Office of Debt Management Office of Debt Management

Fiscal Year 2012 Q2 Report Fiscal Year 2012 Q2 Report

Table of Contents Table of Contents

I. Fiscal

A. Tax Receipts p. 4

B. Monthly Receipt Levels p. 6

C. O tl u ays p. 7

D. Treasury Net Non-Marketable Borrowing p. 9

E. Cumulative Budget Deficits p. 10

F. Deficit and Borrowing Estimates p. 11

G. Budget Surplus/Deficit p. 12

II. Financing

A. OMBs Projections of Borrowing from the Public p. 14

B. Net Marketable Borrowing On “Auto Pilot” Versus Borrowing Forecasts p. 15

C. Sources of Financing p. 17

III. Portfolio Metrics

A. Weighted Average Maturity of Marketable Debt Outstanding with Projections p. 20

B. Recent and Projected Portfolio Composition p. 21

C. Recent and Projected Maturity Profile p. 23

IV. Demand

A. Summary Statistics of Fiscal Year 2012 Q2 Auctions p. 28

B. Bid-to-Cover Ratios p. 29

C. Investor Class Auction Awards p. 33

D Foreign Awards at Auction p 40

2

. Foreign Awards at Auction p. 40

E. Primary Dealer Awards at Auction p. 44
Section I:

Fiscal

3

Quarterly Tax Receipts

100%

150%

50% Change

0%

Year over Year % 

-50%

-100%

Mar-02

Jun-02

Sep-02

Dec-02

Mar-03

Jun-03

Sep-03

Dec-03

Mar-04

Jun-04

Sep-04

Dec-04

Mar-05

Jun-05

Sep-05

Dec-05

Mar-06

Jun-06

Sep-06

Dec-06

Mar-07

Jun-07

Sep-07

Dec-07

Mar-08

Jun-08

Sep-08

Dec-08

Mar-09

Jun-09

Sep-09

Dec-09

Mar-10

Jun-10

Sep-10

Dec-10

Mar-11

Jun-11

Sep-11

Dec-11

Mar-12

4

MMMMMMMMMMM

Corporate Taxes Non-Withheld Taxes (incl SECA) Withheld Taxes (incl FICA)
Peak Season Non-Withheld/SECA Taxes, 2007-2012

250

300

$245

$38

$27

200

250 $230

$170

$10

$10

$19

150

$ bn

$158

$134

$170

$192

$218

$147

$125

$151 $153

50

100

% 93%

0

2007 2008 2009 2010 2011 2012

84% 89% 93% 89%

5

To Date (April 1- 26) Remaining (through end of May)

Monthly Receipt Levels

(12-Month Moving Average)

100

120 

80 

60 

$ bn

20 

40 

-

Mar-02

un-02

ep-02

Dec-02

Mar-03

un-03

ep-03

Dec-03

Mar-04

un-04

ep-04

Dec-04

Mar-05

un-05

ep-05

Dec-05

Mar-06

un-06

ep-06

Dec-06

Mar-07

un-07

ep-07

Dec-07

Mar-08

un-08

ep-08

Dec-08

Mar-09

un-09

ep-09

Dec-09

Mar-10

un-10

ep-10

Dec-10

Mar-11

un-11

ep-11

Dec-11

Mar-12

Individual Income Taxes include withheld and non-withheld. Social Insurance Taxes include FICA, SECA, RRTA, UTF Deposits, FUTA and 6

RUIA. Other includes excise taxes, estate and gift taxes, customs duties and miscellaneous receipts.

M

Ju

S

D

M

Ju

S

D

M

Ju

S

D

M

Ju

S

D

M

Ju

S

D

M

Ju

S

D

M

Ju

S

D

M

Ju

S

D

M

Ju

S

D

M

Ju

S

D

M

Individual Income Taxes Corporation Income Taxes Social Insurance Taxes Other
Ten Largest Outlays for Fiscal Year 2011

800

900

1000

500

600

700

300

400

$ bn

0

100

200

s

n

y

y

e

r

s

n

l

n

Health and

Human Services

Social Security

Administration

Defense-Military

Treasury

Agriculture

Labor

Veterans Affairs

Transportation

Office of Personnel

Management

Education

7

O

Fiscal Year-to-Date Levels of Ten Largest Outlays

400

450

500

250

300

350

400

$ bn

100

150

200

0

50

and

ervices

curity

tration

ilitary

easury

ulture

Labor

Affairs

rtation

sonnel

ent

cation

Health a

Human Se

Social Sec

Administ

Defense-M

Tre

Agricu

Veterans 

A

Transpor

Office of Pers

Manageme

Educ

8

Q1 and Q2 FY2011 Q1 and Q2 FY2012
Treasury Net Non-Marketable Borrowing

20

30

10

-10

0

$ bn -20

-30

Q3-02Q4-02Q1-03Q2-03Q3-03Q4-03Q1-04Q2-04Q3-04Q4-04Q1-05Q2-05Q3-05Q4-05Q1-06Q2-06Q3-06Q4-06Q1-07Q2-07Q3-07Q4-07Q1-08Q2-08Q3-08Q4-08Q1-09Q2-09Q3-09Q4-09Q1-10Q2-10Q3-10Q4-10Q1-11Q2-11Q3-11Q4-11Q1-12Q2-12

Fi l Q t

9

Fiscal Quarter

Foreign Series State and Local Govt. Series (SLGS) Savings Bonds

1,400

Cumulative Budget Deficits by Fiscal Year

1,200

800

1,000

600

$ bn

200

400

0

October

ovember

December

January

February

March

April

May

June

July

August

eptember

10

N

D

F

Se

FY2010 FY2011 FY2012
FY 2012 2014 Deficit and Net Marketable Borrowing Estimates In $ Billions In $ Billions

Primary 

Dealers1 CBO2 OMB3

FY 2012 Deficit Estimate 1,156 1,171 1,327

FY 2012-2014 Deficit and Net Marketable Borrowing Estimates

FY 2013 Deficit Estimate 924 612 901

FY 2014 Deficit Estimate 795 385 668

FY 2012 Deficit Range 973-1,300

FY 2013 Deficit Range 650-1,200

FY 2014 Deficit Range 500-1,100

FY 2012 Net Marketable Borrowing Estimate FY 2012 Net Marketable Borrowing Estimate 1 182 , 1 450 ,

FY 2013 Net Marketable Borrowing Estimate 959 1,059

FY 2012 Net Marketable Borrowing Range 1,050-1,281

FY 2013 Net Marketable Borrowing g Ran e 728-1,100

Estimates as of: Apr-12 Mar-12 Feb-12

1

Based on primary dealer feedback on April 23, 2012. Deficit estimates are averages. 

2

CBO's baseline estimate; assumes current law.

3 bl S 5 f h F b 13 2012 "F l Y 2013 B d f h S G "

11

Table S-5 of the February 13, 2012, "Fiscal Year 2013 Budget of the US Government."

Budget Surplus/Deficit

0%

2%

0

500

4%

2%

-500

6%

-1,500

-1,000

10%

8%

-2,000

-2,500 12% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Fiscal Year

Surplus/Deficit in $ bn-(L) Surplus/Deficit as a % of GDP-(R)

OMB’s Projections

Projections are from Table S-5 of the February 13, 2012, “Fiscal Year 2013 Budget of the US Government.” 

12
Section II:

Financing

13

OMB’s Projections of Borrowing from the Public

1,450

1 200

1,400 

1,600 

1,059

809

752 783 733 690 733 760 781

808

800 

1,000 

1,200

733 690

400 

600 

$bn

0 

200 

(200)

20122013201420152016201720182019202020212022

Fiscal Year

14

OMB’s borrowing from the public projections are from Table S-5 and S-15 of the February 13, 2012, “Fiscal Year 2013 Budget of the US 

Government.” Data labels represent the change in debt held by the public in $ billions. Other represents borrowing from the public to provide 

direct and guaranteed loans, in addition to TARP activity.

PrimaryDeficit Interest Other DataLabels:ChangeinDebtHeldbyPublic
Historical Net Marketable Borrowing and Projected Net 

Borrowing Assuming Future Issuance Remains Constant

1,500 

2,000 

g g

1,000 

bn

500 

$ 

787 1,787 1,483 1,104 1,152 992 872 756 693 482 554 397 279 217 127 (500)

0 

080910111213141516171819202122

200200201201201201201201201201201201202202202

End of Fiscal Year

Bills 2/3/5 7/10/30 TIPS OMB'sprojectionof

Borrowingfromthepublic

HistoricalNetMarketable

BorrowingandProjectedNetBorrowing

(datalabelsatbottom)

15

Portfolio & SOMA holdings as of 3/30/2012. Assumes issuance sizes for Bills, Nominal Coupons and TIPS are unchanged from 3/30/2012 

levels, along with SOMA reinvestment. The principal on the TIPS securities were accreted to each projection date based on market ZCIS levels. 

No attempt was made to match future financing needs. OMB’s borrowing from the public projections are from Table S-5 and S-15 of the 

February 13, 2012, “Fiscal Year 2013 Budget of the US Government.” Data labels represent historical net marketable borrowing and projected 

net borrowing capacity. See table on the following page for details.

