Quarterly Refunding Discussion Ch

August 2, 2005
30-Year Bond Issuance
Three Fundamental Issue

• Financing Needs• Flexibility • Cost Considerations
Financing Needs

• Existing securities can finance projected • Bond issuance is not projected to crowd 

other securities
Debt Portfolio Flexibility

• Average maturity has declined in recent years

modest 30-year issuance would not adversely flexibility

• Roll-over is within the historical range; 30-ye

issuance would reduce short-term funding neewhile maintaining short bias in financing

• Reintroduction of the 30-year diversifies fund• The reintroduction of 30’s increases the inves
Costs

• Term premium partially offset by reduc

event and operation risk, improved cash management, and broader customer bas

• Market consultation indicates potential 

structural demand from real money accopension funds, and asset-liability manag

• Previous presence in market eases mark

acceptance 
DEBT MATURITY MEASURES 

2030405060708090

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 

months

Average Maturity of Issuance

Average Maturity 

54.7

As of June 30, 2005

36.8

(Project

Assumptions: Current CBO budget estimates through FY2015 (except internal Treasury estimate used for FY2005). Future residual financing needs are spread equally across auctioned securities to maintain constant maturity of issuance.

Dashed lines represent with semi-annual 30-y
Distribution of Marketable Debt Outstanding by Securit

0%5%

10%15%20%25%30%35%

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 

BILLS 2-3 YR NOTES 4-7 YR NOTES 8-10 YR NOTES BONDS 

Projected

Projections are based on current CBO budget estimates through FY2015 (except internal Treasury estimate for FY2005). financing needs are spread equally across auctioned securities to maintain constant maturity of issuance. Approximately $bonds are included starting FY2006.

Dotted line: with Bonds
Percentage of Debt Maturing in Next 12 to 36 Months

25%30%35%40%45%50%55%60%65%70%75%

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2

Maturing in 12 Months

Maturing in 24 Months

Maturing in 36 Months

Projected

Projections are based on current CBO budget estimates through FY2015 (except internal Treasury estimate for FY2005). Future residual financing needs are sauctioned securities to maintain constant maturity of issuance. Approximately $25-$30B of bonds are included starting FY2006.

Dotted line: with Bonds
Security Characteristics of Treasury Debt Por

Security

Average 

Spread to 3-

month 

SD of 

spread to 3-

month

Correlation to 

3-month 

nominal yield

Correlation 

to 3-month 

real cost

Average 

modified 

duration for 

change in 

nominal rates

co

6-month 0.19 0.20 0.997 0.71 0.47 

2-year 0.75 0.56 0.977 0.70 1.85 

3-year 0.90 0.72 0.963 0.71 2.69 

5-year 1.10 0.91 0.940 0.65 4.20 

10-year 1.36 1.21 0.904 0.69 7.18 30-year 1.42 1.39 0.858 * 12.90 

5-year TIP 2.01 2.71 0.425 -0.18 4.67 

10-year TIP 1.43 2.93 0.242 -0.26 8.71 20-year TIP 1.57 3.42 -0.081 -0.35 15.10 

Attributes of Different Treasury Security Offerings, Jan 1959-

Notes: Historical data for TIPS are simulated assuming real yields are equivalent to the difference between the yield of a comparable maturity and inflation expectations. Inflation expectations are derived using a simple adaptive expectations last month CPI-U NSA,current month CPI-U NSA and next month CPI-U NSA at 25%, 50% and 25%, respectively. OMof 2.4% is assumed for realized CPI-U NSA post-May 2005. Simulated TIPS' historical real yield is used to calculate TIPconvexity. * Insufficient data.
The Impact of Various Securities on 

Portfolio Costs and Flexibility

Security

Annual 

Auction 

Frequency 

Contribution of debt 

stock maturity to steadystate portfolio's average 

maturity (in months) /1

Historical 

average 

spreads to 3-

month bill 

rate

Steady-state 

Debt Stock 

incl SOMA 

($ billions)

