Treasury Borrowing Advisory Committee

Quarterly Refunding 

August 3, 2004
Liquidity and Reduced Financing Needs

We would like the Committee’s view on reducing 

marketable issuance in the face of declining 

financing needs and the impact of such reductions 

on market liquidity.
 Treasury Financing Requirements

($ Billions)

 July - September 2004 

 (Projected) (Actuals) (Projected) 

Deficit Funding (Def + / Surplus -) 22 26 91

Means of Financing

Change in Cash Balance -24 -23 10

Net Non-Marketable Financing 6 4 -4

Net Marketable Financing 38 31 89

Other* 2 14 -4

Net Marketable Financing 38 31 89

Bills -38

Nominal Notes 69

TIPS 9

Bonds -8

Notes:

Starting Cash Balance 21 21 45

Ending Cash Balance 45 45 35

* Includes direct loan activity, changes in accrued interest and checks outstanding and minor miscellaneous transactions.

Note: Totals may not add due to rounding

 April - June 2004 
*Potential errors estimated with linear least squares regression using OMB Budget forecasts since 1989 and MSR forecasts since 1998. 

Assumes current coupon issuance pattern and issuance amount-- Bill issuance at levels required to 

maintain outstanding FY $ amounts nearly equal to June 30, 2004 total outstanding

-300

-200

-100

0

100

200

300

400

500

600

2004 2005 2006 2007 2008 2009

Fiscal Year

$ billions$ bil

FY05 OMB MSR Budget deficit forecast

Deficits plus potential 

error in OMB estimate

Deficits minus potential 

error in OMB estimate

Bars indicate estimated additional 

financing required In given year for 

different deficit outcomes
Bills as a Percentage of Treasury's Marketable Debt 

15%

20%

25%

30%

35%

40%

1980 1985 1990 1995 2000 2005

15%

20%

25%

30%

35%

40%

Bills Maintained 

 at Roughly 25% 

(see next 5 charts)

Coupon Auction 

Sizes Held Constant
If Bill Issuance held Constant as a percent of Portfolio

0

5

10

15

20

25

30

35

40

45

2004 2005 2006 2007 2008 2009

Announced 

auction sizes 

$ billions

0

50

100

150

200

250

300

350

400

450 net borrowin

 $ billions

BILLS 2-YEAR 3-YEAR 5-YEAR 10-YEAR 5-YEAR TIPS 10-YEAR TIPS 20-YEAR TIPS

Net Marketable 

Borrowing (RHS)

* *For bills, the average auction size equals the amount outstanding at the end of the fiscal year divided by 43 

 (i.e., 4 1-month auctions, 13 3-month auctions, plus 26 6-month auctions).
Historical and Hypothetical Distribution of Treasury's Marketable Debt 

0%

5%

10%

15%

20%

25%

30%

35%

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

end of fiscal year

0%

5%

10%

15%

20%

25%

30%

35%

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

projections if bills 

held constant as % 

of portfolio

Assumes hypotheical auction sizes for '04 - '09 projections. 
Historical and Hypothetical Distribution of Treasury's Marketable Debt 

Issuance 

0%

10%

20%

30%

40%

50%

60%

70%

80%

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

calendar year

0%

10

20

30

40

50

60

70

80

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

projections 

if Bills held 

constant as 

% of 

portfolio

Assumes hypotheical auction sizes for '04 - '09 projections. 
Percentage of Debt Maturing in Next 12 to 36 Months

25%

30%

35%

40%

45%

50%

55%

60%

65%

70%

75%

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

calendar year

25%

30%

35%

40%

45%

50%

55%

60%

65%

70%

75%

Maturing in 12 Months

Maturing in 24 Months

Maturing in 36 Months

projections '04 - '09

if bills held constant

as percent of 

portfolio

Assumes hypotheical auction sizes for '04 - '09 projections. 
Treasury's Marketable Debt Issuance 

