UNITED STATES DEPARTMENT OF THE TREASURY

Presentation to the

Treasury Borrowing Advisory Committee

U.S. Department of Treasury

Office of Debt Management

August 2, 2011
UNITED STATES DEPARTMENT OF THE TREASURY

Agenda

• Fiscal Developments

• Auction Demand & Market Trends

• Portfolio Metrics

2
UNITED STATES DEPARTMENT OF THE TREASURY

FISCAL DEVELOPMENTS

3
UNITED STATES DEPARTMENT OF THE TREASURY

Individual Tax Receipts Slowed in Q3 FY 2011

4

-40%

-20%

0%

20%

40%

60%

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Jun-11

Withheld Taxes Nonwithheld Taxes Corporate Taxes

Q

Quarterly Tax Receipts

Year-over-Year Percentage Change

A closer look at Q3 FY11 (ending June 2011):

Withheld Taxes: -0.3%

Nonwithheld Taxes: 23.2%

Corporate Taxes: -7.8%

Source: Monthly Treasury Statement

Notes: Adjusted for 9/11/01 Corporate Tax Receipts disruption;

Data plotted is year-over-year changes in quarterly receipts
UNITED STATES DEPARTMENT OF THE TREASURY

Public Non-Marketable Redemptions Continued in Q3 FY 2011

5

Source: Monthly Treasury Statement

-$30

-$20

-$10

$0

$10

$20

$30

Q1

FY2005

Q3 Q1

FY2006

Q3 Q1

FY2007

Q3 Q1

FY2008

Q3 Q1

FY2009

Q3 Q1

FY2010

Q3 Q1

FY2011

Q3

Savings Bond Foreign Series SLGS

Net Non-marketable Issuance

In Billions $
UNITED STATES DEPARTMENT OF THE TREASURY

FY2011 Budget Summary through June 2011 (in Billions $)

6

Note: Figures may not add due to rounding

Budget Category

Current Month Fiscal Year-to-Date

Jun 2010 Jun 2011 Differences: FY2010 FYTD2011 Differences:

Act Act $ % Act Act $ %

Individual

Withheld & FICA $142 $135 -$7 -5% $1,248 $1,300 $52 4%

Other & SECA $43 $49 $6 14% $269 $316 $46 17%

Refunds (-) $6 $4 -$2 -33% $244 $226 -$18 -7%

Other Social Ins Taxes $2 $1 -$1 -28% $42 $51 $10 24%

Corporate

Corporate Taxes $57 $51 -$6 -10% $210 $189 -$21 -10%

Refunds (-) $5 $2 -$3 -64% $77 $55 -$22 -29%

Excise, Customs, & Other $18 $19 $1 3% $149 $159 $10 7%

Total Budget Receipts $251 $250 -$1 -1% $1,597 $1,734 $137 9%

Defense $56 $57 $1 2% $499 $506 $7 1%

Social Security Benefits $67 $69 $2 3% $564 $584 $20 4%

Medicaid $24 $27 $3 14% $203 $216 $13 6%

Medicare $43 $51 $8 20% $380 $403 $22 6%

Interest on Debt $107 $111 $4 4% $355 $386 $31 9%

Labor $14 $9 -$5 -33% $131 $102 -$29 -22%

Agriculture $10 $11 $1 14% $101 $108 $7 7%

Education $9 -$20 -$29 -334% $78 $46 -$32 -41%

Veterans Affairs $9 $10 $1 13% $81 $91 $10 12%

Federal Deposit Insurance Corp. $1 $0 -$1 -77% -$21 -$1 $20 96%

Treasury-EIC/CC/Other Credits $3 $2 -$1 -43% $110 $106 -$4 -4%

EESA/HERA $16 $5 -$11 n/a -$79 -$28 $51 65%

Other -$38 -$39 -$1 2% $197 $185 -$12 -6%

Total Budget Outlays $319 $293 -$27 -8% $2,601 $2,705 $104 4%
UNITED STATES DEPARTMENT OF THE TREASURY