( )

Historical Net Marketable Borrowing and Projected Net Borrowing 

Assuming Future Issuance Remains Constant Assuming Future Issuance Remains Constant, $ Billion Billion

End of 

Fiscal Year Bills 2/3/5 7/10/30 TIPS

Historical Net 

Marketable 

Borrowing/Projected 

OMB’s Projections of 

Borrowing from the Fiscal Year Net Borrowing

Capacity

Public

2008 532 106 109 40 787 

2009 503 732 514 38 1,787 

2010 ( ) 204 869 783 35 1,483 

2011 (311) 576 751 88 1,104 

2012 152 160 748 92 1,152 1,450 

2013 4 127 748 113 992 1,059 

2014 0 60 722 90 872 809 

2015 0 (29) 694 91 756 752 

2016 0 101 525 67 693 783 

2017 0 62 344 76 482 733 

2018 0 84 388 82 554 690 

2019 0 60 261 76 397 733

2020 0 3 233 43 279 760 

2021 0 (18) 215 20 217 781 

2022 0 (30) 151 6 127 808 

16

Portfolio & SOMA holdings as of 3/30/2012. Assumes issuance sizes for Bills, Nominal Coupons and TIPS are unchanged from 3/30/2012 

levels, along with SOMA reinvestment. The principal on the TIPS securities were accreted to each projection date based on market ZCIS levels. 

No attempt was made to match future financing needs. OMB’s borrowing from the public projections are from Table S-5 and S-15 of February 

13, 2012, “Fiscal Year 2013 Budget of the US Government.” Data labels represent historical net marketable borrowing and projected net 

borrowing capacity. 
Sources of Financing in Fiscal Year 2012 Q1

October-December 2011 October-December 2011 Fiscal Year to Date

Net Funding Need (282) Bill Issuance

Issuance Gross Maturing Net Gross Maturing Net

Net Bill Issuance 43 4-Week 487 474 13 487 474 13 

N tC I e oupon Issuance 267 13-W k ee 377 367 10 377 367 10

Subtotal: Net Marketable Borrowing 310 26-Week 351 337 14 351 337 14 

52-Week 75 69 6 75 69 6 

Plus: Beginning Cash Balance 58 CMBs 10 10 0 10 10 0 

Less: Ending Cash Balance 86 Bill Subtotal 1,300 1,257 43 1,300 1,257 43 

Subtotal: Funding Adding to Build Up of Cash (28)

October-December 2011 Fiscal Year to Date

Total: Net Funding 282 Coupon Issuance

Issue Gross Maturing Net Gross Maturing Net

2-Year 73 90 (17) 73 90 (17)

3-Year 100 58 41 100 58 41 

5-Year 73 33 40 73 33 40 

7-Year 60 0 60 60 0 60 

10-Year 69 0 69 69 0 69 

30-Year 44 0 44 44 0 44

5-Year TIPS 12 0 12 12 0 12 

10-Year TIPS 11 0 11 11 0 11 

30-Year TIPS 7 0 7 7 0 7 

Coupon 

Subtotal 449 182 267 449 182 267 

17

Total 1,749 1,439 310 1,749 1,439 310 

Sources of Financing in Fiscal Year 2012 Q2

January-March 2012 January-March 2012 Fiscal Year to Date

Net Funding Need (443) Bill Issuance

Issuance Gross Maturing Net Gross Maturing Net

Net Bill Issuance 154 4-Week 523 498 25 1,009 971 38 

Net Coupon Issuance 247 13-Week 409 377 32 786 744 42 

Subtotal: Net Marketable Borrowing 401 26-Week 383 336 47 734 673 61 

52-Week 77 67 10 152 136 16 

Plus: Beginning Cash Balance 86 CMBs 40 0 40 50 10 40 

Less: Ending Cash Balance 43 Bill Subtotal 1,432 1,278 154 2,731 2,534 197 

Subtotal: Funding Provided by Drawdown of Cash 42 

January-March 2012 Fiscal Year to Date

Total: Net Funding 443 Coupon Issuance

Issue Gross Maturing Net Gross Maturing Net

2-Year 107 135 (28) 180 226 (45)

3-Year 104 101 4 204 159 45 

5-Year 107 48 60 180 81 99 

7-Year 89 0 89 149 0 149 

10-Year 72 25 47 140 25 116 

30-Year 46 0 46 89 0 89

5-Year TIPS 0 0 0 12 0 12 

10-Year TIPS 28 8 21 40 8 32 

30-Year TIPS 9 0 9 16 0 16 

Coupon 

Subtotal 563 316 247 1,012 498 514 

18

Total 1,995 1,594 401 3,743 3,032 711 
Section III:

Portfolio Metrics

19

Weighted Average Maturity of Marketable Debt Outstanding

75

80

85

65

70

Maturity (Months)

58.1 months 

62.8 months 

on 3/30/2012

55

60

ighted Average 

M

(Historical Average 

from 1980 to 2010)

45

We

50

i 40

1980198219841986198819901992199419961998200020022004200620082010201220142016201820202022

Calendar Year

Historical Adjust Nominal Coupons to Match Financing Needs Historical Average from 1980 to 2010

20

Portfolio & SOMA holdings as of 3/30/2012. To match OMB’s projected borrowing from the public for the next 10 years, nominal coupon 

securities (2-, 3-, 5-, 7-, 10-, and 30-year) were adjusted by the same percentage. OMB’s borrowing from the public projections are from Table S-5 

and S-15 of the February 13, 2012, “Fiscal Year 2013 Budget of the US Government.” The principal on the TIPS securities were accreted to each 

projection date based on market ZCIS levels. This scenario does not represent any particular course of action that Treasury is expected to follow. 

Instead, it is intended to demonstrate the basic trajectory of average maturity absent changes to the mix of securities issued by Treasury.
Recent and Future Portfolio Composition by Issuance Type, Percent

80%

90%

100%

60%

70%

tfolio

30%

40%

50%

% of Port

10%

20%

0%

20062007200820092010201120122013201420152016201720182019202020212022

End of Fiscal Year

Bills Nominal Coupons TIPS (principal accreted to projection date)

21

p (p p p j )

Portfolio & SOMA holdings as of 3/30/2012. To match OMB’s projected borrowing from the public for the next 10 years, nominal coupon 

securities (2-, 3-, 5-, 7-, 10-, and 30-year) were adjusted by the same percentage. OMB’s borrowing from the public projections are from Table S-5 

and S-15 of the February 13, 2012, “Fiscal Year 2013 Budget of the US Government.” The principal on the TIPS securities were accreted to each 

projection date based on market ZCIS levels. This scenario does not represent any particular course of action that Treasury is expected to follow. 

Instead, it is intended to demonstrate the portfolio composition absent changes to the mix of securities issued by Treasury.

Recent and Future Portfolio Composition by Issuance Type, Percent

End of Fiscal 

Year Bills Nominal Coupons

TIPS (principal 

accreted to 

projection date)

2006 21 3%. 69 5%. 9 2%.

2007 21.6% 68.1% 10.3%

2008 28.5% 61.4% 10.0%

2009 28.5% 63.6% 7.9%

2010 21 1%. 71 9%. 7 0%.

2011 15.4% 77.3% 7.3%

2012 15.1% 77.2% 7.6%

2013 13.8% 78.2% 8.0%

2014 12.9% 78.8% 8.3%

2015 12.1% 79.2% 8.7%

2016 11.5% 79.7% 8.8%

2017 10.9% 80.0% 9.1%

2018 10.4% 80.2% 9.4%

2019 9.9% 80.4% 9.7%

2020 9.4% 80.8% 9.7%

2021 9.0% 81.3% 9.7%

2022 8.6% 81.9% 9.5%

22

Portfolio & SOMA holdings as of 3/30/2012. To match OMB’s projected borrowing from the public for the next 10 years, nominal coupon 

securities (2-, 3-, 5-, 7-, 10-, and 30-year) were adjusted by the same percentage. OMB’s borrowing from the public projections are from Table S-5 

and S-15 the of February 13, 2012, “Fiscal Year 2013 Budget of the US Government.” The principal on the TIPS securities were accreted to each 

projection date based on market ZCIS levels. This scenario does not represent any particular course of action that Treasury is expected to follow. 

Instead, it is intended to demonstrate the portfolio composition absent changes to the mix of securities issued by Treasury.
Recent and Future Maturity Profile, $ Billion

16,000 

18,000 

20,000 

12,000 

14,000 

n

6,000 

8,000 

10,000 

$ b

2,000 

4,000 

0 

2007200820092010201120122013201420152016201720182019202020212022

End of Fiscal Year

< 1yr [1, 2) [2, 3) [3, 5) [5, 7) [7, 10) >= 10yr

23

Portfolio & SOMA holdings as of 3/30/2012. To match OMB’s projected borrowing from the public for the next 10 years, nominal coupon 

securities (2-, 3-, 5-, 7-, 10-, and 30-year) were adjusted by the same percentage. OMB’s borrowing from the public projections are from Table S-5 

and S-15 of the February 13, 2012, “Fiscal Year 2013 Budget of the US Government.” The principal on the TIPS securities were accreted to each 

projection date based on market ZCIS levels. This scenario does not represent any particular course of action that Treasury is expected to follow. 