0

500

1,000

1,500

2,000

2,500

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

calendar year

$ billions

0

500

1,000

1,500

2,000

$ billio

2,500

Bill Issuance Coupon Issuance Total Issuance

projections if

 bills held 

constant as %

of portfolio

Assumes hypotheical auction sizes for '04 - '09 projections. Bill issuance is net issuance while coupon issuance is gross issuance.
Distribution of Inflation, Interest Rate, and Deficit 

We will present charts to the Committee showing 

projected levels of interest rates, inflation and 

deficits and a range of probable outcomes. Does the 

Committee have a views on whether these are the 

appropriate variables to focus on? Is there anything 

presented within these charts that raises concerns? 

Are there any related indicators that Treasury should 

consider?
Budget Probability Distribution

-600

-500

-400

-300

-200

-100

0

100

200

19891990199119921993199419951996199719981999200020012002200320042005200620072008200920102011201220132014

$ Billions 

Budget Surplus (Deficit)

Baseline

 2004 Treasury's estimate

 2005 - 2009 OMB's MSR estimate

 2010 - 2014 OMB's 2009 level

25th and 75th Percentile Confidence Interval

(based on CBO's realized forecast errors from 1981 - 2003)
Term Structure Probability Distribution

0

2

4

6

8

10

12

14

19621964196619681970197219741976197819801982198419861988199019921994199619982000200220042006200820102012

6-month Yield

10-year Yield

Range of possible outcomes

is based on 10-year historical data

Sources: OMB's forecast

Baseline
Inflation Probability Distribution

0

2

4

6

8

10

12

14

19621964196619681970197219741976197819801982198419861988199019921994199619982000200220042006200820102012

CPIU Annual Growth Rate

Sources: OMB's forecast

Range of possible outcomes

is based on 10-year historical data
Contribution of Various Risk Factors to 

Uncertainty in Interest Expense

-50

0

50

100

150

200

250

300

350

400

450

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20

Fiscal Risk

Interest Rate Risk

Inflation Risk

Baseline 

ASSUMPTIONS: (a) Current coupon issuance is kept constant

 (b) Under the optimistic fiscal scenario coupon issance is adjusted slightly to maintain non-zero bill issuance

 (c) Budget deficit, interest rate, and inflation are uncorrelated
Contribution of Various Risk Factors 

to Uncertainty in Interest Expense

-200

-100

0

100

200

300

400

500

600

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 20

Fiscal Risk

Interest Rate Risk

Inflation Risk

Baseline 

ASSUMPTIONS: (a) Current coupon issuance is kept constant

 (b) Under the optimistic fiscal scenario coupon issance is adjusted slightly to maintain non-zero bill issuance

 (c) Budget deficit, interest rate, and inflation are uncorrelated

 (d) Fiscal, Interest rate, and inflation numbers are kept at 2014 level from 2015 - 2028
Cost and Volatility of Different Issuance Portfolios

0

100

200

300

400

500

600

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 20

Current Issuance

Long-term Concentrated

Issuance

Short-term Concentrated

Issuance

Variability due to interest rate risk

ASSUMPTIONS: (a) Fiscal, Interest rate, and inflation numbers are kept at 2014 level from 2015 - 2028

 (b) Long-term concentrated issuance: 77% of coupons in 5-year to 20-year, the rest of coupons in less than 5-year

 (c) Short-term concentrated issuance: 62% of coupons in less than 5-year, the rest of coupons in 5-year to 20-year

 (d) Coupons issuance is kept constant for all portfolios; bills pick up the residual financing
to Uncertainty in Interest Expense

-2

0

2

4

6

8

10

12

14

16

19621964196619681970197219741976197819801982198419861988199019921994199619982000200220042006200820102012

Interest Expense / Outlays 

(Percent)

Fiscal Risk

Interest Rate Risk

Inflation Risk

Baseline 

ASSUMPTIONS: (a) Current coupon issuance is kept constant

 (b) Under the optimistic fiscal scenario coupon issance is adjusted slightly to maintain non-zero bill issuance