Government Deficit and Borrowing Estimates

7

FY 2011-2013 Deficit and Borrowing Estimates (In Billions $)

Primary

Dealers* CBO OMB

FY 2011 Deficit Estimate 1,358 1,480 1,645

FY 2012 Deficit Estimate 1,131 1,100 1,101

FY 2013 Deficit Estimate 940 704 768

FY 2011 Deficit Range 1,249-1,592

FY 2012 Deficit Range 950-1,400

FY 2013 Deficit Range 700-1,300

FY 2011 Marketable Borrowing Range 980-2,055

FY 2012 Marketable Borrowing Range 950-2,100

Estimates as of: Jul-11 Jan-11 Feb-11

*Based on July 29, 2011 Primary Dealer feedback. Deficit estimates are averages.
UNITED STATES DEPARTMENT OF THE TREASURY

AUCTION DEMAND & MARKET TRENDS

8
UNITED STATES DEPARTMENT OF THE TREASURY

Coverage Ratios Have Remained Strong in FY 2011

9

Source: Treasury Auction Data

$0

$500

$1,000

$1,500

$2,000

$2,500

0

0.5

1

1.5

2

2.5

3

3.5

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Weighted Average Coverage Ratio on Nominal Notes and Bonds

In Billions $, Coverage Ratio

Gross Private Issuance (R) Weighted Average Coverage Ratio (L)

Note: Through 6/30/2011
UNITED STATES DEPARTMENT OF THE TREASURY

Foreign Participation in Nominal Coupon Auctions Remains Steady

10

Source: Treasury Investor Class Data; Data through 6/30/2011*FY2006 through FY2010

SOMA 9%

Depository

Institutions 1%

Individuals 1%

Primary Dealers

52%

Other Dealers &

Brokers 4%

Investment Funds

14%

Foreign &

International 19%

Five-Year Average of Investor Class Allotments*

SOMA 3%

Primary Dealers

47%

Other

Dealers &

Brokers

10%

Investment

Funds 17%

Foreign &

International

22%

FY2011 YTD: Average Investor Class Allotments
UNITED STATES DEPARTMENT OF THE TREASURY

Primary Dealers Remain the Largest Purchaser of Treasury Bills

11

Source: Treasury Investor Class Data; Data through 6/30/2011*FY2006 through FY2010

SOMA 12%

Individuals 4%

Primary Dealers

54%

Other Dealers &

Brokers 7%

Investment Funds

13%

Foreign &

International

10%

Other 1%

Five-Year Average of Investor Class Allotments*

SOMA 4% Individuals 2%

Primary Dealers

55%

Other Dealers &

Brokers 11%

Investment Funds

14%

Foreign &

International

13%

FY2011 YTD: Average Investor Class Allotments
UNITED STATES DEPARTMENT OF THE TREASURY

