 
Portfolio & SOMA holdings as of 12/31/2012 and estimated projections of the Large Scale Asset Purchase program announced o

by the Federal Reserve assumed to last for about 1 year. This assumption is based on the Federal Reserve’s most recent primary dAssumes issuance sizes for Bills, Nominal Coupons and TIPS are unchanged from 12/31/2012 levels, along with SOMA reinvestprincipal 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-14 of the “Fiscal Year 2013 Review Budget of the US Government.” * Details for Fiscal Year 2013 is in the Appendix.

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

2008 532 106 105 40 7832009 503 732 512 38 1,7862010 (204) 869 782 35 1,4822011 (311) 576 751 88 1,1042012 139 148 737 90 1,1142013 13 90 720 107 929 2014 0 (5) 672 81 748 

2015 0 (92) 641 80 629 2016 0 91 498 71 660 2017 0 101 327 70 498 2018 0 160 391 81 632 2019 0 170 304 78 552 2020 0 63 266 43 371 2021 0 9 274 13 295 2022 0 3 283 (3) 283 
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 

Portfolio & SOMA holdings as of 12/31/2012 and estimated projections of the Large Scale Asset Purchase program announced o

the Federal Reserve assumed to last for about 1 year. This assumption is based on the Federal Reserve’s most recent primary deamatch 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-14 of the “Fiscal Year 2013 MidBudget of the US Government.” The principal on the TIPS securities were accreted to each projection date based on market ZCIS 

scenario does not represent any particular course of action that Treasury is expected to follow. Instead, it is intended to demonstr

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

64.8 months on 12/31/2012

5(Hfr
0

2468

101214161820

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

$ tr

End of Fiscal Year

Recent and Future Maturity Profile, $ Trillion

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

Portfolio & SOMA holdings as of 12/31/2012 and estimated projections of the Large Scale Asset Purchase program announced o

the Federal Reserve assumed to last for about 1 year. This assumption is based on the Federal Reserve’s most recent primary deamatch 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-14 of the “Fiscal Year 2013 MidBudget of the US Government.” The principal on the TIPS securities were accreted to each projection date based on market ZCIS 

scenario does not represent any particular course of action that Treasury is expected to follow. Instead, it is intended to demonstr

trajectory of average maturity absent changes to the mix of securities issued by Treasury. See table on the following page for detaMaturity distribution by original issuance type and term can be found in the appendix (slide 45).
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 3,039 1,524 1,176 2,026 1,424 1,165 1,331 12014 3,154 1,573 1,470 2,207 1,419 1,152 1,534 12015 3,204 1,876 1,450 2,340 1,545 1,180 1,677 12016 3,406 1,901 1,674 2,462 1,547 1,215 1,848 142017 3,533 2,081 1,669 2,590 1,589 1,290 2,037 142018 3,713 2,190 1,709 2,699 1,658 1,324 2,184 152019 3,715 2,242 1,892 2,737 1,794 1,479 2,364 12020 3,880 2,407 1,861 2,910 1,806 1,477 2,629 12021 4,041 2,384 1,991 3,038 1,849 1,538 2,905 12022 4,018 2,532 2,157 3,128 1,954 1,544 3,220 1

Recent and Future Maturity Profile, $ Billion

Portfolio & SOMA holdings as of 12/31/2012 and estimated projections of the Large Scale Asset Purchase program announced o

the Federal Reserve assumed to last for about 1 year. This assumption is based on the Federal Reserve’s most recent primary deamatch 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-14 of the “Fiscal Year 2013 MidBudget of the US Government.” The principal on the TIPS securities were accreted to each projection date based on market ZCIS 

scenario does not represent any particular course of action that Treasury is expected to follow. Instead, it is intended to demonstr

trajectory of average 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 45).
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

End of Fiscal Year

Recent and Future Maturity Profile, Percent

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

Portfolio & SOMA holdings as of 12/31/2012 and estimated projections of the Large Scale Asset Purchase program announced o

the Federal Reserve assumed to last for about 1 year. This assumption is based on the Federal Reserve’s most recent primary deamatch 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-14 of the “Fiscal Year 2013 MidBudget of the US Government.” The principal on the TIPS securities were accreted to each projection date based on market ZCIS 

scenario does not represent any particular course of action that Treasury is expected to follow. Instead, it is intended to demonstr

trajectory of average maturity absent changes to the mix of securities issued by Treasury. See table on the following page for detaMaturity distribution by original issuance type and term can be found in the appendix (slide 45).
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% 52011 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 26.0% 13.0% 10.1% 17.3% 12.2% 10.0% 11.4% 42014 25.2% 12.6% 11.7% 17.6% 11.3% 9.2% 12.3% 42015 24.1% 14.1% 10.9% 17.6% 11.6% 8.9% 12.6% 42016 24.2% 13.5% 11.9% 17.5% 11.0% 8.6% 13.1% 42017 23.9% 14.1% 11.3% 17.5% 10.7% 8.7% 13.8% 42018 24.0% 14.2% 11.0% 17.4% 10.7% 8.6% 14.1% 42019 22.9% 13.8% 11.7% 16.9% 11.1% 9.1% 14.6% 42020 22.9% 14.2% 11.0% 17.1% 10.6% 8.7% 15.5% 42021 22.8% 13.4% 11.2% 17.1% 10.4% 8.7% 16.4% 42022 21.7% 13.6% 11.6% 16.9% 10.5% 8.3% 17.4% 4

Recent and Future Maturity Profile, Percent

Portfolio & SOMA holdings as of 12/31/2012 and estimated projections of the Large Scale Asset Purchase program announced o

the Federal Reserve assumed to last for about 1 year. This assumption is based on the Federal Reserve’s most recent primary deamatch 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-14 of the “Fiscal Year 2013 MidBudget of the US Government.” The principal on the TIPS securities were accreted to each projection date based on market ZCIS 

scenario does not represent any particular course of action that Treasury is expected to follow. Instead, it is intended to demonstr

trajectory of average 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 45).
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 Q1 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 0.104 4.2 499.0 68.1% 9.2% 22.7% 3.3 Bill 13-Week 0.094 4.5 405.2 69.3% 8.0% 22.7% 7.0 Bill 26-Week 0.139 4.8 351.3 59.7% 7.4% 32.9% 6.0 Bill 52-Week 0.173 5.0 74.4 55.7% 10.8% 33.5% 0.5 Bill CMBs 0.152 5.0 105.0 76.0% 11.8% 12.2% 0.0 

Coupon 2-Year 0.271 3.8 139.0 44.9% 26.9% 28.2% 0.6 Coupon 3-Year 0.355 3.6 95.6 51.5% 23.2% 25.3% 0.1 Coupon 5-Year 0.708 2.9 139.8 41.3% 18.1% 40.6% 0.1 Coupon 7-Year 1.150 2.7 115.9 42.5% 19.5% 38.0% 0.1 Coupon 10-Year 1.676 2.9 65.9 38.7% 26.0% 35.3% 0.1 Coupon 30-Year 2.876 2.6 42.0 48.7% 15.4% 35.9% 0.0 

TIPS 5-Year (1.496) 2.7 14.0 40.4% 10.7% 49.0% 0.0 

TIPS 10-Year (0.720) 2.5 13.0 41.3% 10.4% 48.3% 0.0 TIPS 30-Year 0.479 2.8 7.0 37.7% 13.2% 49.1% 0.0 

Total Bills 0.117 4.6 1,434.9 66.3% 8.7% 25.0% 16.7 

Total Coupons 0.894 3.1 598.2 44.2% 21.9% 33.8% 1.0 

Total TIPS (0.793) 2.7 33.9 40.2% 11.1% 48.7% 0.1 
1.5

2

2.5

3

3.5

4

4.5

5

5.5

6

Dec-02

Dec-03

Dec-04

Dec-05

Dec-06

Dec-07

Dec-08

Dec-09

Dec-10

D11

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

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

Dec-11

Mar-12

Jun12

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

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

Dec-11

Mar-12

Jun12

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

Dec-00

Dec-01

Dec-02

Dec-03

Dec-04

Dec-05

Dec-06

Dec-07

Dec-08

Dec-09

Dec-10

Bid-to-Cover Ratio

Bid-to-Cover Ratios for TIPS

10-Year (6-month moving average) 5-Year 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

