Presentation to the 

Treasury Borrowing Advisory Committee

U.S. Department o

Offi f D bOffice of Deb

Fe
Federal Budget Deficits Year-to-Date

-1 

-1,600 

$ Billions

2008 Y-O-Y % Change

-1,086

-1,267

-1,378

1

-1,400-1,200

2009 2010

-765

-957

-802

-992

-1,000

-800

-263 -311 -319 269

-371

-483 -455

-402

-485

-569

-600-400

-56

-154

-106 -88

263

-152

-269 -237

-200

0

7

7

7

8

8

8

8

8

8

8

8

8

8

8

8

9

9

9

9

9

9

9

9

9

Office of Debt Management

Oct-07

Nov-07

Dec-07

Jan-08

Feb-08

Mar-08

Apr-08

May-08

Jun-08

Jul-08

Aug-08

Sep-08

Oct-08

Nov-08

Dec-08

Jan-09

Feb-09

Mar-09

Apr-09

May-09

Jun-09

Jul-09

Aug-09

S09
Federal Cash Outlays Year-to-Date

0

1-Oct 15-Nov 31-Dec 15-Feb 1-Apr 17-May 2-Jul 

FY07 FY08 FY09 

-1,000

-500

-1,500

Billion

2 500

-2,000

$ 

-3,000-2,500

Office of Debt Management

-3,500
Federal Cash Outlays Breakdown

-75

0

1-Oct 30-Nov 29-Jan 30-Mar 29-May 28-Jul 26-Sep

Defense Vendors

-25

0

1-Oct 30-Nov 29-Jan 30-Mar 

Education

300

-225-150

$ Billions -100 -75

-50

$ Billions

FY07 FY08 FY09 

-450-375-300

FY07 FY08 FY09 FY10

-175-150-125

FY07 FY08 FY09 

Medicare Medicaid

-100

0

1-Oct 15-Nov 31-Dec 15-Feb 1-Apr 17-May 2-Jul 16-Aug

-50

0

1-Oct 15-Nov 31-Dec 15-Feb 1-Apr 17

Medicaid

-300-200

$ Billions

200

-150-100

$ Billions

Office of Debt Management

-600-500-400

FY07 FY08 FY09 FY10

-300-250-200

FY07 FY08 FY09 
Obligations and Cash Outlays for the Recovery Act

300350

Obligations Outlays

250150200

Billions

100

0

50

Office of Debt Management

May-09

Jun-09

Jul-09

Aug-09

Sep-09

Oct-09

Nov-09

Dec-09

Source: Agency Reported Data for Contracts, Grants, Loan

Federal Recovery Accountability & Transpa
TARP Outflows and Inflows

100125

Repayments, Dividends, Interest (LHS)Cash Outflows (LHS)Cumulative Net Cash Flow (RHS)

$Billions 

5075

Cumulative Net Cash Flow (RHS)

0

25

-50-25

-100

-75

Office of Debt Management

-125 

Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct
Federal Cash Receipts Year-to-Date

2,500

FY07 FY08 FY09 FY10

2,0001,500

$ Billion

1,000

500

Office of Debt Management

0

1-Oct 15-Nov 31-Dec 15-Feb 1-Apr 17-May 2-Jul 
Optimism for Future Receipts in the Slowing Decline in Corp

40%

Rolling 12-Month Growth Rates

Corp TaxesWH Taxes

20%30% nWH Taxes

0%

10%

-20%-10%-40%-30%

Office of Debt Management

-50%

Mar-82

Mar-83

Mar-84

Mar-85

Mar-86

Mar-87

Mar-88

Mar-89

Mar-90

Mar-91

Mar-92

Mar-93

Mar-94

Mar-95

Mar-96

Mar-97

Mar-98

Mar-99

Mar-00

Mar-01

Mar-02

Mar-03

Mar-04
Portfolio Distribution

Bill Sh f T t l P tf li

29%31%33%35%37%

Bills as a Share of Total Portfolio

All Bills Regular Bills

Nominal Coupons as a Share of T

19%21%23%25%27%29%

TIPS as a Share of Total Portfolio Total Portfolio

17%19%

Oct-04

Apr-05

Oct-05

Apr-06

Oct-06

Apr-07

Oct-07

Apr-08

Oct-08

Apr-09

Oct-09

Oct-04

Apr-05

Oct-05

Apr-06

Oct-06

Apr-07

Oct-07

Total Portfolio

11%12%13%

TIPS as a Share of Total Portfolio

TIPS Regular Bills 

7%8%9%10%

Office of Debt Management

Oct-04

Apr-05

Oct-05

Apr-06

Oct-06

Apr-07

Oct-07

A08

5%6%

Oct-04

Apr-05

Oct-05

Apr-06

Oct-06

Apr-07

Oct-07

Apr-08

Oct-08

Apr-09

Oct-09
Cumulative Net Coupon Issuance since FY 2007

400500

2-year (LHS) 3-year (LHS)

300

400

lions)

5-year (LHS) 7-year (LHS)10-year (LHS) 30-year (LHS)TIP

S (LHS) Total (RHS)

200

Net Issuance ($ bilS ( S) ( S)

0

100

Cumulative N

-100

Office of Debt Management

-200

Oct-07

Nov-07

Dec-07

Jan-08

Feb-08

Mar-08

Apr-08

May-08

Jun-08

Jul-08

Aug-08

Sep-08

Oct-08

Nov-08

Dec-08

Jan-09

Feb-09

Mar-09

Apr-09

May-09

Jun-09

Jul-09

Aug-09

Sep-09

Oct-09
Treasury Daily Operating Cash Balance

175200

$ Billions

Note: Data through Excludes SFPs

150175

FY 2007 FY 2008FY 2009 FY 2010

Dec. 15 Jun. 15

100125

Apr. 15 

5075

0

25

Office of Debt Management

Oct Nov Dec Jan Feb Mar Apr May Jun Jul A
Debt Maturity Measures

90 

months 

708060 4050

Average Maturity of Marketable Debt Outstanding

30 

Average Maturity of Issuance

Office of Debt Management

20 

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

Data through December 31, 2009. Average Maturity of Issuance uses a 4-quarter average.
Maturing Coupons