PORTFOLIO METRICS

12
UNITED STATES DEPARTMENT OF THE TREASURY

Nominal Coupons and Bills as a Percentage of the Portfolio

13

69%

50%

55%

60%

65%

70%

75%

80%

Jan-0

0

A

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0

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0

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Jan-01

A

pr-01

Jul-01

Oct-01

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2

A

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2

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3

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3

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A

pr-0

5

Jul-0

5

Oct-0

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6

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pr-0

6

Jul-0

6

Oct-0

6

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7

A

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Jul-0

7

Oct-0

7

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8

A

pr-0

8

Jul-0

8

Oct-0

8

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9

A

pr-0

9

Jul-0

9

Oct-0

9

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A

pr-10

Jul-10

Oct-10

Jan-11

A

pr-11

Nominal Coupons

Percentage of Total Portfolio

Average 2000 - 2007

Last: 76% as of 6/30/2011

24%

15%

20%

25%

30%

35%

40%

Jan-0

0

A

pr-0

0

Jul-0

0

Oct-0

0

Jan-01

A

pr-01

Jul-01

Oct-01

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2

A

pr-0

2

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2

Oct-0

2

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3

A

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3

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3

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A

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6

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A

pr-0

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Jul-0

7

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7

Jan-0

8

A

pr-0

8

Jul-0

8

Oct-0

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9

A

pr-0

9

Jul-0

9

Oct-0

9

Jan-10

A

pr-10

Jul-10

Oct-10

Jan-11

A

pr-11

Bills

Percentage of Total Portfolio

Average 2000 - 2007

Last: 16% as of 6/30/2011

Notes: Bills includes SFP and CMBs; Percentage figures are rounded
UNITED STATES DEPARTMENT OF THE TREASURY

Treasury has Suspended the SFP Due to Debt Limit Negotiations

14

$0

$100

$200

$300

$400

$500

$600

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Jun-11

Jul-11

Treasury Supplementary Financing Program Cash Balance

In Billions $

Max: $560B

10/10/2008

Min: $5B

12/30/09

$200B $0B

7/28/11
UNITED STATES DEPARTMENT OF THE TREASURY

TIPS Issuance Will Continue to Increase

15

Note: Data through 7/31/2011

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

0%

3%

6%

9%

12%

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011YTD

TIPS

Calendar Year Issuance in Billions $, Percentage of Portfolio

5-Year (R) 10-Year (R) 20-Year (R) 30-Year (R) TIPS as % of the Portfolio (L)
UNITED STATES DEPARTMENT OF THE TREASURY

Average Maturity of the Debt Continues to Lengthen

16

Note: Data through 7/31/2011

40

45

50

55

60

65

70

75

19

8

0

19

81

19

8

2

19

8

3

19

8

4

19

8

5

19

8

6

19

8

7

19

8

8

19

8

9

19

9

0

19

91

19

9

2

19

9

3

19

9

4

19

9

5

19

9

6

19

9

7

19

9

8

19

9

9

2

0

0

0

2

0

01

2

0

0

2

2

0

0

3

2

0

0

4

2

0

0

5

2

0

0

6

2

0

0

7

2

0

0

8

2

0

0

9

2

010

2

011

Average Maturity of Marketable Debt

In Months

Average Maturity Without SFP Bills Average Maturity (Outstanding)

Current 61.9 as of 7/2011

Average 58.1

Min 42.4 in 4/1980

Max 70.9 in 5/2001

Statistics on Average Maturity since CY1980
UNITED STATES DEPARTMENT OF THE TREASURY

Percentage of Debt Maturing in the Near-Term Remains at Historic Lows

17

Note: Data through 6/30/2011

20%

30%

40%

50%

60%

70%

Jan-9

0

Jul-9

0

Jan-91

Jul-91

Jan-9

2

Jul-9

2

Jan-9

3

Jul-9

3

Jan-9

4

Jul-9

4

Jan-9

5

Jul-9

5

Jan-9

6

Jul-9

6

Jan-9

7

Jul-9

7

Jan-9

8

Jul-9

8

Jan-9

9

Jul-9

9

Jan-0

0

Jul-0

0

Jan-01

Jul-01

Jan-0

2

Jul-0

2

Jan-0

3

Jul-0

3

Jan-0

4

Jul-0

4

Jan-0

5

Jul-0

5

Jan-0

6

Jul-0

6

Jan-0

7

Jul-0

7

Jan-0

8

Jul-0

8

Jan-0

9

Jul-0

9

Jan-10

Jul-10

Jan-11

Percentage of Debt Maturing in Next 12 to 36 Months

Maturing in 12 Months Maturing in 24 Months Maturing in 36 Months
UNITED STATES DEPARTMENT OF THE TREASURY

Treasury Refinancing Needs will be Elevated in Coming Years

18

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

2011201220132014201520162017201820192020202120222023202420252026202720282029203020312032203320342035203620372038203920402041

