Treasury Presentation to TBAC
Office of Debt Management

Fiscal Year 2015 Q3 Report
Table of Contents

2

I. Executive Summary p. 4

II. Fiscal

A. Quarterly Tax Receipts p. 6

B. Monthly Receipt Levels p. 7

C. Eleven Largest Outlays p. 8

D. Treasury Net Nonmarketable Borrowing p. 9

E. Cumulative Budget Deficits p. 10

F. Deficit and Borrowing Estimates p. 11

G. Budget Surplus/Deficit p. 12

III. Financing

A. Sources of Financing p. 15

B. OMB’s Projections of Net Borrowing from the Public p. 17

C. Interest Rate Assumptions p. 18

D. Net Marketable Borrowing on “Auto Pilot” Versus Deficit Forecasts p. 19

IV. Portfolio Metrics

A. Weighted Average Maturity of Marketable Debt Outstanding with Projections p. 24

B. Projected Gross Borrowing p. 25

C. Maturity Profile p. 26

V. Demand

A. Summary Statistics p. 31

B. Bid-to-Cover Ratios p. 32

C. Investor Class Awards at Auction p. 37

D. Primary Dealer Awards at Auction p. 41

E. Direct Bidder Awards at Auction p. 42

F. Foreign Awards at Auction p. 43
Section I:

Executive Summary

3
Receipts

• Budget receipts in the April-June quarter have been stronger overall than during the equivalent period last year, reflecting continuing 

economic growth.

Outlays

• Medicare and Medicaid costs increased $74 billion through June. Medicaid increased $42 billion, mostly due to provisions of the 

Affordable Care Act (ACA) that increased enrollment in Medicaid. Medicare increased $32 billion due to an expansion of drug coverage 

as defined by the ACA. 

• Social Security Administration payments (+$29 billion) were mostly driven by the 1.69% cost-of-living adjustment for calendar year 

2015. 

Net Nonmarketable Borrowing

• Net nonmarketable borrowing declined during the April-June quarter. This decline is due in large part to Treasury’s closing the SLGS 

window.

Sources of Financing in Fiscal Year 2015 Q4

• Treasury is forecasting net marketable borrowing of $127 billion with an end-of-September cash balance of $225 billion. Based on the 

current auction schedule, Treasury is over financed by $44 billion through the end of September 2015.

Projected Net Marketable Borrowing

• Between FY 2016-2018, Treasury’s borrowing need estimates could rise notably relative to current issuance calendar depending on what 

the Federal Reserve does with maturing Treasury securities held in the SOMA portfolio: 

– If the Fed redeems their Treasury holdings, Treasury could be underfinanced by an amount between $508 billion (CBO) to $848 billion 

(OMB)

– If the Fed reinvests all maturing securities, Treasury is only projected to be underfunded by approximately $175 billion between 2016 and 

2018, with the bulk of the shortfall occurring in 2017.

Bid-to-Cover Ratios (BTC)

• BTC ratios in FRNs have settled into a 3.5x-4.5x range, which is in-line with BTC ratios for bills. BTC ratios in nominal coupons and 

TIPS are also in line with recent levels.

Investor Class Allotments

• Investment fund awards continue to increase, particularly in short coupons (2-, 3- and 5-year) and TIPS, but have declined in bills 

recently.

• Foreign awards have increased in bills and long coupons (7-, 10- and 30-year), but have decreased in short coupons.

– In aggregate, however, foreign awards are broadly within their multi-year range.

Highlights of Treasury’s August 2015 Quarterly Refunding Presentation

to the Treasury Borrowing Advisory Committee (TBAC)

4
Section II:

Fiscal

5
6 Source: United States Department of the Treasury 

(60%)

(40%)

(20%)