F b 15 2010 N b 15 2039

8090

$ Billions February 15, 2010-November 15, 2039

2 YR NOTE 3 YR NOTE 5 YR NOTE 7 YR NOTE 10 Y30 YR BOND 5 YR IIS BOND 10 YR IIS NOTE 20 YR IIS BOND 30 Y

*Based on coupon securities o

In the next 5 years 78 days will have maturities greater

6070

In the next 5 years, 78 days will have maturities greater

than $20 billion and 54 days greater than $30 billion.

40502030

0

10

Office of Debt Management

15-Feb-10

31-Mar-10

15-May-10

30-Jun-10

15-Aug-10

30-Sep-10

15-Nov-10

31-Dec-10

15-Feb-11

15-Apr-11

30-Jun-11

31-Aug-11

15-Nov-11

31-Dec-11

15-Feb-12

31-Mar-12

15-May-12

30-Jun-12

15-Aug-12

30-Sep-12

15-Nov-12

31-Dec-12

15-Feb-13

15-Apr-13

31-May-13

31-Jul-13

30-Sep-13

30-Nov-13

31-Jan-14

31-Mar-14

15-May-14

15-Jul-14

31-Aug-14

15-Nov-14

15-Jan-15

15-Jul-15

15-Jan-16

31-Mar-16

31-May-16

31-Jul-16

30-Sep-16

30-Nov-16

15-Feb-17

15-Aug-17

15-Feb-18

15-Aug-18

15-Feb-19

15-Aug-19

15-Feb-20

15-Feb-21
Primary Dealer and Government Deficit Estimates

Deficit Estimates 

Primary Dealers* CBO** 

FY2010: 1,357 1,349 Range 900-1,750

FY2011: 1,121 980 Range 750-1,800Estimates as of: January 2010 January 2010 FY 2010 Marketable Borrowing Estimate* 1,363 1,253 FY 2011 Marketable Borrowing Estimate* 1,150 988 * P i D l fl t ti t B d P i D l f db k * Primary 

Dealers reflect average estimate. 

Based on Primary 

Dealer feedback on J 28 2010 January 28, 2010.

** Based on if current law and policies stayed unchanged (whereas OMB’s projections are based on current law and proposed policy).

Office of Debt Management
OMB Long-term Deficit and Borrowing Projections

600700800

Interest Expense as % 

Interest Expense as % of 

GDP RHS

100%120%140%

202530

Debt as % of GDP

Held by Public Held by Govt

Gross Debt % of GDP

OMB FY11Budget Estimates

200300400500

$Billions

GDP RHS

10-y R

40% 60%80%

1015

20

Held by Public%

$Trillions

0

100

1940

1944

1948

1952

1956

1960

1964

1968

1972

1976

1980

1984

1988

Interest Expense LHS

0%20%

05

1940

1944

1948

1952

1956

1960

1964

1968

1972

1976

1980

1984

1988

1992

1996

2000

2004

2008

2012

2016

2020

y

Held by Govt Accts%

OMB FY2011 Annual Deficits 

1,5002,000

25%30%35%40%

Net Marketable Borrowing as % of GDP

OMB FY2011

Budget Estimates

-200

0

200400

Annual Deficits 

Surplus/Deficits $ (LHS)

500

1,000

5%

10%15%20%

$BillionsNet Marketable Borrowing as % of GDP

-1,200-1,000

-800-600-400

$ Billions Surplus/Deficits as a Percentage of GDP 

(RHS)

Office of Debt Management

-5000

1941

1944

1947

1950

1953

1956

1959

1962

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

2010

2013

2016

2019

-10%

-5%

0%

Net Marketable Borrowing

-1,800-1,600-1,400

1950

1953

1956

1959

1962

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992
Outstanding Debt Subject to Debt Limit

$12,500

$Billions

$11,500$12,000$11,000$10,000$10,500

$9,500

Office of Debt Management

$9,000

3/23/08 5/12/08 7/1/08 8/20/08 10/9/08 11/28/08 1/17/09 3/8/09 4/27/09 6/16/09 8/5/09 9/24
Primary Dealer Settlement Fails in Treasuries and Agency M

300% 

Fails to Receive as a % of 

Securities In 

Weekly Effective Fed Funds Rate (RHS)Treasuries (LHS)MBS (LHS)

Source: FRBNY FR2004 Settlement Fails Data & FRB H.15

200%250%

MBS (LHS)

150% 100% 

0%

50%

Office of Debt Management

0%

Jul-01

Nov-01

Mar-02

Jul-02

Nov-02

Mar-03

Jul-03

Nov-03

Mar-04

Jul-04

Nov-04

Mar-05

Jul-05

Nov-05

Mar-06

Jul-06

Nov-06

Mar-07

Jul-07

Nov-07

Mar-08

Jul-08
What adjustments to debt issuance if any should Treasur

What adjustments to debt issuance, if any, should Treasur

consideration of its financing needs in the short, medium, aterm? 

