Office of Debt Management

Presentation of U.S. Treasury’s Debt Issuance Framework

November 19, 2015
Debt Management Objectives and Constraints

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 Objectives 

 Least expected cost over time is supported by:

 Managing interest rate risk

 Supporting market functioning and liquidity

 Maintaining a broad investor base

 Regular and predictable results in:

 Better market functioning and liquidity

 Reduced issuance uncertainty which lowers cost

 Constraints

 Uncertainty – (Sources: legislative commitments, macro-economic 

forecast errors, technical modeling factors all create uncertainty in deficit 

forecasts)

 Size - Treasury is too large to behave opportunistically in the credit 

markets 
Debt Management Policy

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 Treasury is a regular and predictable market participant, not a market 

timer. 

 Treasury doesn’t react to current rate levels or short-term fluctuations in 

demand.

 Treasury can respond to uncertainty -- to rapidly raise cash or pay down 

debt.

 Treasury seeks continuous improvement in the auction process.

 Treasury strives for transparency and consults often with market 

participants.

 Treasury is well positioned to finance its debt obligations despite 

significant disruptions in its access to financial markets.
Debt Issuance Framework – Recent Developments 

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Treasury Cash Balance - History

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 Historically, Treasury has sought to minimize cash balances, with a cash balance floor set at $5 

billion.

 This floor was established in the 1980s when auction sizes were substantially smaller than current 

auction sizes and Treasury faced a “negative carry” on cash balances which made holding large 

cash balances costly. Auctions were also less frequent in the 1980s than today.

 Prudent risk management during the 2008-2009 financial crisis resulted in Treasury increasing 

cash balances, but the formal minimum cash balance remained at $5 billion.

 From 2002 – 2008, the average daily cash balance was $26 billion. 

 From 2009 – 2014, the average daily cash balance was $63 billion. 

0

20

40

60

80

100

120

198019821984198619881990199219941996199820002002200420062008201020122014

$ bn

Yearly Average Settlement Sizes

BILLS NOMINAL and REAL COUPONS TOTAL
Treasury Cash Balance – Precautionary Balance

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 Historical experience suggests that it is possible for financial markets to 

disrupted for several business days.

 Hurricane Sandy: 1.5 days

 September 11th: 2-3 days

 Treasury staff determined that it would be prudent from a debt 

management perspective to target a cash balance sufficient to cover 

large, unexpected outflows despite restricted access to financial markets. 

 In the May 2015 quarterly refunding announcement, Treasury 

announced a policy to hold a level of cash generally sufficient to cover 

one week of outflows in the Treasury General Account, subject to a 

minimum balance of roughly $150 billion.

 Given the recent debt limit resolution, Treasury has begun to rebuild its cash 

balance, and projects a year end balance of $325 billion, which should be sufficient 

to cover one week of outflows. 

 The bulk of this increase in cash balance is expected to come from bill issuance, 

which is projected to increase by $147 billion. 
Increasing Net Issuance – Demand for Bills

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 As discussed during recent TBAC meetings, a number of developments have already increased, 

and are expected to further increase, demand for Treasury bills, including:

 Market participants expect money fund reform to result in a significant reallocation of assets 

from prime to government-only funds.

 New regulations have increased the costs for banks to fund with “non-operational” 

deposits. Accordingly, expectations are that at least a portion of these deposits may transition 

to government-only money market funds (MMFs) as a substitute.

 Bank liquidity rules have encouraged an increased demand for high-quality liquid assets 

(HQLA) and a reduction of shorter-term or less stable funding sources.

 Leverage ratios have also encouraged banks to reduce capital-intensive, low-return businesses 

such as repo.

 Under new derivatives margin requirements being implemented pursuant to Dodd-Frank, 

Treasury bills as collateral have a favorable haircut treatment.
Increasing Net Issuance – Treasury Analysis

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 The May 2015 Treasury refunding announcement of intent to increase bill issuance 

reflects Treasury’s commitment to market functioning and liquidity. 

 A liquid, efficient market for Treasury securities provides many benefits.