65.0%

Other Dealers

& Brokers

8.3%

Investment

Funds

13.4%

Foreign &

International

10.1%

Other

3.2%

Investor Class Auction Awards: Bills

Fiscal Year 2013-Q1
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

-3%-2%-1%

0%1%2%3%4%5%

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

FY 2012-Q4 less Previous 4 Quarters Most Recent Quarter (FY 2013-Q1)

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

43.9%

Other 

Dealers

& Brokers

9.0%

Investment

Funds

30.0%

Foreign &

International

16.2%

Other

0.9%

Investor Class Auction Awards:

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

Fiscal Year 2013-Q1

Oth

Deal

& Bro

7.2

Investment

Funds

37.9%

Foreign &

International

12.5%

Other

0.7%

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

-15%-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

FY 2012-Q4 less Previous 4 Quarters Most Recent Quarter (FY 2013-Q1)

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

FY 2012-Q4 less Previous 4 Quarters Most Recent Quarter (FY 2013-Q1)

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

40.1%

Other Dealers

& Brokers

2.1%

Investment

Funds

47.1%

Foreign &

International

10.3%

Other

0.4%

Investor Class Auction Awards:

TIPS

Fiscal Year 2013-Q1
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

-6%-4%-2%

0%2%4%6%8%

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

FY 2012-Q4 less Previous 4 Quarters Most Recent Quarter (FY 2013-Q1)

less Previous 4 Quarters
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

Monthly Private Award ($bn)

Total Foreign Awards of Treasuries at Auction, $ Billion

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

Foreign includes both private sector and official institutions.
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

% 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

% 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

% 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

% 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

% 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 12/31/2012 and estimated projections of the Large Scale Asset Purchase program announced o

the Federal Reserve assumed to last for about 1 year. This assumption is based on the Federal Reserve’s most recent primary deamatch 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-14 of the “Fiscal Year 2013 MidBudget of the US Government.” The principal on the TIPS securities were accreted to each projection date based on market ZCIS 

scenario does not represent any particular course of action that Treasury is expected to follow. Instead, it is intended to demonstr

trajectory of average maturity absent changes to the mix of securities issued by Treasury. See table on the following page for deta
End of Fiscal Year Bills 2-, 3-, 5-Year Nominal Coupons 7-, 10-, 30-Year Nominal Coupons Total Nominal Coupons TI

pr

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 13.9% 36.1% 42.0% 78.0% 2014 13.0% 33.9% 44.8% 78.7% 2015 12.3% 31.7% 47.3% 79.1% 2016 11.6% 31.0% 48.5% 79.5% 2017 11.0% 30.8% 49.0% 79.8% 2018 10.5% 30.5% 49.4% 79.9% 2019 10.0% 30.4% 49.6% 80.0% 2020 9.6% 30.4% 50.0% 80.4% 2021 9.2% 30.5% 50.4% 80.9% 2022 8.8% 30.4% 51.1% 81.5% 

Recent and Future Portfolio Composition by Issuance Type, P

Portfolio & SOMA holdings as of 12/31/2012 and estimated projections of the Large Scale Asset Purchase program announced o

the Federal Reserve assumed to last for about 1 year. This assumption is based on the Federal Reserve’s most recent primary deamatch 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-14 of the “Fiscal Year 2013 MidBudget of the US Government.” The principal on the TIPS securities were accreted to each projection date based on market ZCIS 

scenario does not represent any particular course of action that Treasury is expected to follow. Instead, it is intended to demonstr

trajectory of average 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 A

Ons ($ b

4‐Week 10/4/2012 0.100 3.86 39.76 71.5% 9.7% 18.8% 0.24 0.00 4‐Week 10/11/2012 0.115 4.17 39.75 69.9% 6.6% 23.5% 0.25 0.00 4‐Week 10/18/2012 0.125 4.01 39.68 67.6% 10.3% 22.1% 0.22 0.00 

4‐Week 10/25/2012 0.125 4.46 39.65 74.0% 11.9% 14.1% 0.25 0.00 

4‐Week 11/1/2012 0.130 5.23 24.69 47.7% 11.3% 41.0% 0.16 0.00 4‐Week 11/8/2012 0.120 4.73 39.65 62.4% 9.3% 28.3% 0.25 0.00 4‐Week 11/15/2012 0.145 4.14 39.61 56.3% 7.2% 36.5% 0.25 0.00 4‐Week 11/23/2012 0.155 4.12 39.55 73.6% 7.4% 19.1% 0.31 0.00 4‐Week 11/29/2012 0.175 4.32 38.76 76.0% 14.6% 9.3% 0.25 0.00 

4‐Week 12/6/2012 0.060 4.08 39.66 66.3% 6.7% 27.0% 0.24 0.00 

4‐Week 12/13/2012 0.050 4.64 39.76 54.2% 10.8% 35.0% 0.24 0.00 

4‐Week 12/20/2012 0.015 3.99 39.67 82.5% 7.4% 10.1% 0.33 0.00 

4‐Week 12/27/2012 0.045 3.80 38.77 76.4% 6.6% 16.9% 0.26 0.00 

13‐Week 10/4/2012 0.085 4.63 31.16 65.8% 7.1% 27.1% 0.66 0.00 13‐Week 10/11/2012 0.100 4.55 31.11 58.9% 8.4% 32.7% 0.62 0.00 13‐Week 10/18/2012 0.105 4.61 31.16 62.2% 9.3% 28.5% 0.63 0.00 13‐Week 10/25/2012 0.100 4.69 31.25 71.8% 7.1% 21.1% 0.65 0.00 13‐Week 11/1/2012 0.125 4.36 31.43 65.3% 8.1% 26.7% 0.42 0.00 13‐Week 11/8/2012 0.105 4.56 31.37 76.0% 6.9% 17.1% 0.43 0.00 13‐Week 11/15/2012 0.105 4.33 31.19 67.1% 5.9% 27.1% 0.56 0.00 13‐Week 11/23/2012 0.090 4.73 31.29 70.9% 7.7% 21.5% 0.51 0.00 13‐Week 11/29/2012 0.100 4.59 30.62 67.2% 8.4% 24.4% 0.44 0.00 13‐Week 12/6/2012 0.090 4.39 31.31 78.1% 7.2% 14.6% 0.49 0.00 13‐Week 12/13/2012 0.090 4.63 31.41 83.6% 10.3% 6.0% 0.49 0.00 

13‐Week 12/20/2012 0.040 4.44 31.37 71.2% 9.1% 19.7% 0.53 0.00 

13‐Week 12/27/2012 0.085 4.06 30.52 62.0% 8.5% 29.5% 0.53 0.00 26‐Week 10/4/2012 0.135 4.79 26.46 58.5% 7.9% 33.7% 0.59 0.00 26‐Week 10/11/2012 0.145 4.68 26.94 70.4% 8.2% 21.4% 0.66 0.00 26‐Week 10/18/2012 0.150 5.00 26.79 55.5% 7.8% 36.7% 0.61 0.00 26‐Week 10/25/2012 0.150 4.73 27.06 71.6% 7.8% 20.6% 0.57 0.00 

26‐Week 11/1/2012 0.160 4.44 27.66 65.6% 4.8% 29.7% 0.34 0.00 

26‐Week 11/8/2012 0.150 4.76 27.19 57.5% 7.9% 34.6% 0.36 0.00 26‐Week 11/15/2012 0.145 4.98 27.13 49.3% 7.6% 43.2% 0.42 0.00 26‐Week 11/23/2012 0.135 4.91 27.32 64.0% 6.2% 29.8% 0.38 0.00 26‐Week 11/29/2012 0.145 4.94 26.68 65.1% 7.2% 27.7% 0.34 0.00 26‐Week 12/6/2012 0.140 5.17 27.06 56.2% 10.0% 33.8% 0.44 0.00 