0%

20%

40%

60%

80%

Jun-05

Oct-05

Feb-06

Jun-06

Oct-06

Feb-07

Jun-07

Oct-07

Feb-08

Jun-08

Oct-08

Feb-09

Jun-09

Oct-09

Feb-10

Jun-10

Oct-10

Feb-11

Jun-11

Oct-11

Feb-12

Jun-12

Oct-12

Feb-13

Jun-13

Oct-13

Feb-14

Jun-14

Oct-14

Feb-15

Jun-15

Year-over-Year % Change

Quarterly Tax Receipts

Corporate Taxes Non-Withheld Taxes (incl. SECA) Withheld Taxes (incl. FICA)
7

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

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

Source: United States Department of the Treasury 

0

20

40

60

80

100

120

140

Jun-05

Oct-05

Feb-06

Jun-06

Oct-06

Feb-07

Jun-07

Oct-07

Feb-08

Jun-08

Oct-08

Feb-09

Jun-09

Oct-09

Feb-10

Jun-10

Oct-10

Feb-11

Jun-11

Oct-11

Feb-12

Jun-12

Oct-12

Feb-13

Jun-13

Oct-13

Feb-14

Jun-14

Oct-14

Feb-15

Jun-15

$ bn

Monthly Receipt Levels

(12-Month Moving Average)

Individual Income Taxes Corporation Income Taxes Social Insurance Taxes Other
8 Source: United States Department of the Treasury 

0

100

200

300

400

500

600

700

800

HHS

SSA

Defense

Treasury

Agriculture

Labor

VA

Transportation

OPM

Education

Other Defense Civil

$ bn

Eleven Largest Outlays

Oct - Jun FY 2014 Oct - Jun FY 2015
9 Source: United States Department of the Treasury 

(40)

(30)

(20)

(10)

0

10

20

30

40

Q3-05Q4-05Q1-06Q2-06Q3-06Q4-06Q1-07Q2-07Q3-07Q4-07Q1-08Q2-08Q3-08Q4-08Q1-09Q2-09Q3-09Q4-09Q1-10Q2-10Q3-10Q4-10Q1-11Q2-11Q3-11Q4-11Q1-12Q2-12Q3-12Q4-12Q1-13Q2-13Q3-13Q4-13Q1-14Q2-14Q3-14Q4-14Q1-15Q2-15Q3-15

$ bn

Fiscal Quarter

Treasury Net Nonmarketable Borrowing

Foreign Series State and Local Gov't Series (SLGS) Savings Bonds
10 Source: United States Department of the Treasury 

0

100

200

300

400

500

600

700

800

October

November

December

January

February

March

April

May

June

July

August

September

$ bn

Cumulative Budget Deficits by Fiscal Year

FY2013 FY2014 FY2015
11

FY 2015-2017 Deficits and Net Marketable Borrowing Estimates In $ billions

Primary 

Dealers1 OMB MSR2 CBO3 CBO4 OMB5

FY 2015 Deficit Estimate 460 455 486 486 583

FY 2016 Deficit Estimate 482 429 380 455 474

FY 2017 Deficit Estimate 507 436 401 455 463

FY 2015 Deficit Range 420-532

FY 2016 Deficit Range 375-571

FY 2017 Deficit Range 375-696

FY 2015 Net Marketable Borrowing Estimate 551 631 595 586 726

FY 2016 Net Marketable Borrowing Estimate 558 563 469 531 602

FY 2017 Net Marketable Borrowing Estimate 580 567 488 531 596

FY 2015 Net Marketable Borrowing Range 330-650

FY 2016 Net Marketable Borrowing Range 390-730

FY 2017 Net Marketable Borrowing Range 430-730

Estimates as of: Jul-15 Jul-15 Mar-15 Mar-15 Feb-15

1

Based on primary dealer feedback on July 27, 2015. Estimates above are averages. 

2

Table S-11 of OMB's "Fiscal Year 2016 Mid-Session Review"

3

Table 1 and 3 of CBO's "An Analysis of the President's 2016 Budget"

4

Table 1 and 3 of CBO's "Updated Budget Projections: 2015 and 2025"

5

Table S-13 of OMB's "Fiscal Year 2016 Budget of the US Government"
(12%)

(10%)

(8%)

(6%)

(4%)

(2%)

0%

(1,600)

(1,400)

(1,200)

(1,000)

(800)

(600)

(400)

(200)

0

200520062007200820092010201120122013201420152016201720182019202020212022202320242025

$ bn

Fiscal Year

Budget Surplus/Deficit

Surplus/Deficit in $bn (LHS) Surplus/Deficit as a % of GDP (RHS)

Projections are from Table S-1 of OMB's ''Fiscal Year 2016 Mid-Session Review" 12

OMB’s Projection
Section III:

Financing

13
14

Assumptions for Financing Section (pages 13 to 19)

• Portfolio and SOMA holdings as of 6/30/2015.

