Presenta

Treasury Borrowing Advisory 

U.S. Department o

Office of Deb
Office of Debt Management

Fiscal Outlook
Office of Debt Management

Year-over-year growth in revenue from individual acorporate tax receipts is now flat through FY08 Q2

Individual and Corporate Tax Receipts 

Fiscal Year to Date

0

200400600800

10001200140016001800

Oct Nov Dec Jan Feb Mar Apr May Jun Jul Au

$ billions

2004 2005 2006 2007 2008

4.4% 14.6% 12.9% 12.5% 0.0%

Year-Over-Year Growth in Cumulative Receipts 

End of FY Q2
Office of Debt Management

Growth in outlays has increased versus FYTD 200

Total Outlays 

Fiscal Year to Date

(monthly data)

0

500

10001500200025003000

Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug 

$ billions

FY FY FY FY FY FY 

2004 2005 2006 2007 2008

7.3% 6.6% 8.7% 2.9% 5.7%

Year-Over-Year Growth in Cumulative Outlays 

End of FY Q2

FY 2007 FY 2008 % change

Defense 268 292 9%

Social Security Benefits 283 299 6%

Medicare 225 217 -4%

Medicaid 94 99 5%

 Net Interest 112 126 13%

Outlays Through March

($ Billions , Y-O-Y % change)
Office of Debt Management

Year-over-year growth in outlays has exceeded thareceipts since October

Federal Outlays and Net Receipts

Year-Over-Year % Change

0.0%2.0%4.0%6.0%8.0%

10.0%12.0%14.0%

Oct-06

Nov-06

Dec-06

Jan-07

Feb-07

Mar-07

Apr-07

May-07

Jun-07

Jul-07

Aug-07

Sep-07

Oct-07

Nov-07

Dec-07

J08

Outlays Net Receipts
Office of Debt Management

Borrowing needs have increased considerably sinbeginning of the fiscal year

Fiscal Year to Date Deficits

(monthly data) 

-49

-80

-162

-258

-81

-148

-121

-157

-274

-163

-56

-154

-106

-88

-42

-122

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

-50

0

Oct-06

Nov-06

Dec-06

Jan-07

Feb-07

Mar-07

Apr-07

May-07

Jun-07

Jul-07

Aug-07

Sep-07

Oct-07

Nov-07

Dec-07

Jan-08

$ Billions 

2007 FY to Date Deficits

2008 FY to Date Deficits
Office of Debt Management

Primary Dealer Estimates of the FY 2008 deficit hafrom $203 billion in November 2007 to $414 recent

FY 08 Deficit Estimates 

Primary Dealers* CBO 

Current: 414 396 Range based on average absolute forecast error 362-466 319-473 Estimates as of: April 08 March 08 

Note: Ranges based on errors from 2003-2007.* Primary Dealers reflect average estimate.
Office of Debt Management

The longer the forecast horizon, the greater the unsurrounding deficit estimates

Error Bands About Current Deficit Estimates

-600-500-400-300-200-100

0

100200300400

2008 2009 2010 2011 2012 

Fiscal Years $ billions

Deficit estimates from FY2009 OMB Budget

Deficit estimate plus one standard deviation about OMB estimate

Deficit estimate minus one standeviation about OMB estimate

Source: Standard deviations for estimates for current year and years forward and actual deficit or surplus are from OMB's 2009 Budget Table 20-7 and Table 16-2.
Office of Debt Management

SOMA bill redemptions have exerted upward pressprivate bill issuance

Outstanding Bills FY05-FY08

11

Oct-04 Dec-04 Apr-05 Jul-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 

Priv Bills SOMA Total

FY 2008 start

Absolute Chg. y.o.y. + $82 bil.Percent Chg. y.o.y. + 9%

Outstanding Bills

 FYTD 2008 = $1,026 bil.