Office of Debt Management
TBAC Presentation to Treasu

February 2, 2010
Global Sovereign Borrower

February 2, 2010
Global Sovereign Borrowers

Please assess the challenges faced by the global soveborrowers over the short, medium and long term. How challen

ges similar or different to the case of the United 
Summary:

• Sovereign stress has shifted from the emerging world to the develo• Empirical evidence shows fiscal consolidation is achievable•Challenges: 

• Political will• Generating growth Generating growth

• Some countries used foreign exchange depreciation and mpolicy to cushion the fiscal restraint• Others relied on positive externalities, including strong gloand one-off opportunities (privatization proceeds, lower intepeace dividend)• Current task more difficult, owing to dearth of growth driveconstrained policy options constrained policy options
Current Account (% GDP) vs. Budget Deficit (% GDP): 19

RUS

15

1999

10

2009

SWN

5 KOR

10

% of GDP 

05

% of GDP KOR

GER

CAN

ITA

JPN

TUR IND

FRA

IRE

CHN

0

5

t Account as a % US IREUK INDES

F

T

-5

0

Account as a % GER

BRA

AUS

ESP USUK

GRC

ICE

-5

Curren

GRC

ICE

-10

Current 

-10

-10 -5 0 5

Budget Deficit as a % of GDP

-15

-19 -14 -9 

Budget Deficit as a 
Public Debt (% GDP) vs. Budget Deficit (% GDP): 1999 v

140160

1999

200

 2009

GRC

ITA

JPN

100120140

f GDP ICE 140

160180

GDP

IND

GE

R

FRA ESP

US

ICE

RUS CAN

6080

100

ic debt as a % ofICE GRC UK US FR

80 

100 120

Debt as a % of 

TUR

BRA

US

UK

AUS

IRE

SWN

204060

Publi ESP IRE UK

IND

20 4060

Public 

CHN

KOR

0

20

-12 -8 -4 0 4 8

Budget deficit as a % of GDP

0

20

-19 -14 -9 

Budget Deficit as a 
Source: IMF World Economic Outlook
Fiscal Balance Cyclically Adjusted Primary Position Gross Debt

as a %of GDP as

a

%of GDP as a %of potential GDP as

a

%of potential GDP as a %of GDP as

a

%of GDP

US -11.2% -7.3% 84%UK -12.6% -6.8% 71%Japan -7.4% -5.6% 189%Greece -12 7%. -6 0%. 113%Spain -9.6% -5.6% 59%
6 0

% Cyclically Adjusted Primary Balance as a % of Potential GDP

0.02.04.06.0 US

UKJapan

-8.0-6.0-4.0-2.0

1970 1974 1978 1982 1986 1990 1994 1998 2002 2006

6 0

% Cyclically Adjusted Primary Balance as a % of Potential GDP

0.02.04.06.0 Greece

Spain

-8 0-6.0-4.0-2.0-8.0

1970 1974 1978 1982 1986 1990 1994 1998 2002 2006
180

200 US

% Government Gross Financial Liabilities as a % of GDP

80

100120140160180 UK

Japan

0

204060

80

1970 1974 1978 1982 1986 1990 1994 1998 2002 2006

% Government Gross Financial Liabilities as a % of GDP

80

100120 Greece

Spain

0

204060

1970 1974 1978 1982 1986 1990 1994 1998 2002 2006
Date - 

Trough 

Fiscal 

Balance

Starting 

Fiscal 

Balance

Date - Peak 

Fiscal 

Balance

Ending 

Fiscal 

Balance

Change in 

Fiscal 

Balance

Date - 

Trough 

CAPB

Starting 

Cyclically 

Adjusted Primary 

Balance

Date - 

Peak 

CAPB

Endi

Cyclic

Adjus

Prim

Balan

% GDP % GDP % GDP % potential GDP % potenti

p

Greece 1990 -14.0 1999 -3.1 10.9 1989 -6.1 1999 5.0 

Spain 1993 -7.3 2006 2.0 9.3 1991 -3.0 2006 2.9 

Sweden 1993 -11.2 2000 3.7 14.9 1993 -4.8 2000 4.7 

US 1992 -5.9 2000 1.5 7.4 1992 -1.6 2000 3.2 UK 1993 -8.0 2000 3.7 11.7 1993 -4.0 2000 3.0 

Japan 1978 -5.8 1990 2.0 7.8 1977 -4.9 1989 2.2 
Fiscal 

Consolidation 

Period

Change in 

Expenditures 

as a % of GDP

Change in 

Revenues as a 

% of GDP

Average 

GDP Growth 

(trend past 

20 years)

Date - Peak 

Debt to 

GDP Ratio

Starting 

Debt

Date - 

Trough Debt to 

GDP Ratio

Endin

Debt

% GDP % GDP % % GDP % GD

Greece 1989 - 1999 3.8 12.8 2.1 (3.1) 1993 98 1994 96 

Spain 1991 - 2006 -5.9 0.9 3.0 ( ) 3.2 1996 76 2007 42 

Sweden 1993 - 2000 -14.0 1.0 2.8 (2.4) 1996 84 2008 47 

US 1992 - 2000 -4.8 2.6 3.8 (3.2) 1993 72 2001 54 UK 1993 - 2000 -8.7 3.0 3.4 (2.6) 1995 52 2001 40 

Japan 1977 - 1989 1.0 6.4 4.0 (4.4) 1987 77 1991 63 
US: 1992 - 2000

• Clinton Era / Defense Cuts• Government expenditures cut 4.points of GDP.• Economic / productivity boom, mderegulation, tech bubble.• Revenues rose by 2.6 percentag

Revenues rose by 2.6 percentag

• Monetary conditions were stimulbeginning of the adjustment procetightened.
UK: 1993 - 2000

• Post -ERM Fiscal Consolidation• Government expenditures cut 8.points of GDP.• Government employees cut by 11992 and 1998.• Revenues rose by 3 0 percentag