• SOMA redemptions until and including June 2021. These assumptions are based on Chairman 

Bernanke’s June 2013 press conference. 

• Assumes announced issuance sizes and patterns constant for Nominal Coupons, TIPS, and FRNs as of 

6/30/2015, while using an average of ~1.4 trillion of Bills outstanding. 

• The principal on the TIPS securities was accreted to each projection date based on market ZCIS levels 

as of 6/30/2015. 

• No attempt was made to match future financing needs. 
15

Sources of Financing in Fiscal Year 2015 Q3

*Assumes an end-of-June 2015 cash balance of $254 billion versus a beginning-of-April 2015 cash balance of $100 billion. By keeping the cash 

balance constant, Treasury arrives at the net implied funding number. 

Net Bill Issuance (83) Security Gross Maturing Net Gross Maturing Net

Net Coupon Issuance 140 4-Week 440 470 (30) 1,389 1,414 (25)

Subtotal: Net Marketable Borrowing 57 13-Week 312 326 (14) 950 983 (33)

26-Week 312 351 (39) 989 959 30

Ending Cash Balance 254 52-Week 100 100 (0) 250 238 12

Beginning Cash Balance 100 CMBs 30 30 0 30 30 0

Subtotal: Change in Cash Balance 154 Bill Subtotal 1,194 1,277 (83) 3,608 3,624 (16)

Net Implied Funding for FY 2015 Q3* (98)

Security Gross Maturing Net Gross Maturing Net

2-Year FRN 41 0 41 123 0 123

2-Year 78 105 (27) 240 315 (75)

3-Year 73 106 (34) 223 310 (88)

5-Year 105 123 (18) 315 381 (65)

7-Year 87 0 87 261 0 261

10-Year 67 34 32 199 94 104

30-Year 42 0 42 126 11 116

5-Year TIPS 18 23 (5) 34 23 11

10-Year TIPS 13 0 13 54 24 30

30-Year TIPS 7 0 7 23 0 23

Coupon Subtotal 531 391 140 1,598 1,157 441

Total 1,725 1,668 57 5,206 4,781 425

Coupon Issuance Coupon Issuance

April - June 2015 April - June 2015 Fiscal Year-to-Date

Bill Issuance Bill Issuance

April - June 2015 Fiscal Year-to-Date
Assuming Constant Coupon and Average Bill Issuance Sizes as of 6/30/2015* Security Gross Maturing Net Gross Maturing Net

Net Bill Issuance 2 4-Week 442 426 16 1,831 1,840 (9)

Net Coupon Issuance 169 13-Week 312 312 0 1,262 1,295 (33)

Subtotal: Net Marketable Borrowing 171 26-Week 312 326 (14) 1,301 1,285 16

52-Week 75 75 0 325 313 12

Treasury Announced Estimate: Net Marketable Borrowing** 127 CMBs 0 0 0 30 30 0

Implied: Decrease in FY 2015 Q4 Net Issuances (44) Bill Subtotal 1,141 1,139 2 4,749 4,763 (14)

Security Gross Maturing Net Gross Maturing Net

2-Year FRN 41 0 41 164 0 164

2-Year 78 102 (24) 318 417 (99)

3-Year 72 96 (24) 295 406 (112)

5-Year 105 111 (6) 420 492 (72)

7-Year 87 0 87 348 0 348

10-Year 66 32 34 265 127 138

30-Year 42 4 38 168 15 154

5-Year TIPS 16 0 16 50 23 27

10-Year TIPS 28 21 7 82 44 38

30-Year TIPS 0 0 0 23 0 23

Coupon Subtotal 535 366 169 2,133 1,523 610

Total 1,676 1,505 171 6,882 6,286 596

July - September 2015 Fiscal Year-to-Date

Coupon Issuance Coupon Issuance

July - September 2015 July - September 2015 Fiscal Year-to-Date

Bill Issuance Bill Issuance

16

Sources of Financing in Fiscal Year 2015 Q4

*Keeping announced issuance sizes and patterns constant for Nominal Coupons, TIPS, and FRNs as of 6/30/2015, while using an average of 

~1.4 trillion of Bills outstanding.

**Assumes an end-of-September 2015 cash balance of $225 billion versus a beginning-of-July 2015 cash balance of $254 billion.