Maturity Profile of Outstanding Debt

Calendar Year in Billions $

Note: Data through 6/30/2011
UNITED STATES DEPARTMENT OF THE TREASURY

LONG-TERM CHALLENGES

19
20 UNITED STATES DEPARTMENT OF THE TREASURY

What adjustments to debt issuance, if any, should Treasury make in

consideration of its financing needs in the short-, medium-, and long-term?
U.S. Treasury Borrowing Advisory Commit

Presentation to Treasury

August 2, 2011
Charge:

Cost and Benefits Benefits of Extending Extending Average Average Matu

Matu

In past meetings meetings, the Committee Committee has expressed expressed a desi

Treasury to continue to lengthen the average maturity 

outstanding. Please discuss the costs and benefits of e

the average maturity and f k rameworks for quantif i y ng t

costs and benefits.
Given a goal of funding the government 

efficiently efficiently as possible possible over the long term

Major Considerations are:

 Total of interest expense over time

j

 Total of interest expense over time Volatility of interest expense through tim Impact on the real economy economy Rollover/Liquidity Risk
Debt Service Service is a Function Function of Many Var

Var

Debt Service Service = Outstanding Outstanding Debt * Average Average This is a function of many variables

Some Treasury controls:

 Past debt issuance Current debt issuance strategy Debt management communication policy

and many Treasury does not control:

 Outstanding stock of debt

 Current deficit

 Interest rates GDP growth Inflation
Consider the Following Regression:

DebtServ_GDP = a + b1 * GDP_YY + b2 * FFR + b3 * Avg_Mat + b4 * Debt_

Fig. 1 Definition and Summary Statistics

V i bl ar a e D fi i i Definition Mean S dt Dev Min 

DebtServ_GDP Interest payment to nominal GDP Ratio (%) 3.8% 0.9% 1.7% 

GDP_YY Real GDP Y/Y Growth (%) 2.7% 1.7% ‐4.1% FFR Effective Fed Funds Rate (%) 4.3% 2.5% 0.1% A Mt A M t it (M th ) 64 7 46 

Fig. 2 Regression Results & Interpretation

Avg_Mat Average Maturity (Months) 64 7 46 Debt_GDP Debt to nominal GDP Ratio (%) 42.2% 7.1% 31.9% 

Variable Beta p-Value Interpretation

Intercept ‐2.18 < .0001GDP_YY ‐0.05 0.0185 With 1% rise (fall) in GDP growth from a year ago, debt service costs (DSC), m

of GDP, will fall (rise) by 0.05%, all else equal

FFR 0.16 < .0001 With 1% rise (fall) in FFR,DSC will rise (fall) by 0.16%, all else equal

Avg_Mat 0.05 < .0001 With average maturity rising (falling) by 1 month, DSC will rise (fall) by 0.05%, 

Debt_GDP 0.04 < .0001 With 1% rise (fall) in debt to GDP ratio, DSC will rise (fall) by 0.04%, all else eq

N=95 Adj.R‐sq = 84%
6 0

7.08.0

Regression Fit

2 03.04.05.06.00.01.02.0

Dec‐86 Dec‐90 Dec‐94 Dec‐98 Dec‐02 Dec‐06 

Actuals (%) Fitted (%)

3.04.0

Residuals (%)

0.01.02.0

‐3.0‐2.0‐1.0

Dec‐86 Dec‐90 Dec‐94 Dec‐98 Dec‐02 Dec‐06 

 Spike is caused by calendar effects from year end falling on a week

forced interest payments on non‐marketable debt to be pushed into 
Data Series:
Observations from Regression