26‐Week 12/13/2012 0.135 5.05 27.17 59.8% 8.7% 31.4% 0.43 0.00 26‐Week 12/20/2012 0.090 4.75 27.31 56.6% 8.4% 35.0% 0.44 0.00 26‐Week 12/27/2012 0.130 4.50 26.56 45.7% 3.6% 50.6% 0.44 0.00 52‐Week 10/18/2012 0.180 4.86 24.86 48.2% 8.1% 43.7% 0.14 0.00 52‐Week 11/15/2012 0.180 5.08 24.73 61.2% 8.6% 30.2% 0.18 0.00 52‐Week 12/13/2012 0.160 4.96 24.86 57.9% 15.5% 26.6% 0.15 0.00 

CMBs 11/8/2012 0.125 4.72 25.00 87.3% 10.9% 1.8% 0.00 0.00 CMBs 11/15/2012 0.190 4.69 25.00 72.0% 14.7% 13.4% 0.00 0.00 CMBs 11/23/2012 0.155 5.23 20.00 70.6% 4.4% 25.1% 0.00 0.00 

CMBs 12/6/2012 0.165 5.11 25.00 65.7% 18.1% 16.2% 0.00 0.00 CMBs 12/14/2012 0.090 5.62 10.00 94.2% 5.8% 0.0% 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)

SOMA A

Ons ($ b

2‐Year 10/1/2012 0.273 3.60 34.73 55.3% 17.5% 27.2% 0.17 0.00 

2‐Year 10/31/2012 0.295 4.02 34.73 28.3% 38.2% 33.5% 0.16 0.00 2‐Year 11/30/2012 0.270 4.07 34.75 41.9% 23.6% 34.4% 0.15 0.00 2‐Year 12/31/2012 0.245 3.59 34.78 53.9% 28.4% 17.7% 0.12 0.00 3‐Year 10/15/2012 0.346 3.96 31.87 48.7% 22.5% 28.8% 0.03 0.00 3‐Year 11/15/2012 0.392 3.41 31.86 52.7% 22.3% 25.1% 0.04 0.00 3‐Year 12/17/2012 0.327 3.36 31.87 53.3% 24.8% 21.9% 0.03 0.00 5‐Year 10/1/2012 0.647 3.06 34.98 47.2% 10.7% 42.0% 0.02 0.00 5‐Year 10/31/2012 0.774 2.73 34.96 42.2% 15.5% 42.3% 0.04 0.00 

5‐Year 11/30/2012 0.641 2.89 34.97 38.8% 15.9% 45.4% 0.03 0.00 

5‐Year 12/31/2012 0.769 2.72 34.93 37.2% 30.4% 32.4% 0.02 0.00 7‐Year 10/1/2012 1.055 2.61 28.99 48.1% 17.0% 34.9% 0.01 0.00 7‐Year 10/31/2012 1.267 2.56 28.94 43.7% 18.0% 38.2% 0.01 0.00 7‐Year 11/30/2012 1.045 2.81 28.99 41.2% 19.7% 39.1% 0.01 0.00 7‐Year 12/31/2012 1.233 2.72 28.97 37.0% 23.1% 39.9% 0.03 0.00 

10‐Year 10/15/2012 1.700 3.26 20.99 35.7% 22.9% 41.4% 0.01 0.00 10‐Year 11/15/2012 1.675 2.59 23.97 46.2% 14.1% 39.7% 0.03 0.00 10‐Year 12/17/2012 1.652 2.95 20.98 33.1% 42.7% 24.2% 0.02 0.00 30‐Year 10/15/2012 2.904 2.49 12.99 59.3% 14.2% 26.5% 0.01 0.00 30‐Year 11/15/2012 2.820 2.77 15.98 42.1% 12.4% 45.4% 0.02 0.00 30‐Year 12/17/2012 2.917 2.50 12.99 46.1% 20.3% 33.7% 0.01 0.00 

Issue Settle Date

Stop Out

Rate (%)*

Bid‐to‐Cover

Ratio*

Competitive

Awards ($ bn)

% Primary

Dealer* % Direct* % Indirect*

Non‐Competitive

Awards ($ bn)

SOMA A

Ons ($ b

5‐Year 12/31/2012 (1.496) 2.70 13.98 40.4% 10.7% 49.0% 0.02 0.00 

10‐Year 11/30/2012 (0.720) 2.52 12.98 41.3% 10.4% 48.3% 0.02 0.00 30‐Year 10/31/2012 0.479 2.82 6.99 37.7% 13.2% 49.1% 0.01 0.00 

Nominal Coupon Securities

TIPS
Conditions	in	the	Primary	an

Secondary	Housing	Financ

Markets
We	would	like	the	Committee	to	comment	on	current	c

in	the	primary	and	secondary	financing	markets	for	hocredit.		Please	identify	and	discuss	any	barriers	or	hurimpede	the	availability	of		credit	within	these	marketssteps	can	the	banking	industry,	regulators,	and/or	poltake	to	assure	that	the	availability	of	credit	to	this	marcontinues	to	improve?

Treasury Borrowing Advisory Committee Quarte

February 2013 Charge Question #2

Mortgage and Housing Market Conditio
I. General	Macro	and	Market	Conditions

– Housing	market	improving,	rate	levels	down	and	stock	market	recovering

II. Relative	Asset	Prices

– Mortgage	securities	richer,	Treasuries	cheaper,	high‐grade	and	high‐yield	corporates	richer

III. Secondary	Mortgage	Market

– Secondary	market	liquid	and	functioning	well

IV. Primary	Market	

– After	initially	widening,	the	primary	secondary	spreads	are	trending	tighter

V. Capacity	Issues	

– Industry	faces	challenges	to	expansion	due	to	capacity

VI. Policy/Regulatory	Issues	

– Sheer	volume	and	depth	of	proposals,	bills	and	changes	in	regulations	have	created	significan

Summary
• Home	sales	continue	to	rise,	with	some	supply	limitations	

now	apparent;	buyer	traffic	is	strong,	and	residential	investment	has	risen	for	6	consecutive	quarters

• Home	prices	are	now	up	7.6%	year	over	year• An	index	of	home	affordability	remains	close	to	its	all‐time	

high,	reflecting	still	low	home	prices	and	very	low	mortgage	rates

I. General Macro and Market Conditions : Housing Market Improving
• Following	a	6‐quarter,	24%	decline	of	$16.2	trillion,	

household	net	worth	has	rebounded	strongly,	primarily	reflecting	higher	stock	and	bond	valuations

• Owners’	equity	in	real	estate,	which	fell	$7.3	trillion,	

or	54%	from	its	2006Q1	peak,		remains	$3.2	trillion	below	its	pre‐recession	level	in	Q3	2007

• Equity	valuations	have	regained	more	than	80%	of	

their	$11.1	trillion	decline,	while	valuations	of	deposits,	credit	instruments	and	other	financial	assets	are	near	all‐time	highs

I. General Macro and Market Conditions : Household Net Worth Rising
I. General Macro and Market Conditions : Select Interest Rates

• Generally,	Libor	swap	rates	are	higher	and	credit	

spreads	tighter

• Mortgage	yield	near	2.5%• S&P	500	creeping	back	toward	record	levels
• In the following analysis, there are several events studied. The critical dates are:

• November 25, 2008: FOMC Announces QE1• March 18, 2009: FOMC Expands MBS Program to $1.25TN and $300BN Treasuries

• August 27, 2010: 2010 Jackson Hole Economic Symposium• November 3, 2010: FOMC Announces QE2• September 13, 2012: FOMC Announces QE3

II: Relative Asset Prices: Event Study Analysis
II: Relative Asset Prices: Treasuries & Mortgage Spreads
II. Relative Asset Prices: Corporate
• Equity	market		traded	sideways	after	QE3	

announcement,	but	has	recently	appreciated	sharply	as	the	economy	and	housing	gather	momentum

• QE1	in	late	2008	may	have	forestalled	equity	slide.			