Instead, it is intended to demonstrate the maturity profile absent changes to the mix of securities issued by Treasury.

y [, ) [, ) [, ) [, ) [, ) y

Recent and Future Maturity Profile, $ Billion

End of Fiscal 

Year < 1yr [1, 2) [2, 3) [3, 5) [5, 7) [7, 10) >= 10yr Total

2007 1 582 , 664 342 551 276 499 627 4 541 ,

2008 2,151 710 280 657 318 515 690 5,320

2009 2,702 775 666 970 540 691 779 7,124

2010 2,563 1,143 872 1,310 918 881 952 8,639

2011 2,621 1,273 1,004 1,527 1,146 1,086 1,129 9,786

2012 2,964 1,373 1,109 1,854 1,184 1,112 1,184 10,782

2013 3,045 1,552 1,219 2,116 1,378 1,191 1,349 11,850

2014 3,186 1,611 1,476 2,229 1,432 1,183 1,558 12,675

2015 3,246 1,889 1,483 2,364 1,546 1,215 1,707 13,450

2016 3,528 1,950 1,575 2,500 1,622 1,200 1,884 14,259

2017 3,586 2,090 1,644 2,679 1,598 1,343 2,081 15,022

2018 3,726 2,131 1,787 2,818 1,642 1,399 2,245 15,748

2019 3,768 2,283 1,925 2,782 1,811 1,513 2,441 16,523

2020 3 924 , 2 463 , 1 995 , 2 878 , 1 841 , 1 514 , 2 718 , 17 332 ,

2021 4,101 2,598 1,876 3,116 1,918 1,560 2,995 18,164

2022 4,236 2,484 2,202 3,271 2,062 1,497 3,269 19,022

24

Portfolio & SOMA holdings as of 3/30/2012. To match OMB’s projected borrowing from the public for the next 10 years, nominal coupon 

securities (2-, 3-, 5-, 7-, 10-, and 30-year) were adjusted by the same percentage. OMB’s borrowing from the public projections are from Table S-5 

and S-15 of the February 13, 2012, “Fiscal Year 2013 Budget of the US Government.” The principal on the TIPS securities were accreted to each 

projection date based on market ZCIS levels. This scenario does not represent any particular course of action that Treasury is expected to follow. 

Instead, it is intended to demonstrate the maturity profile absent changes to the mix of securities issued by Treasury.
Recent and Future Maturity Profile, Percent

80%

90%

100%

60%

70%

30%

40%

50%

10%

20%

0%

2007200820092010201120122013201420152016201720182019202020212022

End of Fiscal Year

< 1yr [1, 2) [2, 3) [3, 5) [5, 7) [7, 10) >= 10yr

25

Portfolio & SOMA holdings as of 3/30/2012. To match OMB’s projected borrowing from the public for the next 10 years, nominal coupon 

securities (2-, 3-, 5-, 7-, 10-, and 30-year) were adjusted by the same percentage. OMB’s borrowing from the public projections are from Table S-5 

and S-15 of the February 13, 2012, “Fiscal Year 2013 Budget of the US Government.” The principal on the TIPS securities were accreted to each 

projection date based on market ZCIS levels. This scenario does not represent any particular course of action that Treasury is expected to follow. 

Instead, it is intended to demonstrate the maturity profile absent changes to the mix of securities issued by Treasury.

y [, ) [, ) [, ) [, ) [, ) y

Recent and Future Maturity Profile, Percent

End of Fiscal 

Year < 1yr [1, 2) [2, 3) [3, 5) [5, 7) [7, 10) >= 10yr [0,3) [0,5)

2007 34.8% 14.6% 7.5% 12.1% 6.1% 11.0% 13.8% 57.0% 69.1%

2008 40.4% 13.3% 5.3% 12.3% 6.0% 9.7% 13.0% 59.1% 71.4%

2009 37.9% 10.9% 9.3% 13.6% 7.6% 9.7% 10.9% 58.2% 71.8%

2010 29.7% 13.2% 10.1% 15.2% 10.6% 10.2% 11.0% 53.0% 68.2%

2011 26 8%. 13 0%. 10 3%. 15 6%. 11 7%. 11 1%. 11 5%. 50 1%. 65 7%.

2012 27.5% 12.7% 10.3% 17.2% 11.0% 10.3% 11.0% 50.5% 67.7%

2013 25.7% 13.1% 10.3% 17.9% 11.6% 10.1% 11.4% 49.1% 66.9%

2014 25.1% 12.7% 11.6% 17.6% 11.3% 9.3% 12.3% 49.5% 67.1%

2015 24.1% 14.0% 11.0% 17.6% 11.5% 9.0% 12.7% 49.2% 66.8%

2016 24.7% 13.7% 11.0% 17.5% 11.4% 8.4% 13.2% 49.5% 67.0%

2017 23.9% 13.9% 10.9% 17.8% 10.6% 8.9% 13.9% 48.7% 66.6%

2018 23.7% 13.5% 11.3% 17.9% 10.4% 8.9% 14.3% 48.5% 66.4%

2019 22.8% 13.8% 11.6% 16.8% 11.0% 9.2% 14.8% 48.3% 65.1%

2020 22.6% 14.2% 11.5% 16.6% 10.6% 8.7% 15.7% 48.4% 65.0%

2021 22.6% 14.3% 10.3% 17.2% 10.6% 8.6% 16.5% 47.2% 64.4%

2022 22.3% 13.1% 11.6% 17.2% 10.8% 7.9% 17.2% 46.9% 64.1%

26

Portfolio & SOMA holdings as of 3/30/2012. To match OMB’s projected borrowing from the public for the next 10 years, nominal coupon 

securities (2-, 3-, 5-, 7-, 10-, and 30-year) were adjusted by the same percentage. OMB’s borrowing from the public projections are from Table S-5 

and S-15 of the February 13, 2012, “Fiscal Year 2013 Budget of the US Government.” The principal on the TIPS securities were accreted to each 

projection date based on market ZCIS levels. This scenario does not represent any particular course of action that Treasury is expected to follow. 

Instead, it is intended to demonstrate the maturity profile absent changes to the mix of securities issued by Treasury.
Section IV:

Demand

27

Summary Statistics for Fiscal Year 2012 Q2 Auctions

Security

Type Term

StopOut

Rate (%)

BidtoCover

Ratio

Competitive

Awards ($ bn)

%Primary

Dealer % Direct % Indirect

NonCompetitive

Awards ($ bn)

SOMAAdd

Ons ($ bn)

10YrEquivalent

Type Term Rate (%) Ratio Awards ($ bn) Dealer % Direct % Indirect Awards ($ bn) Ons ($ bn) ($ bn)

Bill 4-Week 0.059 4.4 460.9 64.8% 10.0% 25.2% 3.1 57.7 3.99

Bill 13-Week 0.069 4.6 395.5 68.7% 7.3% 24.0% 9.7 0.0 11.32

Bill 26-Week 0.109 4.7 366.5 64.2% 7.7% 28.2% 8.6 0.0 20.97

Bill 52-Week 0.139 4.7 76.4 61.6% 10.0% 28.5% 0.5 0.0 8.57

Coupon 2-Year 0.300 3.7 104.4 52.6% 13.1% 34.3% 0.6 2.0 23.40

Coupon 3-Year 0.391 3.5 95.9 58.8% 7.6% 33.6% 0.1 8.4 31.92

Coupon 5-Year 0.946 3.0 104.9 44.5% 13.1% 42.4% 0.1 2.0 57.48

Coupon 7-Year 1.456 2.9 86.9 46.4% 14.8% 38.8% 0.1 1.6 64.65

Coupon 10-Year 2.000 3.2 65.8 43.2% 18.2% 38.6% 0.1 5.9 65.92

Coupon 30-Year 3.205 2.6 41.9 57.7% 12.4% 30.0% 0.1 3.8 90.75

TIPS 10 Y- ear (0 066) (0.066) 2 9. 27 8. 44 8%. 17 0%. 38 2%. 0 2. 0 3. 31 12 .