 Average M i atur ty is only one of many vari bl a es that impacts 

service to GDP

 Increasing Increasing Average Average Maturity Maturity increases increases debt service service to GDP Increasing Average Maturity can have a potential feedback ethrough through the real GDP variable variable via a “reverse reverse LSAP .” The followi

followi

explore the magnitude of this effect during QE2 and under a m

extension strategy.
Activity During QE2 Period

Fed's SOMA Portfolio Stock of Treasury Debt Treasury Stock ‐ SO

11/12/10 to 6/30/2011

Change 11/12/10 to 6/30/2011 Change 11/12/10 to 6/30/2011 Change 11/12/10 to 6/

Maturity Face Amt DV01 Face Amt DV01 Face Amt 

2Y 52,044 8,699,000 245,000 40,789,000 192,956 32

3Y 156,082 40,646,000 256,000 67,621,000 99,918 265Y 184,369 83,701,000 280,000 127,362,000 95,631 437Y 196,428 121,372,000 232,000 144,474,000 35,572 23

10Y 137,149 113,012,000 177,000 155,712,000 39,851 4230Y 32,555 52,276,000 113,000 190,549,000 80,445 138

758,627 419,706,000 1,303,000 726,507,000 544,373 306

Face amount measured in millions, DV01 measured in $/bp at current yield levels
Maturity extension during LSAP2 added 75‐115 million of longer duration DV01s

Based on the OLS approach in Gag , non J., M. Raskin, J. Remache and B. Sack ( ) 2010 , this 

equivalent to a change in the term premium from 4.0 to 6.1 bp

The calculation method is described with a concrete numerical example on page 25 of

Gagnon, J., M. Raskin, J. Remache and B. Sack (2010)

“the Federal Reserve will have purchased a total of approximately $850 billion in 10‐year

equivalents. This is roughly 6 percent of 2009Q4 nominal GDP, which implies that asset purchases

reduced the term premium by 38 basis points.”

LSAP2 Lower Bound Upper Bound

Duration (01s) 75,000,000 115,000,000

01s/ 1million Notional 10y Note 850 850Notional 10y Note Equivalents ‐850,000,000,000 88,250,000,000 135,300,000,000Nominal GDP (Q4 2009) 14,277,000,000,000 14,277,000,000,000 14,277,000,000,0010y Notes as Percent Percent of GDP ‐5 95% . 0 62% . 0 95% .OLS Regression Coefficient (From Table 2,

p. 34 Gagnon et al. 0.064 0.064 0.064

Change in Term Premium ‐38.1bp 4.0bp 6.1bp

 Note that Chung, Laforte, Reifschneider and Williams (2011) estimate that there is a roughly 4

to 1 ratio between changes in the term premium and changes in the federal funds rate. Thornto(2011) has questioned the stability of this estimate.
Extending the Average Maturity to 70 months would add 375 million 

million additional duration to the market

Adding this much duration to the private sector would increase term 

19 to 24bp

Lower Bound Upper Bound

Duration (01s) 375,000,000 475,000,000

01s/ 1million Notional 10y Note 850 850

Notional 10y Note Equivalents 441,200,000,000 558,800,000,000

Nominal GDP (Q1 2011) 15,018,000,000,000 15,018,000,000,000

10y Notes as Percent of GDP 2.94% 3.72%

OLS Regression Coefficient 0.064 0.064

Change in Term Premium 18.8bp 23.8bp
Interest Expense Over Time

 Historical backtest of long vs. short matu

strategies

o Point‐in‐Time decision to issue a new 5Y bond or rolling 3

years ( hi synt etic fl ) oater

o Quarterly interest expense for a fixed size portfolio all in a 

maturity

 Omits the reverse LSAP feedback on GDP 

rates
Lifetime cost of a new 5Y loan

 Assume a one‐time funding increase with a 5Y horizon

 Compute average rates over the next 5Y of a 5Y bond vs rolling 3M T

 Costs and vol of lifetime costs are both lower for Tbills!

1618

 Costs and vol of lifetime costs are both lower for Tbills!