Equities	rose	significantly	after	2009	and	2010	announcements	(QE1X	and	QE2)

• The	S&P	500	has	appreciated	during	each	of	the	

Fed’s	QE	programs,	although	many	factors	are	at	work.			Index	now	within	4%	of	record	levels

II. Relative Asset Prices: Equities
III. Secondary Mortgage Market: Secondary Mortgage Yield vs. Comparable Amorti• Mortgage	yields	are	very	tight	against	zero	volatility	amortizing	bond• Overall,	MBS	have	richened	in	response	to	the	latest	Fed	action,	with	few	signs	of	excessive	market	str

CMM:		Yield	of	MBS	at	parZVCC:	Par	rate	for	an	amortizing	bond	with	cash	flows	comparable	to	a	par	mortgage	along	the	forwar
III. Secondary Mortgage Market: MBS Market Summary• Agency	MBS	richened	significantly	in	response	to	Chairman	Bernanke’s	Jackson	Hole	speech	and	the	s

announcement	of	QE3,	despite	the	fact	that	they	were	already	at	relatively	tight	levels	

• This	supports	the	view	that	valuations	are	being	driven	by	stock	rather	than	flow	effects
• Higher	coupon	TBAs	have	underperformed	relative	to	FN	3s	since	Jackson	Hole

III. Secondary Mortgage Market: MBS Coupon Performance
• FNCL	3	and	3.5	rolls	showed	some	signs	of	stress	in	the	weeks	following	the	September	FOMC	announ

specialness	remains	elevated

III. Secondary Mortgage Market: MBS Dollar Rolls
• Intraday	volatility	is	now	at	or	below	pre‐Jackson	Hole	levels

III. Secondary Mortgage Market: MBS Volatility and Transactions Costs Impacts

• Similarly,	dealer	estimated	mortgage	transaction	costs	were	elevated	following	the	September	FOMC	anno

since	returned	to	pre‐ Jackson	Hole	levels

Transaction Costs

Bid‐Offer Spread in Ticks for 1 Billion Production Coupon FNCL TBA Outright

Month	Prior	To	Jackson	

Hole

Week	following	Jackson	

Hole

Week	following	9/13	

FOMC	Announcement 10/16/2012 1/14/2013

Min 1.0 1.0 2.0 1.0 1.3Median 1.5 2.0 3.0 2.0 1.5Average 1.4 1.8 2.9 2.0 1.6Max 2.0 2.5 4.0 3.0 2.0

Source: Multiple Dealers
• MBS	volumes	increased	after	the	September	FOMC	announcement	but	have	since	returned	to	normal	l

• Volume	in	FN	3s	now	exceeds	FN	3.5	volume

III. Secondary Mortgage Market: MBS Volumes Impact

• Volume	and	

specified	pooappear	to	haimpacted	by	

Source: BAC

Val

Month Sum Jun 66Jul 62Aug 66Sep 67Oct 73Nov 80Dec 55Jan 70Total 54Spec BalanceAuctioned by aOriginators (m
• Mortgage	fails	increased	during	the	summer,	but	have	not	shown	any	additional increase since	the	Fed

well	below	the	peak	levels	of	2010‐2011

III. Secondary Mortgage Market: MBS Fails
IV. Primary Market: Housing Affordability Indicators

• Traditional	affordability	measures	show	improvement	across	the	board• Housing	sentiment	is	improving,	rates	are	at	historic	lows,	standards	loosening	and	lower	home	prices	rising)
• Primary	and	secondary	market	rates	have	continued	to	trend	downward;	ticking	up	slightly	post	year‐

IV. Primary Market: Primary and Secondary Market Rates

PCC:	Primary	current	coupon	for	a	purchase	money	borrower	with	70LTV	and	750	FICO	for	a	30	day	lockCMM:		Yield	of	MBS	at	par

Source: Internal 

1.5002.0002.5003.0003.5004.0004.5005.0005.5006.0006.500

RA

TE

Mortgage Market Rates

CF30 Median Purchase PCC Delivery CMM
• Lower	rates	resulted	in		increase	in	lock	

volume	

• Mortgage	Application	index	spiked	in	

late	Sep	2012

• Downturn	in	lock	volume	in		late	Dec	

2012	due	to	holiday	season

IV. Primary Market: Post QE3 Impact on Mortgage Applications & Locks
IV. Primary Market: Primary & Secondary Mortgage Spreads• The	September	2012	FOMC	announcement	initially	

pushed	spreads	to	a	new	post‐crisis	high,	but	they	have	since	retraced	their	gains

• Primary	rates	have	fallen		at	a	slower	pace	than	secondary	

since	the	second	half	of	2011,	and	may	have	neared	a	natural	floor
IV. Primary Market: Mortgage Originations

• Market	is	dominated	by	refinance	volume.	Refinance	volumes	are	over	70%	of	total	originations• Majority	of	new	originations	volumes	are	Fixed	Product• Purchase	index	is	near	7	year	lows• Freddie	‘s	outlook	shows	the	mortgage	market		will	continue	to	be	dominated	by	GSEs.	• FHA	will	continue	to	play	a	role	in	origination	market

0

1020304050607080

0

100200300400500600700800900

1,000

Mar‐05

Sep‐05

Mar‐06

Sep‐06

Mar‐07

Sep‐07

Mar‐08

Sep‐08

Mar‐09

Sep‐09

Mar‐10

Sep‐10

Mar‐11

Sep‐11

Mar‐12

Sep‐12

Mar‐13

PercentRefi's

Purchase and Refi Originations

Purchase Originations (Bil $'s, LHS) Refi Originations (Bil $'s, LHS)Percent Refis (RHS)

Source: Haver ‐ MBA

*Grey	line	in	above	charts	represents	break	between	actual	vs.	forecasted	numbers
IV. Primary Market: Refinance vs. Purchase Spread

• Rates	charged	for	Refinance	borrowers	are	higher	than		rates	charged	for	purchase	borrowers

0.0000.0500.1000.1500.2000.2500.3000.3500.4000.4500.500

1/4/2010

2/4/2010

3/4/2010

4/4/2010

5/4/2010

6/4/2010

7/4/2010

8/4/2010

9/4/2010

10/4/2010

11/4/2010

12/4/2010

1/4/2011

2/4/2011

3/4/2011

4/4/2011

5/4/2011

6/4/2011

7/4/2011

8/4/2011

9/4/2011

10/4/2011

11/4/2011

12/4/2011

1/4/2012

2/4/2012

3/4/2012

4/4/2012

5/4/2012

6/4/2012

7/4/2012

8/4/2012

9/4/2012

10/4/2012

11/4/2012

CF30 Median Refi PCC vs CF Median Purch PCC

Purchase	PCC:	Primary	current	coupon	for	a	purchase	money	borrower	with	70LTV	and	750	FICO	for	Refi PCC:	Primary	current	coupon	for	a	refinance	borrower	with	70LTV	and	750	FICO	for	a	30	day	lock
• Times	to	Close	extended	consistently	from	2011• Based	on	latest	data	(Source:	Ellie	Mae)	as	of		Dec	2012,	refinance	

application	on	an	average		took		57	days	to	close	and	purchase	application	took	51	days	to	close.	

• MBS	Issuances	trend	post	2009,	indicates	industry	capacity	is	

approaching	the	$150B	per	month	high	water	mark

• It	is	clear	that	the	originator’s	capacity	would	be	tested	at	these	

levels	if	rates	remain	low	and	HARP	2.0	volume	remains	consistent	over	2013

V. Capacity Issues

0

102030405060

08‐2011

09‐2011

10‐2011

11‐2011

12‐2011

01‐2012

02‐2012

03‐2012

04‐2012

05‐2012

Days

Ellie Mae MortgageOriginations ‐ Time to Clo

Refinance Pu
Freddie Mac Repurchase Request Tre

• Elevated	Underwriting	Standards	– Review	of	new	GSE	

originations	indicate	a	strong	shift	towards	lower	LTV	and	higher	FICO	borrowers;	3Q	12	YTD	LTV		increase	reflects	HARP	2

• Negative	Equity	‐ Surge	in	refinancing	under	to	HARP	2	for	

underwater	borrowers	indicates	a	pool	of	borrowers	who	were	otherwise	ineligible	for	refinance.