Financing Estimates released by the Treasury can be found here: http://www.treasury.gov/resource-center/data-chart-center/quarterlyrefunding/Pages/Latest.aspx
631 564 568 610 659 683 729 751 781 801 848

55%

60%

65%

70%

75%

80%

(400)

(200)

0

200

400

600

800

1,000

20152016201720182019202020212022202320242025

$bn

OMB's Projection of Borrowing from the Public

Primary Deficit Net Interest Other Debt Held by Public

as % of GDP (RHS)

Debt Held by Public Net of

Financial Assets as a % of GDP (RHS)

17

OMB’s projections of net borrowing from the public are from Table S-11 of the “Fiscal Year 2016 Mid-Session Review.” Data labels at the top 

represent the change in debt held by the public in $ billions. “Other” represents borrowing from the public to provide direct and guaranteed 

loans.

$ bn %

Primary Deficit 876 11.5

Net Interest 5,391 70.7

Other 1,358 17.8

Total 7,625

FY2015 - FY2025 Cumulative Total
OMB's economic assumption of the 10-Year Treasury Note rates are from Table 2 of the “Fiscal Year 2016 Mid-Session Review.” 18

The forward rates are the implied 10-Year Treasury Note rates on June 30 of that year.

1

1.5

2

2.5

3

3.5

4

4.5

5

20152016201720182019202020212022202320242025

10-Year Treasury Note Rate, %

Interest Rate Assumptions: 10-Year Treasury Note

OMB FY 2016 MSR Implied Forward Rates as of 6/30/2015

10-Year Treasury Rate of 2.354% 

as of 6/30/2015
19 Treasury’s primary dealer survey estimates can be found on page 9. OMB's projections of net borrowing from the public are from Table S-11 of 

the “Fiscal Year 2016 Mid-Session Review.” CBO's estimates of the borrowing from the public are from Table 1 and 3 of “An Analysis of the 

President's 2016 Budget .” See table at the end of this section for details.

0

100

200

300

400

500

600

700

800

900

1,000

20152016201720182019202020212022202320242025

$ bn

Fiscal Year

Projected Net Borrowing Assuming Constant Future Issuance

Projected Net Borrowing CBO's "An Analysis of the President's 2016 Budget"

OFP's FY 2015 Net Marketable Borrowing Estimate OMB's FY 2016 MSR

PD Survey Net Marketable Borrowing Estimates
20

Impact of SOMA Actions on Projected Net Borrowing Assuming Future 

Issuance Remains Constant

Treasury’s primary dealer survey estimates can be found on page 9. OMB's projections of net borrowing from the public are from Table S-11 of 

the “Fiscal Year 2016 Mid-Session Review.” CBO's estimates of the borrowing from the public are from Table 1 and 3 of “An Analysis of the 

President's 2016 Budget .” See table at the end of this section for details.

0

100

200

300

400

500

600

700

800

900

1,000

20152016201720182019202020212022202320242025

Fiscal Year

Without Fed Reinvestments ($ bn)

Projected Net Borrowing

CBO's "An Analysis of the President's 2016 Budget"

OFP's FY 2015 Net Marketable Borrowing Estimate

0

100

200

300

400

500

600

700

800

900

1,000

20152016201720182019202020212022202320242025

Fiscal Year

With Fed Reinvestments ($ bn)

OMB's FY 2016 MSR

PD Survey Net Marketable Borrowing Estimates
Additional Funding Gap Assuming No SOMA Roll

21

(1)

(174) (181)

(319)

(376)

(259)

(116)

(400)

(350)

(300)

(250)

(200)

(150)

(100)

(50)

0

2015201620172018201920202021

$ bn

Fiscal Year
22

Historical Net Marketable Borrowing and Projected Net Borrowing 

Assuming Future Issuance Remains Constant, $ billions

*OFP’s FY 2015 Net Marketable Borrowing Projection

Treasury’s primary dealer survey estimates can be found on page 9. OMB's projections of net borrowing from the public are from Table S-11 of 

the “Fiscal Year 2016 Mid-Session Review.” CBO's estimates of the borrowing from the public are from Table 1 and 3 of “An Analysis of the 

President's 2016 Budget .”