Revenues rose by 3.0 percentag

• Pound weak, monetary condition/ global growth.
Japan: 1977 - 1989

• Japan “Economic Miracle”• Ve y st o g e e ue g o t o 6 

ry strong revenue growth of 6

points of GDP due to surging expomanufacturing, housing bubble.• Yen was weak, monetary conditiaccommodative.
Sweden: 1993 - 2000

• Post-banking crisis• Most aggressive cuts to governm

Most aggressive cuts to governm

– 14 percentage points of GDP ov• Revenues rose modestly by 1 peGDP.• Real effective exchange rate dec1992 to 2001. Led to export surge• Monetary conditions easy throug
Greece: 1989 - 1999

• EMU convergence EMU convergence• Government expenditures rose by 3.8 pGDP.• Improvement entirely on the revenue si12.8 percentage points of GDP. Around 3increase was due to privatizations. •Tight monetary conditions in first half of led to disinflation, followed by massive econditions.• Convergence/risk premium compressiopayments as a % of GDP fell from 11.2 tand 2007 D i thi i d 

d 2007. During this period, governme

interest rose by 6.2 percentage points of 
Spain: 1991 - 2006

• EMU convergence / Housing boom• Expenditures cut 6 9 percentage po

Expenditures cut 6.9 percentage po

• Revenues rose by 0.9% over the adAround 0.2% of this increase was due From 1998 to 2006 they rose 2.3% duboom. • M t diti d i EM

Monetary conditions easy during EM

Following Euro launch, ECB rates weaccommodative for Spanish growth.• Convergence/risk premium comprespayments as a % of GDP fell from 5.1 1995 d 2007 D i thi i d 1995 and 2007. During this period, gospending ex-interest fell by 1.7% percGDP.
Fiscal Adjustment Scenarios: 5 year

US: Reduction in primary deficit pa needed to stabilise the gross govt debt-to-GDP ratio (% pt change over 5 y

Nominal Nominal GDP growth

Interest Rate 2.0 - 4.0 4.0 - 6.0 6.0 - 8

2.0 1.1 - 1.5 0.8 - 1.1 0.5 - 0

4.0 1.5 - 1.8 1.1 - 1.5 0.8 - 1

6 0 1 8 2 1 1 5 1 8 1 1 1 

UK: Reduction in primary deficit pa needed to stabilise the gross govt debt to GDP ratio (% pt change over 5 y

6.0 1.8 - 2.1 1.5 - 1.8 1.1 - 18.0 2.1 - 2.5 1.8 - 2.1 1.5 - 1

Initial debt-to-GDP ratio is 84%, and the initial primary balance is -7.3% of GDP

UK: Reduction in primary deficit pa needed to stabilise the gross govt debt-to-GDP ratio (% pt change over 5 y

Nominal Nominal GDP growth

Interest Rate 2.0 - 4.0 4.0 - 6.0 6.0 - 8

2.0 1.1 - 1.3 0.8 - 1.1 0.5 - 04.0 1.4 - 1.6 1.1 - 1.4 0.8 - 16.0 1.6 - 1.9 1.4 - 1.6 1.1 - 1

Japan: Reduction in primary deficit pa needed to stabilise the gross govt debt-to-GDP ratio (% pt change over 

Nominal Nominal GDP growth

8.0 1.9 - 2.1 1.6 - 1.9 1.4 - 1

Initial debt-to-GDP ratio is 71%, and the initial primary balance is -6.8% of GDP

Nominal Nominal GDP growth

Interest Rate 0.0 - 1.5 1.5 - 3.5 3.5 - 5

0.0 0.6 - 1.1 -0.2 - 0.6 -1.0 - -0

2.0 1.3 - 1.9 0.6 - 1.3 -0.2 - 04.0 2.1 - 2.6 1.3 - 2.1 0.6 - 1

6 0. 2 8. - 3 4. 2 1. - 2 8. 1 3. - 2 

Initial debt-to-GDP ratio is 189%, and the initial primary balance is -5.6% of GDP
Fiscal Adjustment Scenarios: 5 year

Greece: Reduction in primary deficit pa needed to stabilise the gross govt debt-to-GDP ratio (% pt change over 5 

Nominal Nominal GDP growth

Interest Rate 3.0 - 5.0 5.0 - 7.0 7.0 - 9.0

2.0 0.5 - 1.0 0.1 - 0.5 -0.4 - 0.1

4.0 1.0 - 1.4 0.5 - 1.0 0.1 - 0.5

6.0 1.4 - 1.9 1.0 - 1.4 0.5 - 1.0

S i R d ti i i d fi it d d t t bili th t d bt t GDP ti (% t h 5 

6.0 1.4 1.9 1.0 1.4 0.5 1.08.0 1.9 - 2.3 1.4 - 1.9 1.0 - 1.4

Initial debt-to-GDP ratio is 113%, and the initial primary balance is -6.0% of GDP

Spain: 

Reduction in primary deficit pa needed to stabilise the gross govt debt-to-GDP ratio (% pt change over 5 y

Nominal Nominal GDP growth

Interest Rate 3.0 - 5.0 5.0 - 7.0 7.0 - 9.0

2.0 0.8 - 1.0 0.5 - 0.8 0.3 - 0.5

4.0 1.0 - 1.2 0.8 - 1.0 0.5 - 0.8

6 0. 1.2 - 1.5 1.0 - 1.2 0.8 - 1.08.0 1.5 - 1.7 1.2 - 1.5 1.0 - 1.2

Initial debt-to-GDP ratio is 59%, and the initial primary balance is -5.6% of GDP
Fiscal Adjustment Scenarios: 10 year

US: Reduction in primary deficit pa needed to stabilise the gross govt debt to GDP ratio (% pt change over 10 yrUS: Reduction in primary deficit pa needed to stabilise the gross govt debt-to-GDP ratio (% pt change over 10 yr