101214

ed Rate%

68

Me

StdD

Annualize

024 StdD

8/7/1961 1/28/1967 7/20/1972 1/10/1978 7/3/1983 12/23/1988 6/15/1994 12/6/1999 5/28/2005 11/18/2010
Lifetime cost of a new 10Y

18

 Same experiment using 10Y bond and using average rates over the 10Y 

121416

8

10

CM

nualized Rate%

246 sy

Mean 

StdDev 

An

0

8/7/1961

1/28/1967

7/20/1972

1/10/1978

7/3/1983

12/23/1988

6/15/1994

12/6/1999

5/28/2005

11/18/2010
Quarterly Cost of Long‐Term De

 Quarterly interest expense for a constant‐size debt funded with a single 

 Tbills, 5Y with 5% auctioned each quarter, or 10Y with 2.5% auctioned e

 Pay Now or Pay Later – the late 70’s spike affects Tbills first, but it affect

10 s’ more over time

1416

8

1012

d Rate%

468

regular auction CCMT03Mregular auction C

Annualized

Since '72 CMT03

Mean 5.

StdDev 3.

02

1961 1967 1972 1978 1983 1988 1994 1999 2005 20108/7/1

1/28/1

7/20/1

1/10/1

7/3/1

12/23/1

6/15/1

12/6/1

5/28/2

11/18/2
Historical Rates

Since '62 CMT0

Mean 5StdDev 2

Tenor extension has small effect on spot rate vol

The advantage of longer tenors is in staggering

maturities to average out the impact of each auction

1416181012

d Rate%

468 

Annualize d

02

7/1961 8/1967 0/1972 0/1978 3/1983 3/1988 5/1994 6/1999 8/2005 8/20108/7

1/28

7/20

1/10

7/3

12/23

6/15

12/6

5/28

11/18
What Strategy Strategy is Optimal Optimal Today

 Since ‘62, issuing a synthetic floater beats issuing a 5

the time and a 10Y 60%

 Locking in long rates only reduces cost when rates ris

more than the term premium

 We can’t anticipate rate changes but we can measur

term premium now to decide which product is more 
Estimating the Term Premium

From Gagnon et al.“For Treasury securities, the most important component of the risk premium is referred to as the ‘term prem

reflects the reluctance of investors to bear the interest rate risk associated with holding an asset that has a l

term premium is the additional return investors require, over and above the average of expected future shor

rates, for accepting a fixed long‐term yield.”

 T‐bills represent Treasury’s short term borrowing rates but their future expected values 

unob bl servable quanti it es.

 Forward Fed funds OIS (FF‐OIS) swap rates are the best proxy.

 FF‐OIS term premium can then be call d cu ated as the d ff i erence between quoted long ter

rates and their equivalent calculated with estimated future expected FF‐OIS rates.

 Fixed long term UST issuance requires an additional term premium over and above wha

the long term Fed f d un s OIS swaps.

 For any particular bond, we define the total term premium to be the sum of the FF‐OIS 

and the bond’s FF‐OIS asset swap spread.
This calculation should represent a lower bound on the term 

because Tbill yields are typ y icall below comparable FF‐O
Estimates of the Term Premium Using a Varia

Kim‐Orphanides Orphanides Affine Term Structure Structure M

Note: Results are heavily dependent on model structure and paramete
Matched Maturity Asset Swap Spreads to FF‐OI
Total Term Premium

(FF‐OIS term premium + FF‐OIS asset swap spread)
Longer Dated Term Premiums Appear Eleva

Asset swaps confirm premiums are high. Are high pdue to macro factors factors or to supply/demand? supply/demand?The following charts consider potential drivers such 

Risk AppetiteRisk ExpectationInflation ExpectationP bli u c D bt e DV01Issuance DV01
10Y Total Term Premium vs. Risk Appetite

6080

100

2040

P

‐20

0 10Y TT

P

‐60‐40‐80

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Risk Appetite

BBB‐AAA spreads as a percentage of historic max‐min(1996‐present)

