Treasury Borrowing Advisory 

Quarterly Refunding 

May 4, 2004
Portfolio CompositionWe are introducing both 5-year and 20-will need to reduce nominal issuance to for additional TIPS issuance. In the absliquidity concerns, we would eliminate reopenings of 10-year nominal securitieaccommodate the new securities. We wCommittee’s views on eliminating the 1reopening, simply reducing the sizes oauctions, or spreading the reduction in across both 5-year and 10-year issuancdiscussing these options, we would likCommittee’s views on the timing of impthe Committee’s preferred option. We wthe Committee’s view on initial auction new TIPS offerings and the appropriate these securities in the issuance calend
 Treasury Financing Requirements

($ Billions)

 (Projected) (Actuals) 

Deficit Funding (Def + / Surplus -) 203 171 

Means of Financing

Change in Cash Balance 13 12 Net Non-Marketable Financing 5 7 Net Marketable Financing 177 146 Other* 8 7 

Net Marketable Financing 177 146 

Bills 56Nominal Notes 78TIPS 12Bonds 0

Notes:Starting Cash Balance 33 33 Ending Cash Balance 20 21 

* Includes direct loan activity, changes in accrued interest and checks outstanding and minor miscellaneous transactioNote: Totals may not add due to rounding

 January - March 2004 
*Chart does not include new 5-yr TIPS and 20-yr TIPS.

** Forecast of net financing needs is composed of Treasury’s announced estimate for FY ’04 

Financing Residuals Given Current Issuance 

Assumes current coupon issuance pattern and issuance amount-- Bill issuan

maintain outstanding FY $ amounts nearly equal to September 30, 2003 

-300-200-100

0

100200300400500600

2004 2005 2006 2007 

Fiscal Year

$ billions

Forecast of Net Financing Needs

Forecast plus Avg. Absolute Error

Forecast minus Avg. Absolute Error

Bars Indicate Estimated Additional Financing Required In Given Year For Different Net Financing Needs
* Annual issuance is defined as all coupon issuance plus bills outstanding at the end of the 

Distribution of Treasury's Marketable Debt Is

0%

10%20%30%40%50%60%70%80%

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 20

calendar year

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

Starting Assumption: Percentage Breakdown of Iss
Projected Net Marketable Borrowing and Hypothetica

Hypothetical Auction Sizes Include Amounts Awarded to the Fed

05

101520253035404550

2004 2005 2006 2007 200

 auction sizes 

$ billions

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

Net Marketable Borrowing (RHS)

*Average auction sizes for nominal 10-yr calculated for 7 auctions in '04 and 4 per year aft average auction sizes are calculated assuming 2 auctions per year each (but only one 20- **For bills, the average auction size equals the amount outstanding at the end of the fisca

 (i.e., 4 1-month auctions, 13 3-month auctions, plus 26 6-month auctions).

***Based on assumptions in chart 5.
*Based on assumptions in chart 5.

Distribution of Treasury's Marketable D

0%5%

10%15%20%25%30%35%

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 20

end of fiscal year

BILLS 2-3 YR NOTES 4-7 YR NOTES 8-10 YR NOTES 
*Based on assumptions in chart 5.

Current Projected Change 

in Debt Portfolio Composition Over Next 5 

0%5%

10%15%20%25%30%

Bills 2-year 3-year 5-year 10-year Nom

April 3Septe
**Based on assumptions in chart 5.

Annual Issuance as a Percentage of G

7%9%

11%13%15%17%19%21%

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 200

calendar year

* Assumes nominal GDP grows at 5% annually. 
*Based on assumptions in chart 5.

Percentage of Debt Maturing in Next 12 to 3

25%30%35%40%45%50%55%60%65%70%75%

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 200

calendar year

Maturing in 12 Months

Maturing in 24 Months

Maturing in 36 Months
Financing Uncertainty and Interest Rate As a follow up to discussions regarding the uncebudget-modeling process, we will show the Comcharts illustrating the financing risk due to technbudget forecasting. We will also show the Commillustrating the trade-offs between interest costs volatility. We would like the Committee’s views otolerance for interest rate volatility. 
Components of the Change in CBO's Budget Projec

January 2001 Baseline

Budget Forecast

-600-400-200

0

200400600800

1000

2002 2003 2004 2005 2006 2007 2008 

fiscal year

$ billions

March 2004 Baseline

Budget Forecast

Revenues

DeCh

Spending

Technical 

Surplus Deficit

FY '02 and FY '03 Realized Deficits
Confidence Intervals Around CBO's Baseline 

 (Probability distribution is derived from past projection errors dur

-1200-1000

-800-600-400-200

0

200400600

2003 2004 2005 2006 2007 

fiscal year

$ billions

Baseline Budget Projection75% Confidence Interval95% Confidence Interval

Approximate Contributions to Forecast Uncertainty 

Economic Variables: 35%

Technical Errors: 65%

Legislative Changes: N/A 
Analyzing Cost/Volatility T

• Annual change in interest costs is a 

– Factors not controlled by debt manage

• Deficit• Current Interest Rates and Inflation• Interest Rates on Maturing Debt 

– Factors controlled by debt managers

• Amount of Debt Maturing • Distribution of Issuance

• Would a mean-variance framework 

better debt management decisions?
Interest Expenditures under Various Financing 

Inflation Adjusted to 2003 $Dollars Using GDP Deflator

0

50

100150200250300350400450

1960 1965 1970 1975 1980 1985 1990 

$ billions

Actual: Net InterestShort: All Deficits Financed with 3-Month BillLong: All Deficits Financed with 20-Year Bond
Self-Imposed Constra

• Not market timers -- auction sched• Constraints on adjusting issuance • Most securities can not be called e• Limits on the amount of cash we c
What Measures 

to Use in a Mean-Variance A

• Portfolio

– Debt Outstanding or Issuance

• Cost Measure

– Current or Historical Interest Rates– Current or Historical Spreads

• Volatility Measure

– Change in the Cost of Debt Outstanding or Int– Need to incorporate the different rollover char

payment streams of various securities to mea

interest expenses on the debt outstanding
November CalendarThe November refunding calendar is complicated potential market-moving events and Veterans Dathe Committee’s advice on the scheduling of aucquarter of this year.
Option 1:Keep announcement the same but auction 3y on Monday, 5y on Tuesday, and the 10y on Friday

Monday Tuesday Wednesday Thursday 

1234

Election day/TBAC ANNOUNCEMENT 

8 9 10 11 

AUCTION 3-YEAR NOTE 3/ AUCTION 5-YEAR NOTE 3/ FOMC Holiday 

Option 2:Keep announcement the same but auction 3y on Friday, 5y on Monday, and 10y on Tuesday

Monday Tuesday Wednesday Thursday 

1234

Election day/TBAC ANNOUNCEMENT 

8 9 10 11 

AUCTION 5-YEAR NOTE 3/ AUCTION 10-YEAR NOTE 3/ FOMC Holiday

Option 3:Keep announcement the same but auction 3y on Monday, 5y on Tuesday, and 10y on Wednesday 

Monday Tuesday Wednesday Thursday 

1234

Election day/TBAC ANNOUNCEMENT 

8 9 10 11 

FOMC

AUCTION 3-YEAR NOTE 3/ AUCTION 5-YEAR NOTE 3/ AUCTION 10-YEAR NOTE 3/ Holiday

3/ Settles Nov 15.

Calendar Options for November 200