TIPS 30-Year 0.770 2.5 9.0 45.8% 13.6% 40.6% 0.0 0.1 26.15

TotalBills 0.081 4.6 1,299.4 65.6% 8.5% 25.9% 21.9 57.7 44.85

TotalCoupons 1.122 3.2 500 0. 50 %.2 12.9% 36 9%. 1.0 23.7 334.12

TotalTIPS 0.138 2.8 36.7 45.0% 16.2% 38.8% 0.2 0.4 57.27

28

Stop Out Rate, Bid-to-Cover Ratio, % Primary Dealer, % Direct and % Indirect are weighted averages of Competitive Awards. 10-Yr equivalent 

is approximated using prices at settlement and includes both Competitive and Non-Competitive Awards. For TIPS 10-Yr equivalent, a constant 

auction BEI is used as the inflation assumption.
Bid-to-Cover Ratios for Treasury Bills

5.5

6

4

4.5

5

Ratio

3

3.5

4

Bid-to-Cover R

2

2.5

1.5

Mar-02Mar-03Mar-04Mar-05Mar-06Mar-07Mar-08Mar-09Mar-10Mar-11Mar-12

29

4-Week (13-week moving average) 13-Week (13-week moving average)

26-Week (13-week moving average) 52-Week (6-month moving average)

Bid-to-Cover Ratios for 2-, 3-, and 5-Year Nominal Securities

(6-Month Moving Average)

3.6

3.8

3.2

3.4

atio 2.8

3

Bid-to-Cover R 2.4

2.6

2

2.2

Mar-09

un-09

Sep-09

Dec-09

Mar-10

un-10

Sep-10

Dec-10

Mar-11

un-11

Sep-11

Dec-11

Mar-12

30

M

Ju

S

D

M

Ju

S

D

M

Ju

S

D

M

2-Year 3-Year 5-Year
Bid-to-Cover Ratios for 7-, 10-, and 30-Year Nominal Securities

(6-Month Moving Average)

3.2

3.4

3

atio 2.8 Bid-to-Cover R 2.4

2.6

2.2

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Sep-10

Dec-10

Mar-11

un-11

Sep-11

Dec-11

Mar-12

31

J

O

J

A

J

S

D

M

Ju

S

D

M

7-Year 10-Year 30-Year

Bid-to-Cover Ratios for TIPS

3

3.5

2.5

atio

2

Bid-to-Cover R 1.5

1

Mar-00Mar-01Mar-02Mar-03Mar-04Mar-05Mar-06Mar-07Mar-08Mar-09Mar-10Mar-11Mar-12

32

MMMMMMMMMMMMM

5-Year 10-Year (6-month moving average) 20-Year 30-Year
Investor Class Auction Awards: Bills

Fiscal Year 2012 Q2

Foreign &

Other

4.5%

Foreign &

International 

8.1%

Investment

Funds

14.5%

Primary

Dealers

Other Dealers 

& Brokers

8.4%

64.5%

33 Excludes SOMA add-ons. The “Other” category includes categories that are each less than 2%, which include Depository Institutions, Individuals, 

Pension and Insurance.

Change in Demand Over the Last Year in Bills, Auction 

Awards by Investor Class

5%

6%

2%

3%

4%

Quarters

0%

1%

2%

ge from the Past 4 

3%

-2%

-1%

Chang -4%

-3%

Primary

Dealers

r Dealers 

Brokers

vestment

Funds

reign & 

national 

Other

34 Excludes SOMA add-ons. The “Other” category includes categories that are each less than 2%, which include Depository Institutions, Individuals, 

Pension and Insurance.

Other

& B

Inv

For

Inter
Investor Class Auction Awards: Investor Class Auction Awards: 

Other

1.1%

2-, 3-, and 5-Year Nominal Securities

Fiscal Year 2012 Q2

Other

0 9%

7-, 10-, and 30-Year Nominal Securities

Fiscal Year 2012 Q2

Foreign & 

I t ti l

Foreign & 

I t ti l

0.9%

Primary

D l

International

23.7%

Primary

Dealers

47.7%

International

22.6%

Dealers

51.7%

Investment

Funds

16.0%

47.7%

Investment

Funds

Other 

Dealers 

& Brokers

7.5%

Other 

Dealers 

& Brokers

6.4%

22.4%

35 Excludes SOMA add-ons. The “Other” category includes categories that are each less than 2%, which include Depository Institutions, Individuals, 

Pension and Insurance.

Change in Demand Over the Last Year in 2-, 3-, 5-Year 

Nominal Securities, Auction Awards by Investor Class

1.0%

1.5%

,

-0.5%

0.0%

0.5%

Quarters

-2.0%

-1.5%

-1.0%

ge from the Past 4 

3 5%

-3.0%

Chan

-2.5%

g -4.0%

-3.5%

Primary

Dealers

er Dealers 

Brokers

nvestment

Funds

reign & 

rnational 

Other

36 Excludes SOMA add-ons. The “Other” category includes categories that are each less than 2%, which include Depository Institutions, Individuals, 

Pension and Insurance.

Othe

& B

In

Fo

Inter
Change in Demand Over the Last Year in 7-, 10-, 30-Year 

Nominal Securities, Auction Awards by Investor Class

2.0%

2.5%

,

1.0%

1.5%

4 Quarters

0 5%

0.0%

0.5%

nge from the Past 4 -1.5%

-1.0%

-0.5%

Chan -2.0%

Primary

Dealers

her Dealers 

& Brokers

Investment

Funds

Foreign & 

ternational 

Other

37 Excludes SOMA add-ons. The “Other” category includes categories that are each less than 2%, which include Depository Institutions, Individuals, 

Pension and Insurance.

Oth

&

I

F

Int

Investor Class Auction Awards: TIPS

Fiscal Year 2012 Q2

Foreign &

Other

1.2%

Foreign &

International 

12.8%

Primary

Dealers

44.7%

Investment

Funds

39 5%.

38

Other Dealers 

& Brokers

1.9%

Excludes SOMA add-ons. The “Other” category includes categories that are each less than 2%, which include Depository Institutions, Individuals, 

Pension and Insurance.
Change in Demand Over the Last Year in TIPS, Auction 

Awards by Investor Class

3%

4%

2%

Quarters

0%

1%

e from the Past 4 

-2%

Chang

-1%

-3%

Primary

Dealers

r Dealers 

rokers

vestment

Funds

eign & 

national 

Other

39 Excludes SOMA add-ons. The “Other” category includes categories that are each less than 2%, which include Depository Institutions, Individuals, 

Pension and Insurance.

Other

& B

Inv

F

Fore

Intern

Total Foreign Awards of Treasuries at Auction, $ Billion

160

180

200

120

140

ward ($bn)

80

100

onthly Private A

w

40

60 Mo

0

20

Jun-09

Sep-09

Dec-09

Mar-10

Jun-10

Sep-10

Dec-10

Mar-11

Jun-11

Sep-11

Dec-11

Mar-12

40 Foreign includes both private sector and official institutions.

D

M

D

M

D

M

Bills 2/3/5 7/10/30 TIPS
Foreign Awards of Bills at Auction, Percent

20%

25%

Investors

15%

10%

warded to Foreign 

5%

% A

0%

n-09

p-09

c-09

ar-10

n-10

p-10

c-10

ar-11

n-11

p-11

c-11

ar-12

41 Excludes SOMA add-ons. Foreign includes both private sector and official institutions. Jun Sep De

Ma

Jun

Sep

De

Ma

Jun

Sep

De

Ma

Foreign Awards of Nominal Coupons at Auction, Percent

40%

45%

50%

30%

35%

n Investors

20%

25%

warded to Foreign 10% % A 15%w

0%

5%

un-09

ep-09

Dec-09

Mar-10

un-10

ep-10

Dec-10

Mar-11

un-11

ep-11

Dec-11

Mar-12

42 Excludes SOMA add-ons. Foreign includes both private sector and official institutions.

Ju

Se

D

M

Ju

Se

D

M

Ju

Se

D

M

2/3/5 7/10/30
Foreign Awards of TIPS at Auction, Percent

20%

25%

15%

n Investors

10%

warded to Foreig

5%

% A

0%

un-09

ep-09

Dec-09

Mar-10

un-10

ep-10

Dec-10

Mar-11

un-11

ep-11

Dec-11

Mar-12

43 Excludes SOMA add-ons. Foreign includes both private sector and official institutions.

Ju

Se

D

M

Ju

Se

D

M

Ju

Se

D

M

5-Year 10-Year 20-Year 30-Year

Primary Dealer Awards at Auction, Percent

65%

70%

d 55%

60%

Amount Awarde

45%

50%

otal Competitive 

A

35%

40%

% of To 30%

Jun-09

Sep-09

Dec-09

Mar-10

Jun-10

Sep-10

Dec-10

Mar-11

Jun-11

Sep-11

Dec-11

Mar-12

4/13/26-Week (13-week moving average) 52-Week (6-month moving average)

44

/ / ( g g) ( g g)

2/3/5 (6-month moving average) 7/10/30 (6-month moving average)

TIPS (6-month moving average)
Appendix

45

Issue SettleDate

StopOut

Rate(%)

BidtoCover

Ratio

Competitive

Awards($bn)

%Primary

Dealer %Direct %Indirect

NonCompetitive

Awards($bn)

SOMAAdd

Ons($bn)

10YrEquivalent

($bn)