 The private sector uses Treasury securities as a benchmark for issuance.

 A risk-free asset is useful for collateral.

 A liquid market promotes the transmission of monetary policy.

 Maintaining a liquid market at all points on the curve requires a minimum level of 

issuance.

 Must maintain a supply of Treasury securities that is appropriate relative to market demand. 

 Treasury must issue in a regular and predictable manner. 

 Treasury securities enjoy a “liquidity premium” lowering interest expense.

 Maintaining minimum issuance sizes may compete with Treasury’s least cost 

objective.

 The cancellation of the 30-year bond in 2001 is a case study.
Least Expected Cost Over Time

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 Managing interest expense is very important.

 FY-2015 deficit is 2.4 percent of GDP. Interest expense is 1.2 percent of GDP.

 From FY-2016 through FY-2025, reducing interest expense on all new issuance by 5 basis points 

would reduce the cumulative deficit by nearly $50 billion.

 We will be constantly issuing debt for the foreseeable future. The expected cost of 

issuance over time is critical.

 For example, is it more cost effective to issue a 5-year note and roll it in 5 years time or to issue 

a 10-year note?

 It is not relevant whether the yield curve has a positive slope or whether rates are high or low 

relative to historic levels.

 For a given amount of debt issuance, the relative costs of issuing at different points on 

the curve matter.

 Over the past several decades, estimates of term premiums have declined.

 Treasury bills have historically had lower interest rates than coupon securities with the same 

remaining maturity.
Least Expected Cost Over Time

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 Elevated demand for high-quality liquid assets is a welldocumented phenomena that existed well before the financial 

crisis and regulatory response (Stein et al 2011).

 Bill yields have historically been lower due to various factors 

including their liquid, money-like properties.
Interest Rate Risk and Insurance Considerations

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 Interest rate risk may be a consideration when analyzing the impact of 

increased short-term debt issuance. 

 Bills must be rolled over more frequently than coupons, and are therefore more sensitive to 

unanticipated interest rate shocks. 

 The interest-rate risk profile of an issuance strategy can be altered by considering 

alternative strategies more weighted toward longer-dated issuance, thereby 

possibly providing some insurance against adverse interest rate scenarios.
Floating Rate Note Program Review

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 The introduction of the FRN, which shares important characteristics with bills, has supported 

Treasury’s objective of maintaining a broad investor base.

 The Floating Rate Note (FRN) is a two-year final maturity security that is indexed to the weekly 

three-month Treasury bill auction high rate and pays interest on a quarterly basis. The index rate 

resets each day and features a daily minimum interest accrual rate of zero percent.

 In January of 2014, Treasury conducted its inaugural FRN auction by selling $15 billion worth of 

the new security. 

 Market contacts reported no operational issues and market reception to the first new Treasury 

debt security in over 17 years has been broadly positive. 

 The FRN auction high discount margins have ranged between 6.9 and 16.8 bps since the beginning 

of 2015. 

 Investor classes that are not traditionally invested in short-term Treasury securities such as 

pension and retirement funds and certain foreign and international accounts, have participated in 

the FRN auctions.
FRN Investor Class Auction Allotments

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Dealers 

and 

brokers

74.8%

Investment 

funds

19.0%

Foreign 

and 

international

3.4%

Other

2.8%

Investor Class Auction Awards: 3-Month Bill

January 2014-October 2015

Dealers 

and 

brokers

54.5%

Investment 

funds

11.7%

Foreign 

and 

international

25.4%

Other

8.4%

Investor Class Auction Awards: 2-Year FRN

January 2014-October 2015

Source: United States Department of the Treasury. 
Quarterly Refunding Announcement Process

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 Treasury staff prepare analysis summarizing recent developments in 

financial markets and the broader economy, updated projections of 

Treasury’s future borrowing needs, and scenarios related to the 

optimal path of future issuance. 

 By consolidating the quarter’s qualitative and quantitative analysis 

into one regular publication, Treasury is able to iterate on the 

refunding statement in a consistent and fact-driven manner.