100% equals maximum appetite
100

10Y Total Term Premium vs. Risk Expectatio

608040

0

20

10Y TTP 

‐40‐20‐80‐60

0 10 20 30 40 50 60 70 10 20 30 40 50 60 7

Risk Expectation (Monthly Average of VIX Index)
100

10Y Total Term Premium vs. Inflation Expectation

60802040

20

0 10Y TTP 

‐40‐20‐80‐60

0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.5

Inflation Expectations

5y5y Tips Breakevens (%)
100

120

10Y Fed Funds Term Premium vs. Public Debt DV01

406080

100

0Y FF TP 96‐02 2003‐Sep

0

20

40

0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00

T1

p

Oct08‐Jun

‐20

Privately Held Public Debt DV01 (bln$/bp)

40

10Y Excess Term Premium vs. Public Debt DV01

‐40‐20

0

20

cess TP

‐120‐100

‐80‐60

10Y Exc96‐02

2003‐SepOct08‐Jun

‐140

0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00

Privately Held Public Debt DV01 (bln$/bp)
120

10Y Fed Funds Term Premium vs. Issuance DV01

6080

100

Y FF TP 9

2

0

2040

0 20 40 60 80 100 120

T102

O

‐20

Monthly Issuance DV01 (6mAvg, mm$/bp)

40

10Y Excess Term Premium vs. Issuance DV01

‐40‐20

0

20

s TP

120

‐100

‐80‐60

10YXs

‐140‐120

0 20 40 60 80 100 120

Monthly Issuance DV01 (6mAvg, mm$/bp)
Preceding Analysis Illustrates Costs of Ext

What are the Benefits?

 Macro

 Nominal rates are low (even if term premium is high) Higher debt levels imply greater exposure to rising interest rates

 Risk of a rising nominal rate/low growth environment

 Will reserve currency status continue?

 Large, C d oncentrated F i ore gn O hi wnership of D be t

o Foreign holders would like to diversify

o May view short‐term funding as less stable

 Other large sovereigns sovereigns are also increasing increasing debt and competing competing for c

c

 Other sovereigns have longer average maturities

 Rollover risk

 Traditional rollover risk is likely low since debt is denominated in do Combination of high debt service and increasing rollover needs cou

funding crisis followed by a decline in currency

 Floating rate notes could reduce rollover risk by decoupling the ma

interest rate risk decisions decisions
Low Interest Rates Offer Attractive Longer 

Funding on an Absolute Basis

16.00 

Yield (%) 

A History of Long-Term U.S. Interest Rates: 1913 - July 29, 2011 (monthly) 

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Sources:1900-1976 30-year Prime Corporates1977-Present 30-year Bond Yield

Max 14.87%

Sep. 1981

12.0014.00

8.00

10.00

6.00 

Mean = 5.50%

2.004.00

Min 2.45%

Feb. 1947

0.00 

1913 1920 1927 1934 1941 1948 1955 1962 1969 1976 1983 1990 199

Shaded areas: U.S. RecessionsSource: BNY Mellon; Bloomberg; Global Financial Data; NBER 
Treasury 5yr5yr vs. Spot 5yr & 10y

785634201

Oct‐96 Oct‐97 Oct‐98 Oct‐99 Oct‐00 Oct‐01 Oct‐02 Oct‐03 Oct‐04 Oct‐05 Oct‐06 Oct‐07 Oct‐08 Oct‐

T5y5y 5Y 10Y
Treasury 10yr10yr vs. Spot 10yr

8967452301

Oct‐96 Oct‐97 Oct‐98 Oct‐99 Oct‐00 Oct‐01 Oct‐02 Oct‐03 Oct‐04 Oct‐05 Oct‐06 Oct‐07 Oct‐08 Oct‐

T10y10y 10Y
Debt and Deficit Levels

5%

10% 

‐5%

0%

1930

1940

1950

1960

1970

1980

1990

2000

15%

‐10%‐20%‐15%‐30%‐25%

Fiscal Balance / GDP ‐ rightTotal Debt / GDP ‐ left (reverse order)