4-Week 01/04/12 0.000 5.34 29.42 75.8% 4.2% 19.9% 0.20 2.42 0.25

4-Week 01/10/12 0.000 5.09 29.72 78.4% 5.4% 16.2% 0.28 5.94 0.26

4-Week 01/18/12 0 015 4 66 29 78 56 2% 4 3% 39 5% 0 22 3 78 0 26

BillIssues

4-Week 01/18/12 0.015 4.66 29.78 56.2% 4.3% 39.5% 0.22 3.78 0.26

4-Week 01/24/12 0.020 4.77 29.19 72.7% 9.5% 17.8% 0.24 6.29 0.25

4-Week 01/31/12 0.050 4.94 32.82 59.1% 7.4% 33.5% 0.18 2.42 0.28

4-Week 02/07/12 0.060 4.37 36.75 60.3% 11.6% 28.0% 0.25 5.94 0.32

4-Week 02/14/12 0.110 3.97 39.80 52.6% 7.0% 40.4% 0.20 3.78 0.34

4-Week 02/22/12 0.060 4.11 39.76 68.2% 11.5% 20.3% 0.24 6.29 0.34

4-Week 02/28/12 0.100 4.20 39.75 62.1% 14.8% 23.1% 0.25 2.42 0.34

4-Week 03/06/12 0.060 4.50 39.71 49.2% 12.9% 38.0% 0.29 5.94 0.34

4-Week 03/13/12 0.070 4.05 39.79 69.5% 14.5% 16.0% 0.21 3.78 0.35

4-Week 03/20/12 0.100 3.99 39.77 73.2% 10.9% 15.9% 0.23 6.29 0.35

4-Week 03/27/12 0.065 4.15 34.59 70.2% 11.5% 18.2% 0.25 2.42 0.30

13-Week 01/03/12 0.015 4.93 27.38 77.4% 9.1% 13.4% 0.76 0.00 0.78

13-Week 01/09/12 0.010 5.03 28.11 66.3% 3.8% 29.9% 0.74 0.00 0.80

13-Week 01/17/12 0.025 4.41 28.22 69.4% 7.4% 23.2% 0.77 0.00 0.81

13-Week 01/23/12 0.040 4.98 27.56 75.0% 6.5% 18.5% 0.81 0.00 0.79

13 W k - ee 01/30/12 01/30/12 0 050 . 4 56 . 30 29 . 70 1%. 6 6%. 23 3%. 0 71 . 0 00 . 0 86 .

13-Week 02/06/12 0.080 4.63 32.05 74.4% 6.7% 19.0% 0.76 0.00 0.92

13-Week 02/13/12 0.095 4.31 32.03 77.1% 8.1% 14.7% 0.77 0.00 0.90

13-Week 02/21/12 0.085 4.33 32.28 74.5% 10.1% 15.3% 0.72 0.00 0.91

13-Week 02/27/12 0.115 4.24 31.76 79.8% 5.7% 14.6% 0.71 0.00 0.90

13-Week 03/05/12 0.080 4.41 31.97 67.1% 8.2% 24.7% 0.73 0.00 0.91

13-Week 03/12/12 0.095 4.83 32.24 42.4% 5.8% 51.8% 0.76 0.00 0.94

13 Week - 03/19/12 03/19/12 0 095 . 4 30 . 32 15 . 61 4%. 9 7%. 28 9%. 0 75 . 0 00 . 0 94 .

13-Week 03/26/12 0.085 4.62 29.51 59.4% 7.1% 33.5% 0.74 0.00 0.86

26-Week 01/03/12 0.055 5.23 25.43 66.6% 9.6% 23.8% 0.57 0.00 1.45

26-Week 01/09/12 0.050 4.84 25.59 62.4% 7.2% 30.5% 0.70 0.00 1.46

26-Week 01/17/12 0.060 4.67 25.81 56.5% 9.4% 34.0% 0.69 0.00 1.48

26-Week 01/23/12 0.070 5.01 25.55 57.5% 7.6% 34.9% 0.73 0.00 1.46

26-Week 01/30/12 0.075 4.78 27.59 58.3% 7.0% 34.7% 0.61 0.00 1.56

26-Week 02/06/12 0.100 4.76 29.72 67.3% 6.5% 26.2% 0.68 0.00 1.71

26-Week 02/13/12 0.130 4.36 29.84 71.6% 8.6% 19.8% 0.76 0.00 1.68

26-Week 02/21/12 0.125 4.43 29.90 62.3% 8.2% 29.4% 0.72 0.00 1.69

26-Week 02/27/12 0.145 4.32 29.63 67.8% 6.8% 25.4% 0.70 0.00 1.68

26-Week 03/05/12 0.130 4.54 29.90 69.3% 7.3% 23.4% 0.60 0.00 1.69

26-Week 03/12/12 0.145 5.10 30.07 68.8% 5.3% 25.9% 0.63 0.00 1.76

26-Week 03/19/12 0.150 4.42 30.11 67.1% 8.5% 24.4% 0.59 0.00 1.75

26-Week 03/26/12 0.150 4.79 27.39 55.5% 8.1% 36.4% 0.65 0.00 1.59

52 W k 01/10/12 0 105 4 82 24 76 59 2% 12 2% 28 6% 0 14 0 00 2 76

46

52-Week 01/10/12 0.105 4.82 24.76 59.2% 12.2% 28.6% 0.14 0.00 2.76

52-Week 02/07/12 0.140 4.61 25.83 65.8% 9.7% 24.5% 0.17 0.00 2.92

52-Week 03/06/12 0.170 4.74 25.85 59.5% 8.1% 32.4% 0.15 0.00 2.89

Stop Out Rate, Bid-to-Cover Ratio, % Primary Dealer, % Direct and % Indirect are weighted averages of Competitive Awards. 10-Yr equivalent 

is approximated using prices at settlement and includes both Competitive and Non-Competitive Awards. 
I S ttl D t

StopOut

R t (%)

BidtoCover

R ti

Competitive

A d ($ b )

%Primary

D l % Di t % I di t

NonCompetitive

A d ($ b )

SOMAAdd

O ($ b )

10YrEquivalent

($ b )

NominalCouponSecurities

Issue SettleDate Rate(%) Ratio Awards($ bn) Dealer % Direct % Indirect Awards($ bn) Ons($ bn) ($ bn)

2-Year 01/24/12 0.250 3.75 34.80 58.8% 8.3% 32.9% 0.20 0.66 7.74

2-Year 02/21/12 0.310 3.54 34.83 54.7% 9.5% 35.8% 0.17 0.50 7.73

2-Year 03/27/12 0.340 3.69 34.81 44.3% 21.4% 34.3% 0.19 0.83 7.93

3-Year 01/10/12 0.370 3.73 31.97 56.1% 5.3% 38.5% 0.03 2.27 10.56

3-Year 02/07/12 02/07/12 0 347 . 3 30 . 31 96 . 63 8%. 8 5%. 27 7%. 0 04 . 3 90 . 10 47 .

3-Year 03/12/12 0.456 3.44 31.97 56.5% 8.9% 34.6% 0.03 2.22 10.88

5-Year 01/25/12 0.899 3.17 34.96 41.5% 15.1% 43.4% 0.04 0.66 19.10

5-Year 02/22/12 0.900 2.89 34.97 45.3% 12.9% 41.8% 0.03 0.50 18.97

5-Year 03/28/12 1.040 2.85 34.97 46.8% 11.3% 41.9% 0.03 0.83 19.42

7-Year 01/26/12 1.359 2.73 28.97 56.6% 11.6% 31.8% 0.03 0.55 21.48

7-Year 02/23/12 1.418 3.11 28.98 38.9% 19.3% 41.8% 0.02 0.41 21.38

7-Year 03/29/12 1.590 2.72 28.99 43.8% 13.4% 42.8% 0.01 0.69 21.79

10-Year 01/11/12 1.900 3.29 20.98 44.3% 17.4% 38.3% 0.02 1.49 21.00

10-Year 02/08/12 2.020 3.05 23.87 43.3% 17.9% 38.9% 0.05 2.93 23.92

10-Year 03/13/12 2.076 3.24 20.98 42.0% 19.4% 38.6% 0.02 1.46 21.00

30-Year 01/12/12 2.985 2.60 12.99 60.9% 7.2% 31.9% 0.01 0.92 29.51

30-Year 02/09/12 3.240 2.47 15.96 56.1% 14.7% 29.2% 0.04 1.95 34.42

30-Year 03/14/12 3.383 2.70 12.99 56.3% 14.7% 29.0% 0.01 0.90 26.82

S O id C C ii % i C ii SO dd 0 il

TIPS

Issue SettleDate

StopOut

Rate(%)

BidtoCover

Ratio

Competitive

Awards($bn)

%Primary

Dealer %Direct %Indirect

NonCompetitive

Awards($bn)

SOMAAdd

Ons($bn)

10YrEquivalent

($bn)

10-Year 01/19/12 (0.046) 2.91 14.83 50.3% 13.4% 36.3% 0.14 0.28 16.50

10-Year 03/22/12 (0.089) 2.81 12.95 38.5% 21.1% 40.4% 0.05 0.00 14.62

30-Year 02/16/12 0.770 2.46 8.96 45.8% 13.6% 40.6% 0.04 0.13 26.15

47 Stop Out Rate, Bid-to-Cover Ratio, % Primary Dealer, % Direct and % Indirect are weighted averages of Competitive Awards. 10-Yr equivalent 

is approximated using prices at settlement and includes both Competitive and Non-Competitive Awards. For TIPS 10-Yr equivalent, a constant 

auction BEI is used as the inflation assumption.