• Put	back	Risks	‐ Growing	repurchase	demand	from	GSEs	

has	forced	lenders	to	be	extra	cautious	with	quality	of	borrowers	and	the	collaterals	of	new	originations

• Production	Capacity	– Capacity	may	continue	to	be	less	

scalable,	due	to	protracted	training	regimen	associated	with	stronger	underwriting

V. Capacity Issues: Other Factors Affecting Primary Market

1 New business is defined as issuance of MBS/PC plus purchases of whmortgage-related securities. 2 Refer to sources for Alt-A definitions. 

Source:	www.freddiemac.com/investors/pdffiles/investor‐pre3	Repurchase	requests	outstanding	more	than	four	months	inc

requests	for	which	appeals	were	pending.
VI. Policy/Regulatory Issues

• There	is	a	vast	array	of	policy	and	regulatory	changes	in	progress	that	will	affect	the	future	of	the	hous• QM	and	the	Ability‐to‐Repay	Final	Rule	was	released	January	10,	2013

•The	CFPB	QM	“Ability	To	Repay”	(ATR)	standard		promotes	prudent	underwriting	and	encourage•Whole‐loan	and	Securitization	markets	expect	improved	liquidity	and	execution	efficiency	as	a	reimplementation	•Clarity	around	CFPB	QM/Non	QM	capital	requirements	per	Basel	III	will	further	encourage	a	robestablish	consistency	between	mortgage	origination	and	capital	framework•Potentially	dramatic	implications	for	product	outside	of	safe		harbor		‐ both	at	low‐end	and	high‐edistribution•GSE/agency	reaction	to	carve‐out	provisions	will	have	potential	implications	as	well

• Some	of	the	more	significant	issues	are	set	forth	on	the	following	pages.	These	include:

• Mortgage	originations• GSE	reform• Servicing	standards• Changes	to	regulatory	capital	for	MSR	and	mortgage	loans	under	BASEL	III• Private‐label	issues

• Coupling	the	uncertainty	related	to	these	changes	with	recent	experience	regarding	put	backs,	settlem

lawsuits	and	the	prospect	of	unknown	future	exposure	impedes	the	availability	of	credit.		It	is	likely	thlenders	will	remain	cautious	until	there	is	more	clarity	around	these	issues
Issues impacting Mortgage Servicing, Mortgage Production and Return of Private Capital

Issue Agency Description 

Mortgage Originations

Mortgage	Originator	Standard	including	Loan	Officer	Compensation	under	TILA/RESPA

CFPB Creates	rules	for	loan	originator	compensation	that	are	clear,	balanced	and	

crafted	to	assure	there	are	no	abuses	while	maintaining	a	structure	in	which	originators	can	be	compensated

CFPB’s	proposed	requirement	comparable,	alternative	loan	wpoints	and	origination	points	o

Ability‐to‐repay	‐Qualified	Mortgages	(QM) CFPB Established	minumum	mortgage	underwriting	standards	for	determining	a	

consumers'	ability‐to‐repay

Large	number	of	new	rules	witcomplexity	of	mortgage	origina

Mortgage	Rules	&	Disclosures CFPB New	restrictions	prepayment	penalties,	single	premium	credit	insurance,	

arbitration,	negative	amortization,	and	partial	payments.		a.	For	high‐cost	mortgages,	provides	new	points/fees	definition	and	prepayment	penalty	test,	and	adjusts	APR	test

Requirements	for	Escrow	Accounts CFPB Requires	the	mandatory	establishment	of	escrow	accounts	for	T&I.		Appraisal	Proposal	under	amend	the	Equal	Credit	Opportunity	Act	(ECOA)’s	Regulation	B

CFPB Proposed	rule	that	would	require	mortgage	lenders	to	provide	home	loan	

applicants	with	copies	of	written	appraisals	and	other	home	value	estimates	developed	in	connection	with	the	application.	property’s	value	was	determined.	Imposes	appraisal	independence	requirements	on	any	person	extending	credit	or	providing	services	for	a	consumer	credit	transaction	secured	by	a	consumer’s	principal	dwelling

Under	the	proposed	rule,	crediassociated	with	conducting	appthe	rule	would	prohibit	creditoobtaining	the	reports.	a	relativeincrease	lender's	overhead	andtechnology,	their	compliance	gumanuals,	etc.	

Appraisal	Proposal	related	to	"higher‐risk	loans" CFPB Proposal	establishes	rules	for	appraisals	for	a	category	of	loans	called	

“higher‐risk	mortgage	loans,”	closed	end	loans	on	principal	dwelling	with	rates	similar	to	thresholds	for	higher	priced	mortgage	loans	in	Reg	Z.	QM	loans	are	excluded.	

Concerns	around	using	an	all‐inexceed	compliance	thresholds	

Risk	Retention	‐	QRM CFPB Qualified	Residential	Mortgages	would	be	exempt	from	the	Dodd‐Frank	Act	

requirement	that	securitizers/originator	retain	a	5%	economic	interest	in	secutitized	loans

GSEs	and	FHA	exempt.		Dependkey	issues	(e.g.,	premium	recap

Boxer/Menendez	bill Senate Expansion	of	underwater	refinance	program	to	Non‐GSE	loans;	includes	

fees	and	UPB	forgiveness	component

Uncertainty	over	who	will	bear

extent	of	fees	charged

FHA	loan	limits Policymakers Focus	on	reducing	market	share	of	FHA	could	be	accomplished	by	reducing	

FHA	loan	limits	or	downpayment	requirements

FHA	has	been	critical	recently	imarket.	New	restrictions	could	consumers.

VI. List of Policy/Regulatory Issues
Issue Agency Description

GSE Reform

GSE	Reform	‐	Single	Platform FHFA Proposed	framework	for	a	common	securitizati

Pooling	and	Servicing	Agreement

GSE	Reform	‐	Increased	G‐fees FHFA Proposal	to	adjust	the	guarantee	fees	(g‐fees)	th

Mac	charge	on	single‐family	mortgages	in	statesforeclosure	practices	are	statistically	higher	tha

size	of	the	fee	adjustments	are	intended	to	reflecompared	to	the	national	average.

UST	Revision	of	Preferred	Stock	Purchase	Agreement UST On	August	17,	Treasury	revised	its	preferred	sto

with	the	GSEs	to	eliminate	the	10	percent	divideincome	sweep	on	GSE	profits

Rep	and	Warrants	new	framework FHFA Fannie	Mae	and	Freddie	Mac	are	launching	a	ne

framework	for	conventional	loans	“to	clarify	len

and	liability	on	future	deliveries.”