FYTD 2007 = $944 bil.
Office of Debt Management

Since the beginning of FY2007, the Fed’s holdings of Treasudeclined by $230 billion as new liquidity tools have been intr

Federal Reserve Outright Holdings of Treasury Securities

0

100200300400500600700800900

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2000 2001 2002 2003 2004 2005 2006 2007

Weekly Data

$ Billions

0100200300400500600700800900

$ Billions

Source: Federal Reserve H.4.1 release

Fiscal Yea

to Date

October November December January February March April 16, 2008 Change

TAF 0 0 0 44 60 70 100 100PDCF 0 0 0 0 0 23* 26 26Discount Window 0 0 3 2 0 0 9 928-day RPs 0 0 0 0 0 60** 70 70Currency Swaps 0 0 18 24 36 36 36 36TSLF 0 0 0 0 0 0 129 129

Total 0 0 21 68 96 189 370 370

Outright Treasury Holdings 780 780 770 728 713 682 549 -231* 2-week average** Outstanding end of March

Liquidity Tools

(Monthly Averages, $ Billions)

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

Mitigating volatility in cash balances resulting from receipts, redemptions, and other factors remains c

Treasury Daily Operating Cash Balance

0

255075

100125

Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug 

$ billions

FY 2006FY 2007FY 2008

Note: Data through April 24, 
Office of Debt Management

Rapid growth in marketable financing needs has leincreasing dependence on cash management bills

Near Term Financing Plan

FY 2006

-$75-$25

$25$75

$125

1/11/81/151/221/292/52/122/192/263/53/123/193/264/24/94/164/234/305/75/145/215/286/46/116/186/257/27/97/167/237/308/68/138/208/279/39/109/179/24

CMBs BillFin CpnFin OpBal

Near Term Financing Plan

FY 2007

-$75-$25

$25$75

$125

1/11/81/151/221/292/52/122/192/263/53/123/193/264/24/94/164/234/305/75/145/215/286/46/116/

CMBs BillFin CpnFin 

Near Term Financing Plan

FY 2008

-$75-$25

$25$75

$125

1/11/81/151/221/292/52/122/192/263/43/113/183/254/14/84/154/224/295/65/135/205/276/36/106/176/247/17/87/157/227/298/58/128/198/269/29/99/169/239/30

CMBs BillFin CpnFin OpBal
Office of Debt Management

In 2001 – 2002, Treasury financed an increasing deficthrough increases in bill and shorter-term coupon is

Changes in Issuance in Response to Increasing Deficits:

2001 Revisited

$5.0

$10.0$15.0$20.0$25.0$30.0

1/2/2001

2/2/2001

3/2/2001

4/2/2001

5/2/2001

6/2/2001

7/2/2001

8/2/2001

9/2/2001

10/2/2001

11/2/2001

12/2/2001

1/2/2002

2/2/2002

3/2/2002

4/2/2002

5/2/2002

Size of Last Offering (billions)

3-Month (Weekly) 6-Month (Weekly) 2-Year (Monthly) 5-Year (Monthly)

Security January 2001 (bil) July 2002 (bil) Change in 18 months (bil)

3-Month $12.5 $17.0 $4.56-Month $10.0 $15.0 $5.0

2-Year $10.0 $27.0 $17.05-Year $12.0 $22.0 $10.0

Issuance Sizes and Speed of Change in a Changing Deficit Environment
Office of Debt Management

Treasury has been financing this year’s deficit in a manner

Changes in Issuance in Response to Increasing Deficits and a Stimulus Packag

2007-2008

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

4/16/2007 4/30/2007 5/14/2007 5/28/2007 6/11/2007 6/25/2007 7/9/2007 7/23/2007 8/6/2007 8/20/2007 9/3/2007 9/17/2007 10/1/2007 10/15/2007 10/29/2007 11/12/2007 11/26/2007 12/10/2007 12/24/2007 1/7/2008 1/21/2008 2/4/2008 2/18/2008 3/3

Size of Last Offering (billions)

3-Month (Weekly) 6-Month (Weekly) 2-Year (Monthly) 5-Year (Monthly)

Security April 2007 (bil) April 2008 (bil) Change in One Year (bil)3-Month $17.00 $22.00 $5.006-Month $14.00 $20.00 $6.00