Additional Debt That Can 

Be Raised For $1 Billion 

Increase in Auction Size In 

a Fiscal Year 

($ billions) /1

1-month 52 0.0 0 53 4 3-month 52 0.1 0 283 13 6-month 52 0.3 0.19 551 26 

2-year 12 1.3 0.75 646 12 

3-year 4 0.8 0.90 264 4 

5-year 12 6.0 1.10 1236 12 

10-year 8 13.3 1.36 1368 8 

30-year * 2 23.6 1.42 810 2 

5-year TIP 2 1 2.01 115 2 

10-year TIP 4 4 1.43 420 4 20-year TIP 2 8 1.57 420 2 

Totals 202 58 6166 89 

* Hypothetical# A steady state portfolio illustrates the implications for Treasury's debt stock if Treasury's current issuance pattern and offering sizes were maintained in perpetuity. Assumes no growth in SOMA.

Different Securities' Impact on Flexibility and Cost of a Steady-State P

Notes: /1 Average nominal historical rates are based on data from 1959 to present. A synthetic series to estimate historical nominal rates for TIPS is 
Impact of a new 30 year on Debt Por

2005 2010 

Maturity (years)  Current issuance schedule 1/ 4.50 3.92  With 30-year bonds 2/ 4.50 4.58 Duration (years) Current issuance schedule 3.93 3.58  With 30-year bonds 3.93 3.91 Nominal Interest Cost ($B) Current issuance schedule 152.6 248.9  With 30-year bonds 152.6 249.4 Nominal Interest Cost Sensitivity ($B) 3/ Current issuance schedule -- 389.0  With 30-year bonds -- 400.9 Financing Flexibility ($B) /4 Current issuance schedule -- 5.37%  With 30-year bonds -- 4.39% 

Notes: Projections are based on current CBO budget estimates through FY2015 (except internal Treasury estimate on current OMB estimates for interest rates and inflation. 1/ Under current issuance schedule, auction sizes as pemarketable borrowing needs are held constant. 2/ Approximately $25B to $30B of 30-year bonds are included stasubsequent auction sizes as percents of total marketable borrowing needs are held constant. 3/ Nominal interest 

the change in the debt portfolio's interest expense given a positive shock of 100bps to real and inflation rates. 4/ Achange in auction size over 2006-2010 or 2006-2015.
Treasury Backstop Securi

Lending Facility
Trading volumes are grow

compared to supply

•Cash Market•Futures Market•RP Market 
Turnover Ratios

Average Daily Trading Volume/Marketable Debt Outstanding 

Annual Data

02468

101214

1980198119821983198419851986198719881989199019911992199319941995199619971998199920002001

Percent

Sources: FRBNY, MSPD, BMA

Average Annual Growth Rates 

1981-2004

Outstandings 8%

Average Daily Trading Volume 16%

1990-2004

Outstandings 5%

Average Daily Trading Volume 11%

2000-2004

Outstandings 4%

Average DailyTrading Volume 22%

Annual growth rates in Primary Dealer trading volume based on BMA data.

Turnover Ratios have doubled since 1999.
Peak Open Interest in Front 10-yr Futures Contract vs. Issu

of Cheapest Deliverable Security ($bn)

0

4080

120160200

MJ SDMJ SDMJ SDMJ SDMJ SDMJ SDMJ 

1998 1999 2000 2001 2002 2003 20

peak open interest for front contractoriginal issuance of cheapest-to-deliver security

CBOT data through 7/15/2005
Imbalances Cropping Up Mo

Frequently

Examples:

• Fall 2001: High levels of settlement fails 

August 5-year and 10-year notes after 9

• Second half of 2003: Chronic settlemen

in the May 2013 10-year note 

• 2005: High levels of open interest in futu

contracts led to market dislocations

Outcome: Increasing Fails
Average Daily Treasury Settlement Fails* 

0

50

100150200250

7/4/90

1/4/91

7/4/91

1/4/92

7/4/92

1/4/93

7/4/93

1/4/94

7/4/94

1/4/95

7/4/95

1/4/96

7/4/96

1/4/97

7/4/97

1/4/98

7/4/98

1/4/99

7/4/99

1/4/00

7/4/00

1/4/01

7/4/01

1/4/02

7/4/02

$ Billions

* Fails to ReceiveSource: FRBNY
Risks 

•Large and Persistent Fails•Impaired Liquidity in Cash Market•Loss of Price Convergence in FutuMarket•Operational Cost of Resolving Fails•Ultimately Higher Borrowing Costs Treasury
Imbalances could be mitigate

alleviated through a tempora

increase in the supply of 

Treasuries.
Possible Sources of Additio

Supply

• FRBNY securities lending facility

– Additional supply limited to 65% of SOMA ho– Holdings of some securities are small– No auction participation beyond rollovers– Primary mission of portfolio not securities len