Nominal Nominal GDP growth

Interest Rate 2.0 - 4.0 4.0 - 6.0 6.0 - 8.0

2.0 0.6 - 0.7 0.4 - 0.6 0.2 - 0.4

4.0 0.7 - 0.9 0.6 - 0.7 0.4 - 0.66.0 0.9 - 1.1 0.7 - 0.9 0.6 - 0.7

8.0 1.1 - 1.2 0.9 - 1.1 0.7 - 0.9

Initial debt-to-GDP ratio is 84%, and the initial primary balance is -7.3% of GDP

UK: Reduction in primary deficit pa needed to stabilise the gross govt debt-to-GDP ratio (% pt change over 10 yr

Nominal Nominal GDP growth

Interest Rate 2.0 - 4.0 4.0 - 6.0 6.0 - 8.0

2.0 0.5 - 0.6 0.4 - 0.5 0.3 - 0.4

4.0 0.7 - 0.8 0.5 - 0.7 0.4 - 0.56.0 0.8 - 0.9 0.7 - 0.8 0.5 - 0.7

8.0 1.0 - 1.1 0.8 - 1.0 0.7 - 0 8.

Initial debt-to-GDP ratio is 71%, and the initial primary balance is -6.8% of GDPJapan: Reduction in primary deficit pa needed to stabilise the gross govt debt-to-GDP ratio (% pt change over 1

Nominal Nominal GDP growth

Interest Rate 0.0 - 1.5 1.5 - 3.5 3.5 - 5.5

0.0 0.3 - 0.6 -0.1 - 0.3 -0.5 - -0.

2.0 0.7 - 0.9 0.3 - 0.7 -0.1 - 0.34.0 1.0 - 1.3 0.7 - 1.0 0.3 - 0.76.0 1.4 - 1.7 1.0 - 1.4 0.7 - 1.0

Initial debt-to-GDP ratio is 189%, and the initial primary balance is -5.6% of GDP
Fiscal Adjustment Scenarios: 10 year

Greece: Reduction in primary deficit pa needed to stabilise the gross govt debt Greece: Reduction in primary deficit pa needed to stabilise the gross govt debt to GDP -to-GDP ratio (% pt change over 

ratio (% pt change over 

Nominal Nominal GDP growth

Interest Rate 3.0 - 5.0 5.0 - 7.0 7.0 - 9.0

2.0 0.3 - 0.5 0.0 - 0.3 -0.2 - 0.0

4.0 0.5 - 0.7 0.3 - 0.5 0.0 - 0.36.0 0.7 - 0.9 0.5 - 0.7 0.3 - 0.5

8.0 0.9 - 1.2 0.7 - 0.9 0.5 - 0.7

Initial debt-to-GDP ratio is 113%, and the initial primary balance is -6.0% of GDP

Spain: Reduction in primary deficit pa needed to stabilise the gross govt debt-to-GDP ratio (% pt change over 10 

Nominal Nominal GDP growth

Interest Rate 3.0 - 5.0 5.0 - 7.0 7.0 - 9.0

2.0 0.4 - 0.5 0.3 - 0.4 0.1 - 0.3

4.0 0.5 - 0.6 0.4 - 0.5 0.3 - 0.4

6.0 0.6 - 0.7 0.5 - 0.6 0.4 - 0.58.0 0.7 - 0.9 0.6 - 0.7 0.5 - 0.6

Initial debt-to-GDP ratio is 59%, and the initial primary balance is -5.6% of GDP
Conclusions:

• Fiscal consolidation can happen – could result in slower than desire• Similarities with the US

• Easy monetary conditions as a a starting point• Diffi lt liti l i t Difficult political environment• Modest global growth• Lack of positive externalities

• Differences with the US

• Lack of autonomous monetary policy• Currency flexibility• Historical precedent

• If all countries need to stimulate who will provide the savings? Glo

If all countries need to stimulate, who will provide the savings? Glo

rebalancing is key.
Demand for Treasury Securitie

and 2010 S

pread Outlook

February 2, 2010
Foreigners Foreigners are the largest largest holders holders of Treasuries Treasuries, followe

followe

households and the Fed

Fig. 1 Treasury Treasury Holdings Holdings by Sector

6,0007,0008,0002,0003,0004,0005,000

$(Bil.)

-1,000

0

1,000

Total

Sector

eholds eserve

Gov'ts

Funds Funds

Funds anking

Funds

mpanies

Funds

Dealers

Other

Foreign 

Hous

Federal R

e

State & Local 

Money Market 

Mutual 

F

Private Pension 

Commercial B

a

& Local Gov't Pension 

Life Insurance Co

m

ederal Gov't Pension 

Security Brokers & D

State Q3-07 Q3-08 Q3-09 &F Source: Federal Reserve
Large shifts in % share of holdings holdings occurred occurred in 2008‐2

Fig. 2 Share of Treasury Treasury Holdings Holdings

50%55%30%35%40%45%

cent .

10%15%20%25%

Perc

0%5%

Q499

Q300

Q201

Q102

Q402

Q303

Q204

Q105

Q405

Q306

Q207

Q108

Q408

Foreign Sector Households Federal Reserve State & Local G

g

Money Market Funds Mutual Funds Commercial Banking

Source: Federal Reserve
With the expanding expanding federal federal debt, long‐term Treasury Treasury se

se

outstanding rose significantly

Fi 3 Treas r Holdin s b T pe

7,500

Bills Notes Bonds TIPS

Q407 22.2% 55.0% 12.3% 10.4%

Q408 32 3% 48 3% 10 3% 9 2%

Fig. 3 Treasury Holdings by Type

4,5006,000

Tril.)