 (c) Budget deficit, interest rate, and inflation are uncorrelated

 (d) Outlays numbers, obtained from the OMB, are at 2009 level for 2010 - 2014

 (e) Net interest is used for 1962 - 2003
Contribution of Various Risk Factors 

to Uncertainty in Interest Expense

-4

-2

0

2

4

6

8

10

12

14

16

18

20

196219641966196819701972197419761978198019821984198619881990199219941996199820002002200420062008201020122014201620182020202220242026

Interest Expense / Outlays 

(Percent)

Fiscal Risk

Interest Rate Risk

Inflation Risk

Baseline 

ASSUMPTIONS: (a) Current coupon issuance is kept constant

 (b) Under the optimistic fiscal scenario coupon issance is adjusted slightly to maintain non-zero bill issuance

 (c) Budget deficit, interest rate, and inflation are uncorrelated

 (d) Fiscal, Interest rate, and inflation numbers are at 2014 level for 2015 - 2028 

 (e) Outlays numbers are OMB's forecast for 2004 - 2009 and are kept at 2009 level for 2010 - 2028

 (f) Net interest is used for 1962 - 2003
to Uncertainty in Interest Expense

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

196219641966196819701972197419761978198019821984198619881990199219941996199820002002200420062008201020122014

Interest Expense / GDP 

(Percent)

Fiscal Risk

Interest Rate Risk

Inflation Risk

Baseline 

ASSUMPTIONS: (a) Current coupon issuance is kept constant

 (b) Under the optimistic fiscal scenario coupon issance is adjusted slightly to maintain non-zero bill issuance

 (c) Budget deficit, interest rate, and inflation are uncorrelated

 (d) GDP numbers are OMB's forecast for 2004 - 2009, and are assumed to grow at 5% for 2010 - 2014

 (e) Net interest is used for 1962 - 2003
Contribution of Various Risk Factors 

to Uncertainty in Interest Expense

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

1962196419661968197019721974197619781980198219841986198819901992199419961998200020022004200620082010201220142016201820202022202420262028

Interest Expense / GDP 

(Percent)

Fiscal Risk

Interest Rate Risk

Inflation Risk Baseline 

ASSUMPTIONS: (a) Current coupon issuance is kept constant

 (b) Under the optimistic fiscal scenario coupon issance is adjusted slightly to maintain non-zero bill issuance

 (c) Budget deficit, interest rate, and inflation are uncorrelated

 (d) Fiscal, Interest rate, and inflation numbers are at 2014 level for 2015 - 2028 

 (e) GDP numbers are OMB's forecast for 2004 - 2009, and are assumed to grow at 5% for 2010 - 2028

 (f) Net interest is used for 1962 - 2003
Foreign Ownership of Treasury Securities

Treasury is frequently asked about levels of foreign 

ownership. We believe that broad, diversified 

ownership helps Treasury achieve its objective of 

lowest cost borrowing over time. Does the 

Committee have any views they would like to share 

with us on this issue?
0

5

10

15

20

25

30

35

40

45

50

0

5

10

15

20

25

30

35

40

45

50

FOREIGN HOLDINGS AS A PERCENT OF TOTAL

PRIVATELY HELD PUBLIC DEBT

Calendar Quarter

Department of the Treasury

Office of Debt Management August 2, 2004-13

Percent Percent

1

Estimated Foreign Holdings

Foreign and International Institutional Holdings at FRBNY 3

Benchmark revision

of March 2000

2

28%

50%

Benchmark revision

of June 2003

2

Benchmark revision

of June 2002

2

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

1

2

3

Privately held debt excludes holdings of the Federal Reserve.

Source: Federal Reserve Bank of New York statistical release H4.1.

Series for estimated foreign holdings. Data through May 31, 2004. See http://www.treas.gov/tic/index.html.