Presentation for:

The Treasury 

Borrowing 

Advisory 

Committee

May 1, 2012
The Charge

Treasury regularly studies the evolution of fixed income markets, particularly with 

regard h h i l f fi i l i i i h l i l d b h i d to the changing roles of financial institutions, technological advances, behavior 

of market participants and regulation.

We would like the Committee’s views on how fixed income markets have changed over 

the last few years and how they may evolve in the future. Please comment on both 

positive and negative developments. Are there any specific market structure concerns 

th d at warrant discussion?

1

Changes to the Fixed Income Markets over the Past Few Years

1. Reduced liquidity of spread product

• Lk l f k d l f T l d Likely a consequence of investor risk aversion and regulatory reform. Treasuries remain liquid

2. Prevalence of “risk on / risk off” mentality

• Extreme valuations correlations rising excess returns becoming more volatile Extreme valuations, correlations rising, excess returns becoming more volatile

3. Role of government 

• Extraordinary monetary policy (ZIRP, balance sheet growth, communication/transparency) Extraordinary monetary policy (ZIRP, balance sheet growth, communication/transparency)

• Regulatory reform

4. Chang pp es in market participant behavior

• Cyclical (risk tolerance) and secular (demographics / LDI strategies), customized solutions

5. Growing role of electronic trading

• Driven by increased efficiency and regulatory reform

2
Reduced Corporate Bond Liquidity

Dealer inventories of corporate bonds have declined by more

than 70% since 2007, while the credit market has grown Investment grade corporate bid-offer spreads have increased

p qy

300

350

5 000

5,500

30

35

100

150

200

250

300

Billions of dollars

3,000

3,500

4,000

4,500

5,000

Billions of dollars

10

15

20

25

30

0

50

Dec-01Dec-02Dec-03Dec-04Dec-05Dec-06Dec-07Dec-08Dec-09Dec-10Dec-11

B

2,000

2,500 B

Primary Dealer Corporate Bond Inventory (LHS)

Si f C dit M k t (IG HY RHS)

0

5

Dec-03Dec-04Dec-05Dec-06Dec-07Dec-08Dec-09Dec-10

A bid ff d (4 k b )

Trading is concentrated in a limited number of issuers Relative to 2006, turnover is better for on-the-run IG corporate

37 credits account for 50% of IG corporate trading volume bonds but significantly worse for off-the-run bonds 

Size of Credit Market (IG+HY, RHS) Average bid-offer spread (4 w eek average, bps)

3

Source: Barclays, JP Morgan. The bottom charts are for the 9 months ending September 2011.

Years since issuance

Imp p qy lications of Reduced Corporate Bond Liquidity

• A reduction in liquidity / wider bid-offer spreads has both an upfront cost to existing investors (who have 

to mark their existing holdings at wider levels) as well as an ongoing cost for issuers and investors

o Per a recent study $ *, a strict implementation of the Volcker Rule for the corporate bond market may cost 90-

315bn upfront plus $12-43bn/yr for issuers and $1-4bn/yr for investors in future transactions

o Analysis by Barclays** indicates that the liquidity premium has risen from ~20bps in Jan ’07 to ~40bps in Mar ’12

• Policy makers should carefully consider the impact on market liquidity when introducing new financial Policy makers should carefully consider the impact on market liquidity when introducing new financial

regulations, such as the Volcker Rule

o SIFMA, the Credit Roundtable (a group of large fixed income money managers), and other market participants 

have submitted comments on this topic

o Given the size of the bond markets, it would be difficult, if not impossible, for the banking sector to reintermediate the capital markets (replacing bonds with loans) in response to a prolonged market dislocation

Decomposition of Investment Grade Corporate Bond Spreads

4

* Study conducted by Oliver Wyman at the request of SIFMA

** Barclays analysis regresses corporate bond spreads on bid-offer spreads and CDS spreads Source: Oliver Wyman, Barclays
Fixed Income Market Dynamics – Risk On / Risk Off

160 50%

y

G ld +100%

Recently, US Treasuries have been volatile when compared to

the low level of yields (1sd move = 97bps vs. 10yr yield of ~2%)

Performance of “Safe” and “Risky” Securities: 

Dec ’07 – Mar ‘12

40

60

80

100

120

140

15%

20%

25%

30%

35%

40%

Gold +100% 45%

Japanese Yen +35%

10-Year US Treasury +34%

Swiss Franc +26%

S&P 500 +5%

-

20

40

Dec-90Dec-92Dec-94Dec-96Dec-98Dec-00Dec-02Dec-04Dec-06Dec-08Dec-10

0%

5%

10%

Rolling 52 Week Realized Annualized Vol of 10yr Tsy Yields (in bps LHS)

S&P 500 +5%

Euro Stoxx 50 -32%

Note: All returns are measured in dollars, except for Euro 

Stoxx 50 which is measured in Euros. Gold, Swiss Franc,

and Japanese Yen returns are calculated based on

h ll h i l d i f Rolling 52-Week Realized Annualized Vol of 10yr Tsy Yields (in bps, LHS)

Rolling 52-Week Realized Annualized Vol of 10yr Tsy Yields (as % of yield, RHS)

Corporate excess returns have become more volatile

HSBC Risk On - Risk Off Index

Based on movements of 34 asset classes . Higher = more co-movement

spot rate changes; all other returns include reinvestment of

interest/dividends.

250

221 bps

150

200

thly Excess Return 

redit Index (bps)

+217%

0 3

0.35

0.4

0.45

0.5

70 bps

0

50

100

Unannualized Mont

of Barclays US C

0.1

0.15

0.2

0.25

0.3

Risk On / Risk Off 

Becomes More 

Prominent

5

Dec 1997 - Dec 2007 Dec 2007 - Dec 2011

Source: Bloomberg, Barclays, HSBC

Dec-90Dec-92Dec-94Dec-96Dec-98Dec-00Dec-02Dec-04Dec-06Dec-08Dec-10

Role of Government – Changes in Monetary Policy

• Global central banks have taken extraordinary actions in response to the financial crisis

o Monetar polic rates c t to near ero

g yy

Monetary policy rates cut to near zero

o Balance sheet expansion and composition

o Federal Reserve’s communication strategy / level of transparency

o Interest on Excess Reserves

• Anticipation of central bank behavior has become a significant driver of market sentiment

• Exit strategy uncertain

Central bank balance sheets have expanded significantly Policy rates have been cut to near zero

6%

7%

3.5

4.0

4.5

of dollars

2%

3%

4%

5%

1 0

1.5

2.0

2.5

3.0

Trillions o

0%

1%

Dec-99Dec-00Dec-01Dec-02Dec-03Dec-04Dec-05Dec-06Dec-07Dec-08Dec-09Dec-10Dec-11

-

0.5

1.0

Dec-99Dec-00Dec-01Dec-02Dec-03Dec-04Dec-05Dec-06Dec-07Dec-08Dec-09Dec-10Dec-11

6

Source: Bloomberg

Fed ECB BOJ Fed ECB BOJ BOE
Role of Government – Reg y ulatory Reform Overview

• A significant amount of regulatory reform has occurred and rules continue to be written

o Movement toward Basel III in the United States

Higher capital requirements

Liquidity requirements

o D dd o -F k bill d M l ki ill i Frank bill enacted. Many rulemakings still in progress

Volcker Rule

Derivatives Reform

Risk Retention – “skin in the game” for securitizations

Orderlyq y Li uidation Authority

Consumer Financial Protection Bureau

Financial Stability Oversight Council

o Money market reform

New holdings restrictions enacted in 2010

Additional reforms (floating NAV, holdback requirement, capital buffer) currently being analyzed

• While these reforms are well-intentioned and will likely increase the soundness of large US financial 

i i i h b fi institutions, these benefits are not cost-f d i f l bili i i h free and may, in fact, create new vulnerabilities in the 

financial system

o Lower market liquidity, decreased credit availability

o Central clearing may create entities that are “too big to fail” and suffer from moral hazard

o Banks may engage in higher risk (higher ROA) activities to compensate for higher capital requirements

7

Banks may engage in higher risk (higher ROA) activities to compensate for higher capital requirements

Impact of Regulatory Reform on Investment Banking

• Investment banks are being pressured by a number of forces 

B l25 d3

p gy g

o Basel 2.5 and 3

o Volcker Rule

o Electronic Trading

o Centralized Clearing Centralized Clearing

• In order to earn their cost of capital, investment banks increasingly need to differentiate 

themselves

o Services offered to investors

Willingness to commit balance sheet to facilitate trades

Research, analytics, and technology

Access to issuers, companies, and market experts

Collateral management services

o Services offered to issuers

Balance sheet commitments (e g revolvers) Balance sheet commitments (e.g. revolvers)

Breadth of distribution network

Transaction banking

Risk management

8
Reforming the OTC Derivative Markets

• In recent years, several reforms to reduce risk / improve disclosure have been implemented

o At the end of 2010, ~50% of interest rate swaps and <10% of CDS were centrally cleared 

o Trillions of dollars of partially offsetting trades (both CDS & interest rate swaps) have been compressed

o O t t di CDS ti l + t di l bli h d kl b th DTCC Outstanding CDS notional + trading volume published weekly by the DTCC

• In September 2009, G-20 leaders committed to reforming the OTC market

o“All standardized OTC derivative contracts should be traded on exchanges or electronic trading platforms, 

where appropriate, and cleared through central counterparties by end-2012 at the latest. OTC derivative 

contracts sh ld b d d N hould be reported to trade repositories. Non-centrall l d h ld b b h h lly cleared contracts should be subject to higher 

capital requirements.”