• Large holders

– Most securities are already made available– Individually rational reductions in lending dur

episodes of chronic fails

• Development of a backstop Treasury sec

lending facility

– Design to provide additional supply, while no

impeding normal market functioning
Specials Financing

Demand for Borrowing

Securities Increases

Cost of 

Borrowing Increases

Zero Bound on RPs 

Limits Cost of Borrowing

Spillover into Fails

Buy-in Rule Triggered

Unable to Enforce Buy-in Rule

Because of Supply Constraints

BUT

21
Desirable Outcomes

• Facilitate settlement of 

cash market transactions

• Improve functioning of the 

specials market

– Do not want to damage 

specials market

– Promote market pricing 

through zero RP rate 

– Do not want to distort 

risk/reward trade-offs

• Strengthen futures 

market

– Promote price convergence

Treasury Const

• Continue to prov

certainty of supp

• Supplier of last re

– Encourage mark

solutions to suppimbalances

– Stay out of mark

risk of systemic p

– Do not want to b

perceived as rewshorts
Effects of a Treasury 

Securities Lending Facility

Potential Additional

Supply

Allows Enforcement of

Buy-in Rule

Encourages Pricing Through

Zero Bound

Encourages Availability of 

Existing Supply

Already in the Market

Additional Supply Through Securities 

Lending Facility As Last Resort

23
Desired Attributes of a Backs

Securities Lending Facility

• Clarity and confidence of availability 

– Non-discretionary, standing facility– Unlimited supply, renewable terms

• Discourage use unless market seve

stressed

– Price set at a penalty rate 

• Not designed to address transitory n

– Term greater than overnight needed
Example of How a Backsto

Securities Lending Facility C

Work

• Treasury Stands Ready to Lend Any 

Security at Implied Negative RP Rat

• Quantity Unlimited• Borrow for Fixed Term• If Needed, Borrower Could Renew fo

Same Term
Specials Market

1. Normal Functioning 2. Current Fails S

3. Prompt Delivery / Desired Outcome 4. Backstop Securities Le

Quantity

Interest Rate

0

GC rate

Demand

Supply

Quantity

Interest Rate

0

GC rate

Demand

Supply

Negative RP rates encourage additional supply and curtail demand.

Quantity

Interest Rate

0

GC rate

Supply

Supply may actually decline at near zero RP rates because of fear of not having the security returned.

Buyeno incsecurrates

Quantity

Interest Rate

0

GC rate

Market Supply

Implied Floor / Securities Lending Fac

        s imp
Many Questions Would Need to be Answ

• Policy

– Eligible participants– Pricing mechanism– Term of loan

• Statutory/Regulatory

– Nature of transaction (loan, or sale and buyback)– Authority

• Standing• During Budget Surpluses • Debt Ceiling 

– Interaction with buy-in rule– Clarification of tax regulations– Possible legislative changes

• Operational

– Institutions to conduct transactions– Collateral arrangements– Accounting

• Systems modifications • Treatment of interest accrual• Treatment of interest payments• Affect on amounts of debt outstanding
Presentation to the U.S. Treasury 

and the Treasury Borrowing 

Advisory Committee

August 2, 2005
Presentation Question:

Please discuss the impact of currency movements on the Treasury's cost of 

borrowing. Are foreign investors exerting significant downward pressures on the 

Treasury's financing costs or are other forces at work which have limited 

increases in yields? 

Main Points:

3⁄4 Currency movements can impact Treasury's cost of borrowing 

through a lower exchange rate creating more stimulative financial 

conditions. 