2-Year $18.00 $30.00 $12.00

5-Year $13.00 $19.00 $6.00

Issuance Sizes and Speed of Change in a Changing Deficit Environment
Office of Debt Management

Par TIPS outstanding have grown at a rapid clip

TIPS Outstanding

Par Amount

0

50

100150200250300350400450

2001 2002 2003 2004 2005 2006 20

End of Fiscal Year

$ Billions

*Through March 31, 2008
Office of Debt Management

Inflation accrual has grown at an even faster pace

TIPS Outstanding

0

50

100150200250300350400450500

2001 2002 2003 2004 2005 2006 2007 

End of Fiscal Year

$ Billions

Par Inflation accrual

*Through March 31, 2008
Office of Debt Management

Maturing 3-year and 5-year notes create large outfcash management challenges

Coupons Maturing

April 30, 2008-February 15, 2038

0

20406080

100120

30-APR-2008

15-MAY-2008

31-MAY-2008

30-JUN-2008

31-JUL-2008

15-AUG-2008

31-AUG-2008

15-SEP-2008

30-SEP-2008

15-OCT-2008

31-OCT-2008

15-NOV-2008

30-NOV-2008

15-DEC-2008

31-DEC-2008

15-JAN-2009

31-JAN-2009

15-FEB-2009

28-FEB-2009

15-MAR-2009

31-MAR-2009

15-APR-2009

30-APR-2009

15-MAY-2009

31-MAY-2009

15-JUN-2009

30-JUN-2009

15-JUL-2009

31-JUL-2009

15-AUG-2009

31-AUG-2009

15-SEP-2009

30-SEP-2009

15-OCT-2009

31-OCT-2009

15-NOV-2009

30-NOV-2009

15-DEC-2009

31-DEC-2009

15-JAN-2010

31-JAN-2010

15-FEB-2010

28-FEB-2010

15-MAR-2010

31-MAR-2010

15-APR-2010

15-MAY-2010

15-JUN-2010

15-JUL-2010

15-AUG-2010

15-SEP-2010

15-OCT-2010

15-NOV-2010

15-DEC-2010

15-JAN-2011

15-FEB-2011

28-FEB-2011

31-MAR-2011

15-APR-2011

30-APR-2011

31-MAY-2011

30-JUN-2011

31-JUL-2011

15-AUG-2011

31-AUG-2011

30-SEP-2011

31-OCT-2011

30-NOV-2011

31-DEC-2011

15-JAN-2012

31-JAN-2012

15-FEB-2012

29-FEB-2012

31-MAR-2012

15-APR-2012

30-APR-2012

31-MAY-2012

30-JUN-2012

15-JUL-2012

31-JUL-2012

15-AUG-2012

31-AUG-2012

30-SEP-2012

31-OCT-2012

15-NOV-2012

30-NOV-2012

31-DEC-2012

31-JAN-2013

15-FEB-2013

28-FEB-2013

31-MAR-2013

15-MAY-2013

15-JUL-2013

15-AUG-2013

15-NOV-2013

15-JAN-2014

15-FEB-2014

15-MAY-2014

15-JUL-2014

15-AUG-2014

15-NOV-2014

15-JAN-2015

15-FEB-2015

15-MAY-2015

15-JUL-2015

15-AUG-2015

15-NOV-2015

15-JAN-2016

15-FEB-2016

15-MAY-2016

15-JUL-2016

15-AUG-2016

15-NOV-2016

15-JAN-2017

15-FEB-2017

15-MAY-2017

15-JUL-2017

15-AUG-2017

15-NOV-2017

15-JAN-2018

15-FEB-2018

15-MAY-2018

15-NOV-2018

15-FEB-2019

15-AUG-2019

15-FEB-2020

15-MAY-2020

15-AUG-2020

15-FEB-2021

15-MAY-2021

15-AUG-2021

15-NOV-2021

15-AUG-2022

15-NOV-2022

15-FEB-2023

15-AUG-2023

15-NOV-2024

15-JAN-2025

$ Billions

10 YR IIS NOTE 10 YR NOTE 2 YR NOTE20 YR IIS BOND 3 YR NOTE 30 YR BOND30 YR IIS BOND 5 YR IIS NOTE 5 YR NOTE
Office of Debt Management