• Dodd-Frank + subsequent rulemakings by regulators will implement these reforms

Gross notional outstanding exceeds $700trn, but is a 

25

30

35

40

ns of dollars

500

600

700

800

ns of dollars

poor measure of risk posed to the financial system Gross credit exposure, a more accurate assessment of risk, is ~$3trn

5

10

15

20

5

Trillion

100

200

300

400

500

Trillion

0

Jun.1998Jun.1999Jun.2000Jun.2001Jun.2002Jun.2003Jun.2004Jun.2005Jun.2006Jun.2007Jun.2008Jun.2009Jun.2010Jun.2011

Gross Market Value

Gross Credit Exposure (Gross Market Value adjusted for netting)

0

Jun.1998Jun.1999Jun.2000Jun.2001Jun.2002Jun.2003Jun.2004Jun.2005Jun.2006Jun.2007Jun.2008Jun.2009Jun.2010Jun.2011

Interest Rate Contracts FX Contracts

Credit Default Sw aps Other Gross Credit Exposure (Gross Market Value, adjusted for netting)

9

p

Source: Bank for International Settlements (BIS)

Gross market value = Cost of replacing all existing contracts

Gross credit exposure = Gross market value adjusted for netting agreements

Implications of OTC Derivative Reform

“As Mark Twain’s character Pudd’nhead Wilson once opined, if you put all your eggs in one basket, you better 

watch that basket.” – Chairman Ben Bernanke speaking about clearinghouses, April 2011

• Implications of central clearing

o Clearinghouses are likely too-big-to-fail

o Moral hazard could be substantial, depending on structure

P fit t h h ld hil l b b l i g b Profits accrue to shareholders, while losses are borne by clearing members

Competition among clearinghouses could lead to degradation of standards

Regulators should consider setting minimum margin and shareholder equity requirements to ensure 

incentives are aligned

o Collateral p g q gg q y q g p osting requirements could trigger a liquidity squeeze during a market panic

A recent BIS study found that although major derivatives dealers likely have sufficient unencumbered 

assets to meet initial margin requirements, dealers could face large variation margin calls (a 1-in-200 

day event could require ~$60bn in collateral posting by the 14 largest dealers)

• Implications of exchange trading Implications of exchange trading

o Volumes likely to increase

o Growth of electronic and algorithmic trading

o Reduced liquidity / higher cost of non-standard contracts?

10

Source: Federal Reserve, JP Morgan, BIS
Imp g act of Regulation on Securitization Markets

• Depending on the final rules, regulatory reform may adversely affect issuance volumes, investor 

demand, and pricing of securitizations

o Risk retention

5% risk retention might be too large / make securitization uneconomical for certain asset classes

If final rules mandate a “horizontal slice,” then trusts would likely be consolidated on balance sheet

Premium capture rules (securitization proceeds worth more than par are retained and become a first loss 

piece) seriously harm the economics of issuing CMBS and non-agency RMBS

o P d RWA l l ti i Proposed RWA calculation is pro-cycli l ca

Under the Simplified Supervisory Formula Approach, capital charges on securitizations increase as a 

function of realized losses (with sharp cliff effects at certain thresholds)

o Reg AB II requires more disclosure, increasing costs for 144A deals (currently >40% of ABS issuance)

o Vl k R l lk l d d k l d Volcker Rule likely to reduce secondary market liquidity

• On a positive note, the Basel III Liquidity Coverage Ratio requirement may encourage banks to 

replace short-term funding with securitizations

ABS, Non-Agency MBS, and CMBS issuance have declined sharply The amount outstanding has dropped by ~40% since 2007

2,500

3,000

3,500

4,000

4,500

dollars

800

1,000

1,200

1,400

f dollars

ABS, Non Agency MBS, and CMBS issuance have declined sharply The amount outstanding has dropped by 40% since 2007

0

500

1,000

1,500

2,000

2,500

9697989900010203040506070809

01

billions of 

0

200

400

600

996997998999000001002003004005006007008009010011

billions o

199199199199200200200200200200200200200200201201

ABS Non-Agency MBS CMBS

19191919202020202020202020202020

ABS Non-Agency MBS CMBS

11

Source: JP Morgan, Merrill Lynch, Federal Reserve, Commercial Mortgage Alert, Loan Performance

Fixed Income Market Dynamics – Supp yl & Demand

• Supply

o Positive net new issuance (new issuance > redemptions) from US govt. and corporations

o Negative net new issuance of securitized products (especially non-agency MBS)

2,000

2,500

3,000

dollars)

Treasuries

Agency Debt (negative '07 - '12)

Agency MBS (negative '10 - '12)

CLOs (negative '09 - '12)

$239

$1,113

500

1,000

1,500

uance (billions of 

ABS (negative '08 - '12)

CMBS (negative '08 - '12)

Non-agency MBS (negative '08 - '12)

Build America Bonds

EM Corporates $239

-1,000

-500

0

2004 2005 2006 2007 2008 2009 2010 2011 F2012

Net Issu

p

HY corporates

IG corporates

Total Net Issuance

Total Net Issuance (ex Tsy & Agency

Debt)

• Demand

o Mutual Funds and ETFs – Significant inflows into fixed income funds

o Money Market Funds – Assets stabilizing, prime funds continue to move up in quality

C D fi d B fi Pl Shif i i fi d i i l l l d i

2004 2005 2006 2007 2008 2009 2010 2011 F2012 Debt)

o Corporate Defined Benefit Plans – Shifting into fixed income, particularly long-duration assets

o Rest of World – Buying treasuries, GSE holdings declining

o Federal Reserve – Acquired treasuries, agency bonds, and agency MBS via QE

o Growth of customized and non-traditional solutions – Global, credit-focused, unconstrained

M f i ii i

12

o Movement from active to passive equity strategies

Source: JP Morgan
Fixed Income Mutual Funds

3 0

3.5

ars)

25%

30%

Fixed income mutual funds are experiencing strong inflows Fixed income flows have been correlated with performance

1.5

2.0

2.5

3.0

ts (Trillions of dolla

0%

5%

10%

15%

20%

0.0

0.5

1.0

-90-91-92-93-94-95-96-97-98-99-00-01-02-03-04-05-06-07-08-09-10-11

Asset

-15%

-10%

-5%

Dec-90Dec-92Dec-94Dec-96Dec-98Dec-00Dec-02Dec-04Dec-06Dec-08Dec-10

DecDecDecDecDecDecDecDecDecDecDecDecDecDecDecDecDecDecDecDecDecDec

Last 12-Month Return of Barclays US Aggregate Bond Index

Next 12-Month Flow s (as % of AUM)

The share of mutual fund assets that are passively managed has risen Global and world bond funds have been growing quickly

16%

6%

8%

10%

12%

14%

16%

150

200

250

300

illions of dollars)

0%

2%

4%

6%

199319951997199920012003200520072009

0

50

100

-90-91-92-93-94-95-96-97-98-99-00-01-02-03-04-05-06-07-08-09-10-11

Assets (B

13

Bond and Hybrid Funds Equity Funds

Source: Investment Company Institute (ICI), Barclays

DecDecDecDecDecDecDecDecDecDecDecDecDecDecDecDecDecDecDecDecDecDecGrowingp y Po ularity of Fixed Income ETFs

• While still small relative to fixed income mutual funds, fixed income ETFs have grown quickly over 

the past few years

o ~$4bn AUM as of 12/31/2002, ~$21bn as of 12/31/2005, and ~$184bn as of 12/31/2011

• High Yield ETFs have grown especially fast and now hold over 3% of outstanding HY bonds, while 

High Grade ETFs hold ~1% of outstanding bonds

• High Yield ETF fund flows have begun to exert technical forces on the bond market, with 

benchmark-eligible bonds outperforming non-benchmark bonds during periods of HY ETF inflows 

(and vice versa)

AUM f Fi d I M l F d d ETF AUM of Fixed Income Mutual Funds and ETFs Bh k enc mark-eli ibl b d d f h HY ETF h i fl ligible bonds tend to outperform when HY ETFs have inflows

2 5

3.0

3.5

ns of Dollars 1 0

1.5

2.0

2.5

Trillion 0.0

0.5

1.0

200020012002200320042005200620072008200920102011

14

Long-Term Bond Mutual Funds Bond ETFs

Source: ICI, Barclays Cumulative Return = Cumulative return on bonds in the Barclays U.S. High Yield Very Liquid 