Servicing	compensation FHFA Various	proposals	to	move	25	bps	servicing	fee

VI: Policy/Regulatory Issues
Servicing

CFPB	Proposed	Servicing	Standards CFPB These	two	notices	contain	rules	to	protect	homeo

costly	mistakes	by	their	mortgage	servicers

State	specific	Servicing	Standards Various	States States	are	introducing	their	own	mortgage	servici

be	put	in	place	in	addition	to	OCC	standards

Eminent	Domain Various	

Municipalities

Municipalities	are	exploring	seiizng	mortgage	notconcept

Capital

BASEL	III	‐	Proposed	MSR	capital	rules OCC/Fed/FDIC Proposed	MSR	rules	would	increase	risk	weightin

BASEL	III	‐	Proposed	treatment	of	PLS OCC/Fed/FDIC Proposed	rules	would	increase	risk‐weighting	ass

Securitization;

BASEL	III	‐	Proposed	treatment	of	Whole	Loans OCC/Fed/FDIC Proposed	rules	increase	risk	weighting	associated

Return of Private Label

Uncertanty	regarding	pending	regulations All	of	Above Market	Participants	can	not	plan	for	the	future	an

mode	as	various	issues	are	circulating

Rep	and	Warrants	Liabilities FHFA Part	of	FHFA's	strategic	Plan	is	to	pursue	R&W	fo

to	1/1/13

Capabilities/credibility	of	rating	agencies N/A Lack	of	confidence	in	rating	agency	models	or	theMI	Rescissions N/A The	volume	of	MI	rescissions	that	lenders	are	exp

lack	of	clarity	on	the	scope	of	mortgage	insurance

Lawsuits	filed	by	FHFA	against	Major	Financial	Institutions	for	MBS	sold	ro	GSEs	during	housing	boom

FHFA In	total,	17	banks	face	possible	penalties	for	alleg

quality	of	the	collateral	backing	these	securities.	A

the	FHFA	found	evidence	of	violations	in	$190	bilFannie	and	Freddie.	The	allegations	range	from	mvalue	ratios,	employment	and	occupancy	status	o

VI: Policy/Regulatory Issues
TBAC Presentation

February 5, 2013

Charge #3: For the past several years, Treasury has been pursuing a policy of extending the average maturity of its debt. Should Treasury consider even more rapidly extending the weighted average maturity odebt? If Treasury were to do so, what strategies might best assist us in achieving the goal, while remaining consistent with our broader debt management principles?
Reminder: Previous TBAC Meetings

Previous TBAC meetings have considered similar questions. Some observations from those meetings include:

 Feb 2011: Issuing 50y coupon bonds does not lengthen duration significantly

 Aug 2011: The term premium has been positive since the 1980s, implying the lowest cost strategy wou

borrow at the short end and avoid paying the term premium

 Aug 2011: The benefits of extension do not come for free. Historical analysis suggests that shorter term 

at many times been both cheaper and the volatility costs have not been high.

 Aug 2011: Previous periods of local low points in interest rates would not have provided dramatic benef

extension of average maturity 

 Feb 2012: “With interest rate risk premium currently near all time lows, savings [from FRN] are likely to 
Update on Market Conditions

TBAC considered a similar question in February 2011. Since Feb 2011, yields have fallen across the yield curve

Source: Bloomberg
Update on Market Conditions

Curve flattened from 2y5yParallel shifts at 5y, 10y and 30y

Source: Bloomberg
Term Premium

Jeremy Stein, Federal Reserve Governor, November 30, 2012:

“Treasury term premiums are now near historic lows, on the order of minus 80 basis points, according tused by the Board staff.”

Definition of the Term Premium from Kim-Wright 2005: 

“The yield on a nominal Treasury security can be decomposed into the sum of the compounded expectshort-term interest rate over the maturity of the bond and a risk or term premium to compensate investouncertain return on holding the bond (over a horizon less than its maturity).”“This paper uses an arbitrage-free three-factor term structure model to estimate a decomposition of the structure of nominal interest rates into expected future short rates and term premiums.”

Data from the Kim-Wright model are available daily since 1990. The data include the estimated teon zero-coupon bonds of maturities 1, 2, ... 10 years. These data are updated frequently and are 

available on the Federal Reserve website. 

Source: Kim, D. and J. Wright, (2005) “An Arbitrage Free Three-Factor Term Structure Model and the Recent Behavior of Long

Horizon Forward Rates” http://www.federalreserve.gov/pubs/feds/2005/200533/200533pap.pdf 
Term Premium

Kim-Wright term premiums are negative at 2y, 5y and 10y10y term premium turned negative in August 2011

Source: Kim-Wright 2005 http://www.federalreserve.gov/pubs/feds/2005/200533/200533pap.pdf 
A fact about Maturity Extension

WAM extension is not due to extending WAM of new issuance. WAM extends as maturing securities are reissued as longer maturity notes/bonds.*

 E.g. a maturing note goes from WAM < 1 to WAM ~ 50. This process extends the WAM of total debt o

Bills are also being reduced as a share of the portfolio* See Appendix for an example
Alternatives for Faster Maturity Extension

What about bills? What’s the right level?Current projections maintain the current nominal amount of bills through 2022.Considerations:

 Fastest way to extend WAM would be to reduce bills issuance

 Maintaining the current nominal amount of bills outstanding means bills will be declining as share of the 

debt and declining as a share of GDP

 Term premiums would suggest the short end is not the cheapest way to fund in current environment

 Long term demand for liquidity may keep bills rates low in the future
Alternatives for Faster Maturity Extension

Maintaining current maturity structure of new issuance will extend WAM to 80 months by 2022The following alternatives would maintain the recent pace of WAM extension, extending WAM to 

by 2017:*

1. Same auction schedule: Reduce 2y/3y issuance by 4pp each, increase 10y/30y issuance by 4 pp 

2. 50y Bond: Reduce 2y/3y issuance by 1.25pp each, add 50y bond equal to 3 percent of total coupo3. 20y Bond: Reduce 2y/3y issuance by 4pp each, add 20y bond equal to 8 percent of total coupons

* Assume that the WAM of new issuance is increased through 2017. After 2017 revert to current WAM of new issuance. Maintanominal amount of bills outstanding throughout.
Distribution of Outstanding Debt, 2012 and 2017 ($bn)

2012 $bn

∆ from 

2012 $bn

∆ from 

2012 $bn

∆ from 

2012 

Bills 1,629 1,629 0 1,629 0 1,629 0 

Notes/Bonds/TIPS

 <= 1 year 1,304 2,019 715 1,784 480 1,943 639  2-5 years 4,509 6,359 1,850 5,855 1,346 6,196 1,687  6-10 years 2,379 2,881 501 3,204 824 2,838 459  11-20 years 388 234 -154 234 -154 234 -154  21-30 years 837 1,827 990 2,243 1,406 1,814 977  31+ years

0

0

0

0

0 295 295

Total 11,046 14,948 3,902 14,948 3,902 14,948 3,902 

Faster Maturity Extensi

2017

Base Case Option 1 Option 2

Alternatives for Faster Maturity ExtensionThe base case involves significant amounts of new issuance at the long end

 In the base case, the amount of 20+ year Treasury debt outstanding will double from 2012 to 2017

Faster maturity extension would require the investors to absorb more than this base case
Alternatives for Faster Maturity Extension

Maintaining current issuance profile leads to changes in profile of outstanding debt by 2017:

 Increase in percent of outstanding debt in 21-30 year maturities 

 Increase in percent of outstanding debt in the 2-5 year maturities (due 2009/10 issuance maturing)

 Decrease in percent of outstanding debt in 11-20 year maturities

 Decrease in percent of outstanding debt <=1 year (due to smaller bill share)
Alternatives for Faster Maturity Extension

Changes in auction sizes would be significant

 E.g. if the current auction schedule was maintained, would add $7bn for each 30y auction in 2013 unde

Issuance in 2013: Base Case v. Faster Maturity Extension

# of 

Auctions

Total 

Issuance 

($bn)

Ave 

Auction 

Size 

($bn)

Total 

Issuance 

($bn)

Ave 

Auction 

Size 

($bn)

∆ in 

Auction 

Size

($bn)

Total 

Issuance 

($bn)

Ave 

Auction 

Size 

($bn)

∆ in 

Auction 

Size

($bn)

Is

Bills* 52 (weekly) 1,628 . 1,628 . . 1,628 . 

Notes/Bonds

2-yr note 12 477 40 377 31 -8 448 37 -2 

3-yr note 12 465 39 367 31 -8 432 36 -3 

5-yr note 12 471 39 471 39 471 39 . 

7-yr note 12 395 33 395 33 395 33 . 

10-yr note 12 287 24 358 30

6 287 24 . 

20-yr bond 12 . . . . . . . . 30-yr bond 12 191 16 277 23

7 191 16 . 

50-yr bond 4 . . . . 61 15 15 

TIPS**

5-yr TIPS 3 52 17 52 17 52 17 . 10-yr TIPS 6 96 16 119 20

4 96 16 . 