Financing Considerations in FY 2008

 Increased bills as a percent of the portfolio Increased nominal coupons from current low levels Issuing longer-dated cash management bills to bridge low points 

balances during tax refund season and fiscal stimulus program

 But marketable borrowing needs remain high as a result of:

– Lower net State and Local and Government Issuance 

• -$10 b FY 08 through Q2 vs. $43 b FY 07 through Q2

– Redemptions by Federal Reserve 

• $120 b impact FYTD 08

– Sales by Federal Reserve 

• FYTD sales = $114 b with impact of $79 b in bills in FY 08

– Enactment of fiscal stimulus program 

• $168 b total size with rebates beginning in late April

– Lower growth in revenue combined with higher growth in outlays

 Cash management and the overall debt profile, while manageab

focus for debt managers and potentially call for additional tools.
Office of Debt Management

Given current and medium-term trends in the economic amarket outlook, what are the TBAC’s thoughts on Treasurissuance? In particular, Treasury would like the Committeon the potential introduction of new securities, including thbill.
Presenta

Treasury Borrowing Advisory C

U.S. Department o

Office of Deb
Office of Debt Management 

Recent Actions by Market Participants to Address Fails in t

Repurchase Market
Office of Debt Management 

As in 2001, fails have increased as the Fed Funds declined rapidly

Primary Dealer Treasury Security Settlement Fai

Interest Rate Environment

0

50

100150200250300350

1/4/1995

7/4/1995

1/4/1996

7/4/1996

1/4/1997

7/4/1997

1/4/1998

7/4/1998

1/4/1999

7/4/1999

1/4/2000

7/4/2000

1/4/2001

7/4/2001

1/4/2002

7/4/2002

1/4/2003

7/4/2003

1/4/2004

7/4/2004

1/4/2005

7/4/2005

1/4/2006

7/4/2006

$ Billions

Weekly Effective Fed Funds Rate

Average Daily Fails to Receive

Correlation Coefficient = -0.5125

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

Since the February Refunding, Treasury has consuprivate market participants to prevent systemic fai

 At the February Quarterly Refunding, we discussed the potential environ

which lower interest rates raised the risk of chronic fails, a risk that we bliquidity and raises our cost of borrowing. 

 In addition, we asked market participants to pursue the identification and 

implementation of market oriented solutions to help mitigate such a deve

 Private sector participants have responded with some actionable items t

in the near term.

 The private sectors participants championing these efforts are the Secu

and Financial Markets Association (SIFMA) and the Treasury Market Pr(TMPG).
Office of Debt Management 

Current SIFMA Responses

 Prompt Delivery Trading Practice:

• In 2004, SIFMA published a “prompt delivery” trading practice. A “p

delivery” repo trade is a transaction in which the Seller represents thdeliver a particular security within 15 minutes of entering into the tra

the transaction fails, the trade would be cancelled and the identity o

party would be disclosed to the non-failing party.

• Status: This trading practice is available, but is rarely used.

 Negative Rate Repo Trading Practice:

• In 2006, SIFMA published a Repo Trading Practice for negative rep

trading. If a party enters into a negative rate repo transaction and fsecurities, the rate on the transaction will be changed to the absolutnegative rate agreed upon. This provides incentive to deliver.

• SIFMA has formed a Task Force of operational professionals to ens

lessons learned from the March 2008 experience are incorporated ipractices.

• Status: Market participants entered into a number of negative repo 

transactions during the recent spike in settlement fails at the end of SIFMA members believe that negative repo rate capability aids in afails by allowing market participants to source securities at a marke

secures delivery. 
Office of Debt Management 

Additional SIFMA Initiatives

 Fails Best Practices:

• SIFMA is developing Fails Best Practices. These Best Practices are expe

recommend that when fails age beyond a few days, and in any event afteshould implement risk mitigation procedures, including, but not limited to:

-Margining of outstanding fails;-Limiting certain trading techniques;-Identifying pair-offs;-Facilitating or encouraging early cash-settlements; and-Attempting to source securities needed for delivery.