Index minus return on HY bonds that are outside of the index but have comparable liquidity 
Demand from the Rest of World and the Federal Reserve

• Demand from international investors (primarily foreign central banks)

o Following the conservatorship of Fannie Mae and Freddie Mac, international investors have 

become net sellers of GSE securities

o International investors continue to accumulate Treasuries

• Demand from the Federal Reserve

o A f l f QE1 QE2 d O T h F d l R h l d l As of result of QE1, QE2, and Operation Twist, the Federal Reserve has accumulated a large 

portfolio of Treasury and GSE MBS securities

C l i fl f i i l i i 12/31/06 Cumulative flows of international investors since 12/31/06 C l i fl f h F d l R i 12/31/06 Cumulative flows of the Federal Reserve since 12/31/06

2,000

2,500

e 12/31/06 

ars)

2,000

2,500

e 12/31/06 

ars)

500

1,000

1,500

mulative flows since

(billions of dolla

500

1,000

1,500

mulative flows since

(billions of dolla

-500

0

2007Q12007Q32008Q12008Q32009Q12009Q32010Q12010Q32011Q12011Q3

Cum

-500

0

2007Q12007Q32008Q12008Q32009Q12009Q32010Q12010Q32011Q12011Q3

Cum

15

Agency and GSE-Backed Securities US Treasuries Agency and GSE-Backed Securities US Treasuries

Source: Federal Reserve

Corporate Defined Benefit Plans

• In contrast to retail investors, who are more focused on preservation of capital, corporate DB plans 

are more concerned with matching their assets and liabilities

oAs a result of the financial crisis, corporate DB plans have both increased their allocation to fixed income 

and lengthened their duration

• There is a supply-demand mismatch for long-dated corporate bonds

o Issuance of >10yr investment grade corporate bonds has dropped from ~$220bn in 2007 to ~$100bn in 2011 Issuance of >10yr investment grade corporate bonds has dropped from ~$220bn in 2007 to ~$100bn in 2011

Asset Allocation of Corporate DB Plans Asset Allocation of Corporate DB Plans over Next 1 – 2 Years

8% 12% 19%

70%

80%

90%

100%

21%

20%

4%

3%

75%

70%

61%

56%

5%

9%

35%

42%

High Yield

Global Equity

US Small Cap Equity

US Large Cap Equity

40% 61% 64%

30%

40%

50%

60%

32%

29%

27%

21%

67%

62%

59%

75%

1%

9%

14%

5%

TIPS

Emerging Markets Equity

Non-US Equity

High Yield

39%

26% 26%

0%

10%

20%

200020012002200320042005200620072008200920102011

41%

41%

35%

57%

50%

63%

2%

9%

1%

0% 20% 40% 60% 80% 100%

Long Corporate Bonds

US Investment Grade Fixed Income

Long Government Bonds

Cash Fixed Income Equity Alternatives & Other

16

0% 20% 40% 60% 80% 100%

% planning to increase % planning no change % planning to decrease Source: Barclays, Pensions & Investments, Pyramis
Money Market Funds

• In September 2008, prime funds experienced their worst-ever month of outflows (-$391bn) after a 

prominent fund “broke the buck”

o Many of these assets appear to have been transferred into government MMFs (+$347bn in Sep 2008)

o Assets in money market funds subsequently peaked in January 2009 at ~$3.9trn

• Prime money market fund managers have become increasingly conservative

o E E b k h d d f 52% f M 2011 31% f F b 2012 Exposure to European banks has dropped from 52% as of May 2011 to 31% as of Feb 2012

This decrease has been accomplished entirely via reducing exposure to unsecured debt

Money Market Fund AUM European Bank Exposure in Prime Money Market Funds

3%

4% 9%

40%

50%

60%

2.5

3.0

3.5

4.0

llions of Dollars

45% 42% 42%

22%

10%

10%

20%

30%

0 5

1.0

1.5

2.0

Tril

22%

0%

10%

H2 2006H1 2007H2 2007H1 2008H2 2008H1 2009H2 2009H1 2010H2 2010

2/28/115/31/116/30/117/31/118/31/119/30/11

10/31/1111/30/1112/31/11

1/31/122/28/12

0.0

0.5

Dec-90Dec-92Dec-94Dec-96Dec-98Dec-00Dec-02Dec-04Dec-06Dec-08Dec-10

Taxable: Government Taxable: Prime

CDs, CP, and Other Repo

17

Tax-Exempt Total

Source: ICI, Fitch

Electronic Trading in the Treasury Market

•The treasury market is characterized by high turnover and strong liquidity

$140 ll f d l d b d l 2011

g y

o ~$140 trillion of trading volume reported by primary dealers in 2011

o This equates to turnover of over 14x the outstanding volume

• Dealer-Dealer Trades

o Interdealer trades are the largest segment of the market

o The vast majority of interdealer trades of on-the-run treasuries occur electronically, while offthe-run treasuries generally trade via voice

o Many interd l d d h h l h h hb k dealer trades are executed with the assistance of computer algorithms, which break

large orders into smaller pieces or automatically execute trades to hedge trading-book risks

ICAP Plc, the largest interdealer broker and whose electronic platform accounts for ~25% 

of all Treasuryg p g trading volume, reported that ~45% of their 2009 trading volume in 

Treasuries was executed via algorithms

• Customer-Dealer Trades

o Electronic trading continues to increase in prevalence Electronic trading continues to increase in prevalence

o Customers can trade electronically with a variety of banks via Tradeweb and Bloomberg

o Prices for smaller-sized electronic trades can be automatically quoted via dealer algorithms

o Voice trading yp g remains the only option for large trades

18

Source: SIFMA, ICAP, conversations with market participants, Federal Reserve Bank of St Louis
Electronic Trading p in the Corporate Bond Market

•Electronic trading plays a small, but growing, role in the corporate bond market

• MarketAxess reports market share of ~11% in investment grade corporate bond trading 

and ~2% in the high yield corporate market 

o M k tA i b li d t t 90% f l t i t di l i th k t MarketAxess is believed to represent over 90% of electronic trading volume in those markets

o These trades are primarily between dealers and customers

o While these trades are executed electronically, the dealer manually determines a price

10%

12%

MarketAxess Estimated Market Share of U.S. Investment Grade Corporate Trading Volume

6%

8%

0%

2%

4%

19

Source: MarketAxess

2007 2008 2009 2010 2011

Electronic Trading in the Derivatives Market

• The mandated shift of derivatives from the OTC market to exchanges or Swap Execution 

Facilities represents a significant change to market structure 

• It is possible that trading dynamics of derivatives in the future will begin to resemble the 

equity or FX markets of today

o Higher volumes and lower bid-offer spreads

o Significant shift toward electronic trading

o Increased use of computer algorithms by (1) banks and high-frequency traders to automatically 

quote prices and (2) investors to source liquidity / seek best execution

• This change is not without risks

o Shifting from voice to electronic trading introduces “fat finger” risk

For instance, in 2002, the Dow dropped 100 points when a Bear Stearns trader accidentally entered a 

sell order for $4bn, rather than $4mm. sell order for $4bn, rather than $4mm.

o The use of algorithms to implement trades can have adverse consequences

The CFTC-SEC study of the 2010 “Flash Crash” concluded that a mutual fund who tried to sell ~$4bn 

of E-Mini S&P 500 futures contracts via an algorithm was a contributor to the crash. The sell algorithm 

was set to target 9% of trading volume over the previous minute (without regard to price or time). was set to target 9% of trading volume over the previous minute (without regard to price or time).

o High frequency trading may become more prevalent

Analyses of the impact of high frequency traders (HFTs) reach mixed conclusions

HFTs generally enhance market liquidity. However, it has been observed that some (but not all) HFTs 

withdraw liquidity from the market during periods of stress possibly leading to price volatility withdraw liquidity from the market during periods of stress, possibly leading to price volatility

20

Source: Federal Reserve Bank of Chicago, CFTC, SEC, BIS, Risk.net
For Further Consideration

• There are several market structure developments that we believe warrant further analysis

1. Impact of pending regulations on credit availability / liquidity

o Is secondary market liquidity (outside of the treasury sector) permanently impaired?

o Will the securitization market (particularly non-agency MBS , CMBS, and ABS) be a viable 

source of term funding going forward?

o Will the flow of credit to “Main Street” be adversely affected?

2. Clearinghouses

o Are we putting all of our eggs in too few baskets?

o Are incentive structures aligned to promote market stability?

3. Movement of derivatives trading from OTC to exchanges / Swap Execution Facilities

o What will the new derivatives market look like? How will the mix of investors change?

o Will appropriate safeguards (i.e. pre, during, and post trade controls) be in place?

o Will the likely rise in cost / decrease in liquidity of non-standardized derivatives adversely affect 

end users with legitimate hedging needs?

4. Systemic threats posed by reduced banking sector profitability

o If regulatory reform reduces the ability of banks to cover their cost of capital, what new activities 

will they undertake? What will be the consequences?

21