3⁄4 Foreign official investors exert downward pressure on 

Treasury's cost of borrowing through funding the current 

account deficit. Foreign private and official investors have 

exhibited a tendency recently of buying longer maturity 

instruments. 

3⁄4 These are just some of the factors limiting the increase in 

yields; others include: 

• A decrease in risk premiums 

• An increase in the global savings rate 

• Structural changes in the bond market 

3⁄4 However, the impact of some of these factors could wane. 
1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

80

90

100

110

120

130

140

150

160

2

4

6

8

10

12

14

16

18

US Trade-weighted Dollar Index (DXY) 29-Jul-05 89.35

US 10 Year Yield 29-Jul-05 4.28

level

percent

Updated 29-Jul-05

(cash’dx.cl)

29-Jul-05

89.35

4.28

1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

130

120

110

100

90

80

70

0

2

4

6

8

10

12

14

US Real Trade-weighted Dollar (Inverted and Advanced by 18-months) Dec 06 90.30

Core CPI Ann%Chg Jun 05 2.09

level

percent

Updated 1-Aug-05

(work’fx_us_real.m.lag)

Dec06

90.30

Jun05

2.09

*Source: A US Investment Bank.
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

0

20

40

60

80

0

20

40

60

80

Total Official Net Purchases of US bonds (treasury,agency and corporate bonds)

Total Private Net Purchases of US Bonds (treasury, agency and corporate bonds)

Level

May 05

70.68

57.43

13.25

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

0

500

1000

1500

2000

2500

3000

3500

4000

0

500

1000

1500

2000

2500

3000

3500

4000

Cummulative Sum of Total Official Net Purchases of US Bonds (treasury,agency and corporate bonds) May 05 887.13

Cummulative Sum of Total Private Net Purchases of US Bonds (treasury, agency and corporate bonds) May 05 4151.98

level

percent

Updated 27-Jul-05

(work’bond_off_sum)

May 05

887.13

4151.98

Source: Department of Treasury.
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

-150

-100

-50

0

50

100

150

200

-150

-100

-50

0

50

100

150

200

One Period MSum:12

US Net portfolio flows - monthly funding requirement (monthly c/a + monthly net FDI)

Level

Level

Updated 26-Jul-05

(work’fund_gap_m)

May 05

-6.13

-72.69

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

-200

-150

-100

-50

0

50

100

150

200

-200

-150

-100

-50

0

50

100

150

200

One Period MSum:12

US Net private portfolio flows - monthly funding requirement (monthly c/a + monthly net FDI)

Level

Level

Updated 26-Jul-05

(work’fund_gap_priv)

May 05

-19.33

-230.29

Source: Department of Treasury, Bureau of Economic Analytics.
2000 2001 2002 2003 2004 2005

100

200

300

400

500

600

700

100

200

300

400

500

600

700

Foreign Private Institutions: Holdings of Treasury Bonds (Bil $) May 05 707.31

Foreign Private Institutions: Holdings of Treasury Bills (Bil $) May 05 77.90

level

US$

2000 2001 2002 2003 2004 2005

200

300

400

500

600

700

800

900

1000

200

300

400

500

600

700

800

900

1000

Foreign Official Institutions: Holdings of US Treasury Bonds (Bil.$) May 05 1012.80

Foreign Official Institutions: Holdings of US Treasury Bills (Bil.$) May 05 229.00

US$

US$

Updated 18-Jul-05

(haver_usint’fhofftbn)

May 05

1012.80

229.00

Source: Department of Treasury.
Source: Department of Treasury.
Maturity Structure of Foreign Holdings of US Long-Term Debt 

Total Debt

0

5

10

15

20

One or

less

1-2 2-3 3-4 4-5 5-6 6-7 7-8 8-9 9-10 10-15 15-20 Over 20

Year

(%)

Jun-02 Jun-03 Jun-04

Maturity Structure of Foreign Holdings of US Long-Term Debt 

Treasury

0

5

10

15

20

25

30

One or less 1-2 2-3 3-4 4-5 5-6 6-7 7-8 8-9 9-10 10-15 15-20 Over 20

Year

(%)