Q408 32.3% 48.3% 10.3% 9.2%Q409 24.7% 57.6% 9.9% 7.8%

1,5003,000

$(T

0

Dec-04

Feb-05 Apr-05

Jun-05

Au

g-05

Oct-05

Dec-05

Feb-06 Apr-06

Jun-06

Au

g-06

Oct-06

Dec-06

Feb-07 Apr-07

Jun-07

Au

g-07

Oct-07

Dec-07

Feb-08 Apr-08

Jun-08

Au

g-08

Oct-08

Dec-08

Feb-09 Apr-09

Jun-09

Au

g-09

Oct-09

Bills Notes Bonds TIPS Total

Source: Treasury
Fed data suggests suggests the Fed, foreigners foreigners and households households (

funds) dominated the ‘09 increase in Treasury holdings

Fi 4 Q tl Ch i T H ldi b P h

600700

Fig. 4 Quarterly Change in Treasury Holdings by Purchaser

100200300400500

$(Bil.)

-300-200-100

0

100 

300

Q404

Q105

Q205

Q305

Q405

Q106

Q206

Q306

Q406

Q107

Q207

Q307

Q407

Q108

Q208

Q308

Q408

Q109

Q209

Q309

Federal Reserve Depository InstitutionsHouseholds Dealers and BrokersPension and Retirement Funds and Insurance Cos. Investment Funds ex MMMFForeign and International Foreign and International OtherMoney Market Fund Total

Source: Federal Reserve
Foreigners’ accumulation in 2009 outpaced prior years

Foreign official institutions are larger holders than foreign pr

(non‐US banks, pension pension funds, insurance) insurance)

Fig. 5 Foreign Net Purchases of Long‐Term

Treasuries (Year‐to‐date)

Fig. 6 Foreign Treasury H

Treasuries (Year to date) Official vs Private Official vs. Private

200250300350

.) . 2,000

2,5003,000

0

50

100150

200

YTD, US$ (Bil

500

1,0001,500

US$ (Bil.)

-50

0

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

2005 2006 2007 2008 2009

Source: US Treasury

0

Nov-00

May-01

Nov-01

May-02

Nov-02

May-03

Nov-03

May-04

Nov-04

May-05

Nov-05

May-06

Nov-06

Official Private 

Source: US Treasury
Foreigners Foreigners shift to Treasuries Treasuries, away from agencies agencies

Fig. 7 F i ore gn N t e P h urc ases of US Long‐Term A t sse s

150200

50

100

US$ (Bil.)

100

-50

0

-

Nov-05

Jan-06

Mar-06

Ma

y-06

Jul-06

Se

p-06

Nov-06

Jan-07

Mar-07

Ma

y-07

Jul-07

Se

p-07

Nov-07

Jan-08

Mar-08

Ma

y-08

Jul-08

Se

p-08

Nov-08

Jan-09

Mar-09

Ma

y-09

Jul-09

Se

p-09

Treasurys Agencies Corporates Equities Total (RHS)

Source: US Treasury
China surpassed surpassed Japan to become the largest largest foreign foreign ho

ho

trend stalled in 2009, though holdings in dollar terms ro

Fi 8 Sh f Ttl F i T H ldi

40%45%

Fig. 8 Share of Total Foreign Treasury Holdings

20%25%30%35%

rcent of Total

5%

10%15%

20%

Per

0%

Nov-04

Feb-05

Ma

y-05

Au

g-05

Nov-05

Feb-06

Ma

y-06

Au

g-06

Nov-06

Feb-07

Ma

y-07

Au

g-07

Nov-07

Feb-08

Ma

y-08

Au

g-08

Nov-08

Feb-09

Ma

y-09

Au

g-09

Nov-09

Japan China OPEC Caribbean+Cayman Island UK Elsewhere

S US T ource: US Treasury
Foreigners’ Foreigners’ demand for Treas ries u shifted shifted from bills to bond

risk aversion fell and the yield curve steepened, and this tren

continue in 2010

Fig. 9 Foreign Net Purchases

Bonds vs. Bills (Private Holders) Fig. 10 Foreign Net Purch

Bonds vs Bills (Official HBonds vs. Bills (Official H

200250300350400

(Bil.) 200 250

300350400

(Bil.) 

100

-50

0

50

100150

200

12-Month Sum, $ (

-100

-50

0

50

100150

200

12-Month Sum, $ 

-100

Nov-00

Mar-01

Jul-01

Nov-01

Mar-02

Jul-02

Nov-02

Mar-03

Jul-03

Nov-03

Mar-04

Jul-04

Nov-04

Mar-05

Jul-05

Nov-05

Mar-06

Jul-06

Nov-06

Mar-07

Jul-07

Nov-07

Mar-08

Jul-08

Nov-08

Mar-09

Jul-09

Nov-09

Private: Bonds Private: Bills

Source: US Treasury

100

Nov-00

Mar-01

Jul-01

Nov-01

Mar-02

Jul-02

Nov-02

Mar-03

Jul-03

Nov-03

Mar-04

Jul-04

Nov-04

Mar-05

Jul-05

Nov-05

Mar-06

Jul-06

Nov-06

Official: Bonds Offici

Source: US Treasury
The Fed increased increased holdings holdings in 2009, mostly in notes an

bonds, holding fewer bills after the financial crisis start

Fig. 11 Treasury H ldi o ngs by Type

800900 In the spring of 2008 the Fed sold

Treasury bills in order to sterilize aexpansion of the TAF program

500600700

Bil.)