Source: OMB, Center for Financial Stability
Foreign Ownership Has Risen, Is Concentrated

Likely Linked to Reserve Currency Statu
What is Outlook for Reserve Currency Sta

3.5

4

Swiss Franc/USD:January 1973 to July 2011

U.S. Dollar Losing Ground as a Safe Haven Currency

3.5000

4.0000

U.S.Dollar/BrazilianReal:June 

Rise of Major EM Currencies to U

1 5

2

2.5

3

3 5

1.5000

2.0000

2.5000

3.0000

0

0.5

1

1.5

an-73 an-75 an-77 an-79 an-81 an-83 an-85 an-87 an-89 an-91 an-93 an-95 an-97 an-99 an-01 an-03 an-05 an-07 an-09 an-11

0.0000

0.5000

1.0000

1.5000

un-94 un-95 un-96 un-97 un-98 un-99 un-00 un-01 un-02 un-03 un-04 

 As both safe haven and EM currencies outperform, the dollar’s status as the global rese

Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja

JaJaJaJaJaJaJa JaJaJaJaJa

Source: BNY Mellon Global Markets

Ju

Ju

Ju

Ju

Ju

Ju

JuJuJuJuJu

Source: BNY Mellon Global Markets

As both safe haven and EM currencies outperform, the dollar s status as the global rese

appears to be slipping

 The idea of a reserve currency is that it is built on strength, not typically that it is “best 

choices”. The fact that there are not currently viable alternatives to the US dollar is a ho

perhaps portends a deteriorating fate
US Debt Mix is Most Short‐Term Funded Among OECD 

< 5 yrs 5‐10 yrs > 

U.S. (2010) 71% 20% Spain 66% 3% 3Germany 59% 25% 1Netherlands 54% 27% 1Finland 53% 38% Belgium 51% 30% 1France 49% 29% 2Greece 46% 27% 2Italy 45% 26% 2U.S. ( ) 1946 41% 24% 3Austria 40% 36% 2Portugal 39% 41% 2Ireland 36% 47% 1Average 49% 31% 2

 Many cite mid‐1940s high debt levels as proof that U.S. can w

l f di d h th t it i k dl 

Sources: U.S. Treasury, Bloomberg, Center for Financial Stability Inc.

Average 49% 31% 2

large funding needs, however the maturity mix was markedly 

than today.
While PERCENTAGE of total debt maturing is shrinking

of ttl o a d bt e mat i ur ng / GDP is ri is ng rapidly

70% 

Marketable Debt Maturing in Next 36 Months

65% 

As % of outstanding debt (LHS)

60% 55% 

As % of GDP (RHS)

50% 

Dec-99

Dec-00

Dec-01

Dec-02

Dec-03

Dec-04

Dec-05

Dec-06

Dec-07

Dec-08

Dec-09

'as % of outstanding debt' as % of GDP
Projected Interest Expense Differenti

Current bill/coupon mix vs. moving to 50/50 mix over 2 yea

250

billions 150

200

Following the 

forward curve

300bp shock at 5 years500bp shock at 5 years

pense differential in 50 100 years Constant spot ratesInterest exp

‐50

0

‐150‐100

2010

2012

2013

2014

2016

2017

2019

2020

2021
Conclusion

 The benefits of extension do not come for free. Historical analysi

that shorter term funding has at many times been both cheaper a

volatility volatility costs have not been high

 Recent cycles of rising rates have not lasted long enough for matu

extension to p ya off

 It is possible, however, that “this time is different” because

o Nominal rates are much closer to the zero bound than previous periodso Deficits Deficits are very high historically historically and rising interest interest expense expense less acceptable acceptableo Concentrated foreign ownership creates less reliable demando The benefits of funding attributable to being the reserve currency may be fading

 While this presentation presentation has focused focused exclusively exclusively on average average matur

matur

for future study is the impact of the distribution of maturities on 

expense