Maturity Structure of Foreign Holdings of US Long-Term Debt 

Corporate

0

2

4

6

8

10

12

14

16

One or less 1-2 2-3 3-4 4-5 5-6 6-7 7-8 8-9 9-10 10-15 15-20 Over 20

Year

(%)

Maturity Structure of Foreign Holdings of US Long-Term Debt 

Agency

0

5

10

15

20

25

One or less 1-2 2-3 3-4 4-5 5-6 6-7 7-8 8-9 9-10 10-15 15-20 Over 20

Year

(%)

Source: Department of Treasury.
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 0

80604020

140120100

140120100806040200

China Cummulative Holdings of Treasury Bonds ($ Bil) May05 150.19China Cummulative Holdings of Agency Bonds ($ Bil) May05 144.51China Cummulative Holdings of Corporate Bonds ($ Bil) May05 42.12

Level

Level

Updated 27-Jul-05(work’ch_trea_sum)

May 05

150.19144.51

42.12

Source: Department of Treasury.
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

987654

1098765432

US 10-year Bond Yield 29-Jul-05 4.28US 10-Year Foward 1 Year Rate 29-Jul-05 5.12

level

percent

29-Jul-05

4.285.12
World Gross National Savings Rate (%)

21.0

21.5

22.0

22.5

23.0

23.5

24.0

24.5

25.0

25.5

26.0

1985

1986

1987

198819891990199119921993

19941995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

National Savings as a % of GDP

By Region

10

15

20

25

30

35

40

US Euro Area UK Japan Asia NIEs Developing

Asia

Middle East

1983-90 Avg 1991-98 Avg 1999 2000 2001 2002 2003 2004

National Investment as a % of GDP

By Region 

10

15

20

25

30

35

40

US Euro Area UK Japan Asia NIEs Developing

Asia

Middle East

1983-90 Avg 1991-98 Avg 1999 2000 2001 2002 2003 2004

Source: IMF World Economic Outlook (April 2005).
Source: A US Investment Bank.
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

2.62.42.22.01.81.61.41.21.00.80.6

2.62.42.22.01.81.61.41.21.00.80.6

Treasury Term Premium

Level

Level

05Q2

0.75

Source: Federal Reserve Board. Derived from a three-factor arbitrage-free term structure model.
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

3.53.02.52.01.51.0

3.53.02.52.01.51.0

OECD Real GDP 10-year moving standard deviation 05:1 0.98OECD Consumer Price Inflation 10-year moving standard deviation 05:1 1.13

level

percent

Updated 26-Jul-05(work’oecd_gdp_msd)

05:1

0.981.13

Source: OECD
1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

8642

141210

1412108642

US 10-year 

Bond 

Yield Jul 05 4.16

US 10-year Inflation Expectations* Jun 05 2.50

level

US$

Updated 27-Jul-05(work’treas_m)

Jul 05

4.16

Jun 05

2.50

*Source: Federal Reserve board for data from 1979 to date. History is derived from a fitted model.
Fixed Income Issuance by Sector in 10-Year note Equivalents (Billions)

0

50

250200150100

Jan 97 -

Apr-97

Jul-97

Oct-97

Jan 98 -

Apr-98

Jul-98

Oct-98

Jan 99 -

Apr-99

Jul-99

Oct-99

Jan 00 -

Apr-00

Jul-00

Oct-00

Jan 01 -

Apr-01

Jul-01

Oct-01

Jan 02 -

Apr-02

Jul-02

Oct-02

Jan 03 -

Apr-03

Jul-03

Oct-03

Jan 04 -

Apr-04

Jul-04

Oct-04

Jan 05 -

Apr-05

ABSMBSAGENCYGOVTCORP

Source: A US Investment Bank.
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

0

50

300250200150100

-50-100

350300250200150100500

Nonfarm Nonfinancial Corporate Business: Financing Gap (Adjusted for MSFT Dividend, SAAR, Bil.$)

Level

Source: Federal Reserve Board Flow of Funds
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

-100

0

700600500400300200100

2000180016001400120010008006004002000

One Period MSum:4

Pension Fund, Life Insurance Companies and Mutual Funds: Flows into Credit Market Instruments

Level

Level

05Q1

401.68

1337.76

Source: Federal Reserve Board Flow of Funds.