100200300400

$(

0

100

12/22/04

03/16/05

06/08/05

08/31/05

11/23/05

02/15/06

05/10/06

08/02/06

10/25/06

01/17/07

04/11/07

07/04/07

09/26/07

12/19/07

03/12/08

06/04/08

08/27/08

11/19/08

02/11/09

05/06/09

07/29/09

10/21/09

Bills Notes and Bonds Inflation Compensation TIPS Total

Source: Federal Reserve
As loan demand fell cyclically cyclically, US commercial commercial banks hel

government securities

Fi 12 B k L C il B k T H ldi

600750900

Fig. 12 Bank Loans vs. Commercial Banks Treasury Holdings

0

150300450600

Diff. SA, $Bil

-600-450-300-150

0

Y-Y 

600

Dec-05

Feb-06

Apr-06

Jun-06

Aug-06

Oct-06

Dec-06

Feb-07

Apr-07

Jun-07

Aug-07

Oct-07

Dec-07

Feb-08

Apr-08

Jun-08

Aug-08

Oct-08

Dec-08

Feb-09

Apr-09

Jun-09

Aug-09

Oct-09

D09

US Government Securities in Bank Credit: All Commercial BanksLoans and Leases in Bank Credit: All Commercial Banks

Source: Federal Reserve
The household household category category has substituted substituted from agencies agencies 

Treasuries; household category likely includes hedge fu

Fi 13 N t A i iti f Fi i l A t B H h ld (NSA)

400600800

Fig. 13 Net Acquisition of Financial Assets By Households (NSA)

200

0

200

400

$(Bil.) 

-800-600-400-200 -800

Q304

Q404

Q105

Q205

Q305

Q405

Q106

Q206

Q306

Q406

Q107

Q207

Q307

Q407

Q108

Q208

Q308

Q408

Q109

Q209

Q309

Checkable Deposits and Currency Time & Savings Deposits Money Market Fund Shares Treasurys Agencies Corporate and Foreign Bonds Equities Mutual Fund Shares Security Credit Other Total

Source: Federal Reserve Source: Federal Reserve
Most research research agrees that, net of Fed purchases purchases, net fix

income issuance will surge by approximately $1.5 T

Fig. 14 Net Fi d xe Income Issuance ex‐F de P h urc ases (N i l ot onal, Coupons 

400500

Netissuance ex‐Fed = $1.2Tril Netissuance ex‐Fed = $2.7Tril

100200300

$(Bil.)

-200-100

0

-300

Jan-09

Feb-09

Mar-09

Apr-09

May-09

Jun-09

Jul-09

Aug-09

Sep-09

Oct-09

Nov-09

Dec-09

Jan-10

Feb-10

Mar-10

Apr-10

May-10

Jun-10

Jul-10

Aug-10

Sep-10

Oct-10

Nov-10

Trsy Agy Debt Agy Mtge HG CorpHY Corp Govt G Supra MuniABS EM T Fd h d A Fd h 

Trsy Fed purchased Agy Fed purchas

Mbs Fed purchased Total (net of Fed)

.
Sources of marginal demand for excess net issuance

Fig. 15 Possible Treasury Demand by Sector

($ billions)

Net 

Net 

Coupons + Net 

2009 2010

Bills TIPS Bills

Net Supply (Act.+Est.) -73 1385 -400 1400 1400

Assume No Fed & 

Comparable 

Behavior to '08/09

Assume No Fed & 

05-09 % Share of 

Net Change in 

Holdings

Net Coupons + TIPS

Low

Fed 0 300 0 0 0Foreigners 445 620 935 Foreigners addMoney Mkt+MF -165 80 155 Depends on asset allocaOther 40 145 430 "Other" categories includBanks 115 60 30 Depends on loan demanHouseholds 650 495 -150 Households/Hedge FundNet Demand -73 1385 -400 1400 1400

Price 

Sensitivit

y

High

Net Demand 73 1385 400 1400 1400

Sources: Federal Reserve, US Treasury
Treasury Treasury issuance issuance of bills and coupon securities securities

Fig. 16 Treasury Supply (Bills) 

A t l d E ti t

Fig. 17 Treasury Supply 

Actual and Estimate A t l d E ti t Actual and Estimate

400600800

1000

1000120014001600

-400-200

0

200

400

$(Bil.)

200

0

200400600800

$(Bil.)

-600

2006

2007

2008

2009

2010

Net Bills Fed Net Purchases

Sources: Federal Reserve, US Treasury and Estimates

-200

2006

2007

2008

Net Coupon +TIPS Fed Net P

Sources: FederalReserve,US Treasury and Estimates
Expectations for the performance of spread products in 

• Long-dated swap spreads should widen while short-dated swap spreads should remain stable or • Corporate credit spreads should continue to stabilize tighter• Municipal spread levels have tightened with strong demand, but fundamental deterioration contin• CMBS spreads should continue to improve spreads should continue to improve• Mortgage basis should widen modestly
The term structure structure of swap spreads spreads should

normalize in 2010

• Long (15-30y) spreads should widen

– Increased balance sheet demand for 0% risk-weighted assets that trade LIBOR plus– Very negative forward spread levels

• Short (0-5y) spreads should remain stable or tighten slightly as systemic risk concerns continue to wane

Fig. 18 Historical Swap Spreads

180 200

40

04080120160

6080

100120140160

bp

ead (bp)

-160-120-80-40

0

2040

60

23-Jan-95 10-Nov-97 1-Sep-00 4-Aug-03 6-Jul-06 4-Jun-09

Spre

2Y (bp) 30Y - 2Y (bp) (2nd axis) 30Y (bp) (2nd axis)
Corporate credit spreads should continue compressing

• Corporate credit spreads tightened in 2009 in line with market normalization

Corporate credit spreads should continue compressing

• Growth recovery and moderate volatility support tightening• Risks include double-dip recession, deterioration in housing, and investor retrenchment