30-yr TIPS 3 26 9 38 13

4 26 9 . 

Total 2,459 4,083 4,087 

*Bills issuance is equal to the total bills outstanding as of Dec 31, 2013**TIPS are assumed to be 12% of 30y issuance, 25% of 10y issuance, and 10% of 5y Issuance

Base Case Option 1 Option 2 

Faster Maturity Extension

4,088
Evaluating the Alternatives

Treasury’s goal is “to ensure the federal government's financing needs are met at the lowest cost over time. To achieve this goal, Treasury issues a variety of marketable Treasury securities in sufamounts to ensure the liquidity of each and maintains a regular and predictable auction schedule

Accordingly, evaluate the costs/benefits of faster maturity extension on the following metrics:

1. Percent of portfolio maturing each year2. Gross Issuance of notes/bonds/TIPS3. Average interest costs of outstanding notes/bonds/TIPS4. Duration of new issuance
Percent of Portfolio Maturing Each Year

Decreasing 2y/3y issuance would reduce the percent of the portfolio maturing each year starting 

 Issuing a 50y bond would have a comparatively smaller impact on the percent of portfolio maturing, bec

smaller reduction in 2y/3y issuance.

* The Faster Maturity Extension depicted in the following four charts corresponds to Option 1: From 2013 to 2017, reduce 2y/3y 4pp each, increase 10y/30y issuance by 4 pp each; after 2017 revert to current maturity structure of issuance
Gross Issuance of Notes/Bonds/TIPS

A smaller percentage of the portfolio maturing means that annual gross issuance will also be sma

 Reducing gross issuance after 2017 will lower interest costs, because Treasury would be issuing less a

higher interest rates
Average Interest Rate on Outstanding Debt

The impact of faster maturity extension on interest costs is a combination of: 

a. Higher interest costs from 2013 to 2016 due to longer maturity of new issuanceb. Lower issuance after 2017 reduces the amount issued when interest rates are higher

Preliminary estimate: these two factors cancel each other over 10 yrs => no net savings

NOTE: The forecasts for the 3m and 10y Treasury rate are from the CBO (Aug 2012). By 2017 the yield curve is assumed to reaverage shape over the past 20 years. These forecasts do not include any impact of faster maturity extension on rates
Cost Effectiveness of Faster Maturity Extension (1 of 2)

Faster maturity extension would add duration to the market each year through 2017

 Would add close to 600 million in DV01s through 2015 TBAC Aug 2011*: “adding 375-475 m additional duration (DV01s) to the market would increase term pr

19-24 bps”

* The TBAC Aug 2011 analysis relied on work by Gagnon, J., M. Raskin, J. Remache and B. Sack (2010). The original Gagnon analysis has been used by the Federal Reserve to estimate the impact of LSAPs on term premium and interest rates.
Cost Effectiveness of Faster Maturity Extension (2 of 2)

Potential Term Premiums

Source: Bloomberg 
Federal Reserve Holdings (1 of 2)

As of Dec 26, 2012 the Federal Reserve System Open Market Account (SOMA) held approximatin 21+ year US Treasury debt

 SOMA holds 41% of the 30y Treasury bonds issued since 2009 In Feb 2013, Fed will buy 75% of new 30y Treasury supply
Federal Reserve Holdings (2 of 2)

Twist and QE operations have significantly lengthened the WAM of the Fed’s SOMA portfolioThe Fed currently owns 29% of all marketable 10yr Equivalents outstanding
Ownership of Treasury Debt

Private pension demand has been on the rise while other investors have been falling, replaced bforeign buyers

Source: Federal Reserve, Flow of Funds
Potential Sources of Demand

The Pension & LDI community is expected to provide the most domestic demand for long-dated 

 The majority of pension fund duration (KRD)* demand is in the 15 to 25 year sector, while there is curre

this sector and few outstanding issues to choose from

 Hedging demand also exists in the 40 and 50yr KRD buckets $125B in 40 and 50yr maturities would be required to plug long-end duration needs assuming all dema

 $575B in 20yr notes would be required to cover 20yr pension demand assuming all demand is currently  With a $600B funding gap and a 12yr pension liability, at current yields the pension industry needs

* KRD = Key Rate DurationSource: Bloomberg, BlackRock

05

101520

3 5 7 10 15 20 25 30 40 

Typical US corporate pension liability KRD Structure vs. UST Outstanding 

(Trillions of Duration Dollars)

Pension Dur $ (T) UST Dur $ (T)
Other Sources of Duration

Corporate credit duration is already increasingMortgage duration could extend significantly in a higher rate regimeAdditionally, WAMs are already extending with base case Treasury projections

Source: CS, JPM, Blackrock
Local, Sovereign, and Corporate Issuers have also been extendin

Yields and Duration of US Fixed IncomeMortgage Extension Scenarios in 10yr Equivalents (Billions)

Source: Barclays Capital; Bloomberg; BlackRock

2006 2012 2006 2012

 Total 5.34% 1.7% -3.6 4.46 5.02 0.6 Treasury 4.79% 0.9% -3.9 4.95 5.52 0.6 Government-related 5.13% 1.5% -3.7 3.98 5.12 1.1 Agency 5.11% 1.0% -4.1 3.55 3.87 0.3 Local authority 5.30% 3.2% -2.1 7.78 9.72 1.9 Sovereign 5.36% 2.7% -2.6 5.83 8.19 2.4 Supranational 5.02% 0.7% -4.3 4.29 3.48 -0.8 Corporate 5.66% 2.7% -3.0 6.05 7.25 1.2 Industrial 5.81% 2.6% -3.2 6.64 7.74 1.1 Utility 5.79% 3.0% -2.8 7.12 9.17 2.1 Financials 5.47% 2.6% -2.9 5.16 5.72 0.6 Securitized 5.59% 2.1% -3.5 3.60 2.93 -0.7 MBS 5.63% 2.1% -3.5 3.46 2.92 -0.5 ABS 5.32% 0.9% -4.4 2.77 3.21 0.4 CMBS 5.36% 1.8% -3.5 4.83 3.17 -1.7

YIELD DURATION YEARS

Change 
Ownership of Gilt stock and changes over time

Source: UK Debt Management Office 
Brief History of UK and US LDI

*Importantly UK pension liabilities are inflation-linked, ie grow over time with the path of realized inflation (contrast US liabilities which are fixed $ values)

UK Movement to LDI started with amendments to funding and accounting 

in the early 2000s.

 The previous very off-market rules were replaced with ones that were 

much more on-market and provided much greater mark-to-market transparency of risk. In this regard you could argue the UK leapfrogged the rest of the pensions world.

 Plans started adopting LDI in 2002-2005. The good markets of the post 

dot-com burst steadily made conversion to largely matched investment policies relatively affordable

 The 2004 Pensions Act and the creation of the role of ‘Pensions 

Regulator’ was a final spur, encouraging Trustees to seek to fully fund and in most cases de-risk their plans.

 Due to this focus on de-risking, discount rates are generally set by 

reference to risk-free curves (ie gilts or swaps), and, due to the nature of UK liabilities, focus on real yields*.

 The main challenge, therefore, was accessing sufficient quantities of 

very long-dated inflation-linked assets. The IL Gilt market was not of sufficient size, and hence pension plans looked to the nascent inflation swap market (IFS).