• Status: SIMFA expects to publish its Best Practices in a matter of we

 Buy-in Procedures for Government Securities: Cash Settlement.

• SIFMA plans to publish revised Buy-in Procedures that will include a 

settlement feature which will enable dealers to closeout aged fails relcustomer’s securities. Prices to be determined by widely recognized s

• Status: The revised Buy-in Procedures have been approved by all rel

committees within SIFMA. SIFMA will submit an exemptive request t
Office of Debt Management 

Additional SIFMA Initiatives

 Master Repurchase Agreement: Mini-closeout provision:

• SIFMA is developing a “mini-closeout” annex that can be used with 

Repurchase Agreement (MRA). Allows fails to receive position to csettle only failing trade w/o closing out all transactions under the ag

• Status: SIFMA’s Fails Task Force has endorsed this approach and 

recommend to SIFMA’s Funding Division Executive Committee. Asapproval by the Committee, SIFMA should be in a position to publisyear.

 SIFMA Treasury Fails Monitoring Committee:

• SIFMA will form a Treasury Fails Monitoring Committee with senior repr

from the funding and cash markets including the buyside. 

• The Committee’s function will be to assess the level of settlement fa

ongoing basis and to alert the market, by public statement, when mmitigation, remediation and the attention of management is warrant

• The Committee will be authorized to recommend particular practice

address the specific circumstances causing an elevated level of set

• The Committee will develop metrics and objective standards that wi

Committee’s determination that a particular event warrants industryattention. 

• Status: The Committee will be formally constituted prior to the publi

SIFMA’s Fails Best Practices.
Office of Debt Management 

Treasury Market Practices Group Background

 The TMPG was formed in February 2007 to support the integrity and eff

U.S. Treasury market through the promotion of best practices in Treasuand related markets. 

 Members include senior business and operations managers, legal and c

professionals from securities dealers, banks and buy-side firms.

 The Federal Reserve Bank of New York sponsors the TMPG and provid

administrative support. 

 In May 2007 the TMPG published “Treasury Market Best Practices” whi

key principles for trading and operations. The document continues to be market conditions and trading practices evolve. 

 Ongoing work includes discussions around chronic fails remedies, collab

clearing entities on practices around general collateral financing, and fixprime brokerage best practices.
Office of Debt Management 

Treasury Market Practices Group Initiatives

 Treasury Market Best Practices: 

• Expanded to recommend early management attention to large or un

settlement fails in specific issues (February 2008). 

• Clarified best practice guidance for avoiding use of general collatera

finance “special” repo collateral (April 2008). 

• Considering whether changes to practice guidance are needed in lig

negative rate and guaranteed delivery trading in the repo market.

 Increased coordination of settlement among custodians, asset manager

corporations, etc:

• Round-robin netting mechanism across clearing banks being develo

 Broad support for all proposed SIFMA initiatives.

• However, some differences remain in the timing and pricing of the c

settlement option of the Buy-in rule. 

• TMPG strongly encourages cash settlement for resolution of fails be
Office of Debt Management 

Issues for Consideration

 Buy-in procedures: 

• Timeframe of 5 business days vs. currently 30 days before acting. 

 Negative rate repo trading:

• Implementation and practices.

 Impose more demanding measures: 

• Capital charges as a result of fails to deliver.• Margining as a result of fails to deliver.

 Other potential responses?
Office of Debt Management 

Charge to the Treasury Borrowing Advisory Comm

 At the February Refunding, we discussed the potential for an environme

lower interest rates raised the potential risk of systemic fails, a risk that w

impairs liquidity and raises our cost of borrowing. 

 In addition, we asked market participants to pursue the identification and 

implementation of market oriented solutions to help mitigate such a deve

 What is the Committee’s view on actions taken by market participants? W

steps would you suggest be undertaken? What type of timeline and benwould be most effective?