Fig. 19 Corporate Yields and Spreads Fig. 20 Credit Spreads vs

67

9%

10% Merrill Lynch U.S. Corporate Master Index

20 

Trend GDP Growth Is Positive for Cre

23456

3%4%5%6%7%8%

OAS (%)

Yield

-5

05

1015

Real GDP (%)

01

0%1%2%

Dec-96

Jul-97

Feb-98

Sep-98

Apr-99

Nov-99

Jun-00

Jan-01

Au

g-01

Mar-02

Oct-02

May-03

Dec-03

Jul-04

Feb-05

Sep-05

Apr-06

Nov-06

Jun-07

Jan-08

Au

g-08

Mar-09

Oct-09

Ma

y-10

Yield [LHS] OAS [RHS]

-10 

3/78

1/80

10/81

7/83

4/85

1/87

10/88

7/90

4/92

1/94

10/95

7/97

4/99

1/01

10/02

7/04

Real GDP Y/Y% [LHS]GDP Trend [LHS]Moody's Baa Credit Sp

Source: Haver
Credit normalization driven by improving fundamentals

• Default rate projections suggest Moody’s Speculative Grade Default Rate peaking

Credit normalization driven by improving fundamentals

• Strong corporate balance sheets with negative financing gap• Favorable technicals - high grade gross supply to fall

Fig. 21 Corporate Cash/Assets Fig. 22 Projected Corpora

13%14% S&P 500 Balance Sheets Are Strong

1,200 

U.S. Corporate Debt Gross Issuance

8%9%

10%11%12%

13%

%

400600800

1,000

U.S. Mil.

5%6%7%

03/00

08/00

01/01

06/01

11/01

04/02

09/02

02/03

07/03

12/03

05/04

10/04

03/05

08/05

01/06

06/06

11/06

04/07

09/07

02/08

07/08

12/08

05/09

10/09

03/10

Cash & Short Term Investments/Total Assets 4QMA Source: FactSet

0

200

1999

2000

2001

2002

2003

2004

2005

2006

2007

High Grade [LHS] HG Forecast [RHS] High Yield [RHS] 
Weak municipal municipal fundamentals fundamentals will be somewhat somewhat offset by

supportive technicals

• Municipal revenues have fallen sharply• Fundamentals and ratings trends remain negative in the municipal market with headline and downremaining elevated in 2010• Spread levels should be sustained with favorable technicals for tax-exempt securities – inflow of mmunicipal funds and shift towards BABs supply

89

1.41.5

Fig. 23 Muni to Treasury Ratio Fig. 24 GDP vs. State Tax 

45678

10 Year Rates %

0 80.911.11.21.31.4

Muni to TSY Ratio

23

1/10/92

1/10/93

1/10/94

1/10/95

1/10/96

1/10/97

1/10/98

1/10/99

1/10/00

1/10/01

1/10/02

1/10/03

1/10/04

1/10/05

1/10/06

1/10/07

1/10/08

1/10/09

1/10/10

0.60.70.8

3M Rolling 10 Yr UST Rate LHS 3M Rolling 10 Yr Muni to TSY Ratio RHS

Source: Bloomberg Source: Rockefeller Institute.
Hi hg G d ra e CMBS spreads sh ld ou continue to improve due t

technicals

• CRE and CMBS fundamentals will continue to deteriorate in the coming months.• However, tight spreads and light supply should provide a solid tone to high grade CMBS spreads.• Despite tighter credit spreads, growth of CRE borrowing / financing is small. Market participants athe whole loan market to increase in activity by 2H10. 

Fig. 25 CMBS Spreads

400600800

1,000

HG CMBS Spreads are still elevated relative to HG Corporates

0

200

400

AAA CMBS IG CDS

CMBS IG CDS
Mortgage Mortgage spreads spreads should see limited limited widening widening in 2010

• Mortgage basis should widen as Fed exits market• Widening will be limited due to:

– small t i er net issuance – the fact that certain buyers sensitive to short term spread behavior (hedge funds and mo

have already significantly shed mortgages

Fig 26 UST Rates and CMM Rates/Spreads Fig. 26 UST Rates and CMM Rates/Spreads
More than sufficient sufficient mortgage mortgage demand to support support the mar

as the Fed exits

Fig. 27 MBS Holders

Ownership structure of the Agency MBS market ($m

• Significant wild cards are the behavior of overseas investors, convexity hedgers’ response to rate movements, and housing price improvements

Ownership structure of the Agency MBS market ($m

12/08 

Federal Reserve + Treasury 70 Banks + Savings + Credit Unions 1,020 GSEs (Fannie + Freddie + FHLBs) 910 Overseas Investors 750 

State/Local Governments 250 

Fig. 28 Net Supply/Demand Estimates

State/Local Governments 250 Agency MBS held by others* 1,800 Size of the agency MBS market 4,800 *Mutual funds, hedge funds, insurance companies, pension funds

Supply/Demand Technicals ($millions) 2009 2010

Conventionals 95 $740MM issuance, assuming $100MM in buyouts.

Ginnie Mae 215 Sharp growth of importance of FHA/GNMA sector.ARM (16)Net Supply 480 294Federal Reserve + Treasury 1 230 50

Fig. 28 Net Supply/Demand Estimates

Federal Reserve + Treasury 1,230 50Banks + Savings + Credit Unions 60 50 to 150 Expect fairly strong demand, volatile convexity hedging coGSEs (Fannie + Freddie + FHLBs) 20 0 Focused on buyouts.Overseas Investors 0 -100 to 100 Function of US trade deficit, oil prices, foreign official buyiDomestic Money Managers (300) -100 to 300 Money Managers may need to replace sales.Others (530) ??? May re-enter as spreads widen.Net Demand 480Net Demand