 Government issuance out to the 50 year point significantly helped with 

pricing (risk measurement) and supply of very long-dated rates exposure

US Funding and accounting reforms did not hap

 PPA made it a requirement to fully fund 

years.. albeit with a 5 year initial phase

 FAS87 reform (phase I) put pension su

sponsor’s balance sheet raising awarestatement reform is phase II – which is 

 2006/7 was marked with a lot of discussion 

were in full swing), but there was very little a

 By the time pension plans were ready to mo

was in full swing, followed of course by the ‘

relevant because pension plans became vethe perceived ’opportunity cost’ of de-risking 

 Of note, both PPA and accounting center ar

bond discount rates. Therefore the perceive

corporate bond.
US Debt Mix vs OECD Nations

Source: Bloomberg, U.S. Treasury, Center for Financial Stability 

Treasury projects that 10+ yr issuance will be 17.2% of outstanding debt stock by 2022
Conclusions

Treasury yields have fallen since Feb 2011

 Some measures suggest the term premium is currently negative

Outstanding debt between 21-30 yrs of maturity will roughly double over the coming 5 years Benefits from faster WAM extension are small

 Small (<2pp) decrease in percent of portfolio maturing each year

 Preliminary estimate: no net savings, assuming CBO’s interest rate forecast is realized

 Cost/benefit analysis changes significantly if interest rates move sharply higher

Potential to increase interest rates, counter-acting monetary policy

 Back-of-the-envelope: additional duration could push up interest rates by >25 bps

Absent changes in the accounting or regulatory environment, demand in excess of already plannissuance is uncertain. Treasury should further explore issuance philosophy

 Opportunistic issuance Distribution methodology
Appendix

- WAM extension dynamics- Assumptions for Scenario Analysis
Appendix

WAM extension dynamicsAs the portfolio matures, the maturing securities are reissued at longer maturities out the curve. the WAM of the portfolio can be extended, even if the WAM of new issuance is below the WAM oportfolio.Example:

 A portfolio with 50 percent in 30y bonds and 50 percent in 1 week bills has a WAM of 15 years. Assume 1⁄2 of the bills are reissued as 5y notes. The WAM of new issuance is 5 years.

 The new portfolio is: 50 percent in 30y bonds, 25 percent in 5y notes, and 25 percent in 1 week bills. T

WAM of 17.5 years.

=> WAM of the total portfolio was extended by 2.5 years, even though the WAM of new issuance was lowe

the original portfolio
Appendix

Assumptions for Scenario Analysis (1 of 2)

BASE CASE: Debt Issuance and Outstanding($ billions)

2013 2014 2015 2016 2017 2018 2019 

[1] Bills (outstanding as of Dec 31st) 1,629 1,629 1,629 1,629 1,629 1,629 1,629 [2] Seasoned Coupons w Maturity < 1 year 1,447 1,562 1,862 1,859 2,019 2,108 2,208 [3] Deficit (source: OMB MSR '12) 991 661 595 615 576 543 578 [4] Dec Tax Deal (source: OMB Dec '12) -4 -42 -57 -65 -74 -79 -87 [5] Other Financing Needs (source: OMB MSR '12) 168 142 142 134 120 114 105 [6] Treasury Net Financing Needs ([3]+[4]+[5]) 1,155 761 680 684 622 578 596 [7] Gross Coupon Issuance (prior yr [2] + [6]) 2,459 2,208 2,242 2,546 2,481 2,597 2,704 [8] Total Debt Outstanding (Coupon + Bills) 12,201 12,962 13,642 14,326 14,948 15,526 16,122 

*The forecasts for the 3m and 10y Treasury rathe CBO (Aug 2012). By 2017 the yield curve to return to its average shape over the past 2These forecasts do not include any impact of extension on rates
Appendix

Assumptions for Scenario Analysis (2 of 2)

New Notes/Bonds/TIPS Issuance (Pct of Total)Base CaseFrom 2013 onwards use the 2011 percentages

Maturity 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 20

2 21.3% 19.4% 20.2% 19.4% 19.4% 19.4% 19.4% 19.4% 19.4% 19.4% 19.4% 19.4% 19.43 19.6% 18.9% 17.7% 18.9% 18.9% 18.9% 18.9% 18.9% 18.9% 18.9% 18.9% 18.9% 18.5 21.6% 21.3% 22.2% 21.3% 21.3% 21.3% 21.3% 21.3% 21.3% 21.3% 21.3% 21.3% 21.7 16.3% 16.1% 16.8% 16.1% 16.1% 16.1% 16.1% 16.1% 16.1% 16.1% 16.1% 16.1% 16.

10 13.4% 15.5% 14.9% 15.5% 15.5% 15.5% 15.5% 15.5% 15.5% 15.5% 15.5% 15.5% 15.30 7.7% 8.8% 8.2% 7.5% 7.5% 7.5% 7.5% 7.5% 7.5% 7.5% 7.5% 7.5% 7.

Option 1 From 2013 to 2017, subtract 4pp from the 2/3 percentage in 2011, add 4 pp to the 10/30 percentage in 2011, after 2017 revert to 2011 perce

Maturity 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 20

2 21.3% 19.4% 20.2% 15.4% 15.4% 15.4% 15.4% 15.4% 19.4% 19.4% 19.4% 19.4% 19.43 19.6% 18.9% 17.7% 14.9% 14.9% 14.9% 14.9% 14.9% 18.9% 18.9% 18.9% 18.9% 18.5 21.6% 21.3% 22.2% 21.3% 21.3% 21.3% 21.3% 21.3% 21.3% 21.3% 21.3% 21.3% 21.7 16.3% 16.1% 16.8% 16.1% 16.1% 16.1% 16.1% 16.1% 16.1% 16.1% 16.1% 16.1% 16.

10 13.4% 15.5% 14.9% 19.5% 19.5% 19.5% 19.5% 19.5% 15.5% 15.5% 15.5% 15.5% 15.30 7.7% 8.8% 8.2% 12.8% 12.8% 12.8% 12.8% 12.8% 8.8% 8.8% 8.8% 8.8% 8.

Option 2 From 2013 to 2017, subtract 1.25pp from the 2/3 percentage in 2011, add 2.5 pp to the 30 percentage in 2011, after 2017 revert to 2011 perc

Maturity 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 20

2 21.3% 19.4% 20.2% 18.1% 18.1% 18.1% 18.1% 18.1% 19.4% 19.4% 19.4% 19.4% 19.43 19.6% 18.9% 17.7% 17.7% 17.7% 17.7% 17.7% 17.7% 18.9% 18.9% 18.9% 18.9% 18.5 21.6% 21.3% 22.2% 21.3% 21.3% 21.3% 21.3% 21.3% 21.3% 21.3% 21.3% 21.3% 21.7 16.3% 16.1% 16.8% 16.1% 16.1% 16.1% 16.1% 16.1% 16.1% 16.1% 16.1% 16.1% 16.

10 13.4% 15.5% 14.9% 15.5% 15.5% 15.5% 15.5% 15.5% 15.5% 15.5% 15.5% 15.5% 15.30 7.7% 8.8% 8.2% 8.8% 8.8% 8.8% 8.8% 8.8% 8.8% 8.8% 8.8% 8.8% 8.50 0.0% 0.0% 0.0% 2.5% 2.5% 2.5% 2.5% 2.5% 0.0% 0.0% 0.0% 0.0% 0.

Option 3 From 2013 to 2017, subtract 4pp from the 2/3 percentage in 2011, add 4 pp to the 20y percentage in 2011, after 2017 revert to 2011 percenta

Year 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 20

2 21.3% 19.4% 20.2% 15.4% 15.4% 15.4% 15.4% 15.4% 19.4% 19.4% 19.4% 19.4% 19.43 19.6% 18.9% 17.7% 14.9% 14.9% 14.9% 14.9% 14.9% 18.9% 18.9% 18.9% 18.9% 18.5 21.6% 21.3% 22.2% 21.3% 21.3% 21.3% 21.3% 21.3% 21.3% 21.3% 21.3% 21.3% 21.7 16.3% 16.1% 16.8% 16.1% 16.1% 16.1% 16.1% 16.1% 16.1% 16.1% 16.1% 16.1% 16.

10 13.4% 15.5% 14.9% 15.5% 15.5% 15.5% 15.5% 15.5% 15.5% 15.5% 15.5% 15.5% 15.20 0.0% 0.0% 0.0% 8.0% 8.0% 8.0% 8.0% 8.0% 0.0% 0.0% 0.0% 0.0% 0.

30 7.7% 8.8% 8.2% 8.8% 8.8% 8.8% 8.8% 8.8% 8.8% 8.8% 8.8% 8.8% 8.