Fiscal 

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

Historical/Projected 

Net Borrowing 

Capacity

OMB's FY 2016 MidSession Review

CBO's "An Analysis of 

the President's 2016 

Budget"

Primary Dealer 

Survey

2010 (204) 869 783 35 0 1,483 

2011 (311) 576 751 88 0 1,104 

2012 139 148 738 90 0 1,115 

2013 (86) 86 720 111 0 830 

2014 (119) (92) 669 88 123 669 

2015 (14) (282) 640 88 164 596 552* 595 551 

2016 0 (173) 442 69 41 380 564 469 558 

2017 0 (73) 256 70 (0) 252 568 488 580 

2018 0 28 238 65 0 331 610 512 

2019 0 35 104 66 0 204 659 588 

2020 0 (0) 119 39 0 158 683 646 

2021 0 15 157 14 0 186 729 735 

2022 0 72 231 2 0 305 751 770 

2023 0 43 195 2 0 240 781 798 

2024 0 2 192 1 (0) 195 801 832 

2025 0 (33) 200 (44) (0) 122 848 865 
Section IV:

Portfolio Metrics

23
24

Assumptions for Portfolio Metrics Section (pages 22 to 27) and Appendix

• Portfolio and SOMA holdings as of 6/30/2015.

• SOMA redemptions until and including June 2021. These assumptions are based on Chairman 

Bernanke’s June 2013 press conference. 

• 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. 

• The principal on the TIPS securities was accreted to each projection date based on market ZCIS levels 

as of 6/30/2015.

• OMB’s estimates of borrowing from the public are Table S-11 of the “Fiscal Year 2016 Mid-Session 

Review.”
This scenario does not represent any particular course of action that Treasury is expected to follow. Instead, it is intended to demonstrate the 25

basic trajectory of average maturity absent changes to the mix of securities issued by Treasury.

40

45

50

55

60

65

70

75

80

85

90

19801982198419861988199019921994199619982000200220042006200820102012201420162018202020222024

Weighted Average Maturity (Months)

Calendar Year

Weighted Average Maturity of Marketable Debt Outstanding

Historical Adjust Nominal Coupons to Match Financing Needs Historical Average from 1980 to end of FY 2015 Q3

69.6 months on

6/30/2015

58.8 months

(Historical Average

from 1980 to Present)
This scenario does not represent any particular course of action that Treasury is expected to follow. Instead, it is intended to demonstrate the 26

basic trajectory of average maturity absent changes to the mix of securities issued by Treasury.

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

20152016201720182019202020212022202320242025

$ bn

Projected Gross Borrowing excluding Bills for Fiscal Year

Maturing in < 1 Year excluding Bills OMB's Projected Net Borrowing
This scenario does not represent any particular course of action that Treasury is expected to follow. Instead, it is intended to demonstrate the 27

basic trajectory of average maturity absent changes to the mix of securities issued by Treasury. See table on following page for details. 

0

5

10

15

20

25

20152016201720182019202020212022202320242025

$tr

Projected Maturity Profile from end of Fiscal Year

<= 1yr (1,2] (2,3] (3,5] (5,7] (7,10] > 10
28

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. Portfolio composition by original issuance type 

and term can be found in the appendix (Page 43).

Recent and Projected Maturity Profile, $ billions

End of Fiscal Year <= 1yr (1,2] (2,3] (3,5] (5,7] (7,10] > 10 Total (0,5]

2007 1,606 639 341 545 267 480 557 4,434 3,130

2008 2,152 711 280 653 310 499 617 5,222 3,796

2009 2,702 774 663 962 559 643 695 6,998 5,101

2010 2,563 1,141 895 1,273 907 856 853 8,488 5,872

2011 2,620 1,334 980 1,541 1,070 1,053 1,017 9,616 6,476

2012 2,951 1,373 1,104 1,811 1,214 1,108 1,181 10,742 7,239

2013 2,939 1,523 1,242 1,965 1,454 1,136 1,331 11,590 7,669

2014 2,935 1,739 1,319 2,207 1,440 1,113 1,528 12,281 8,199

2015 3,136 1,779 1,342 2,389 1,484 1,125 1,657 12,912 8,646

2016 3,177 1,821 1,556 2,418 1,508 1,186 1,825 13,491 8,972

2017 3,220 2,060 1,540 2,493 1,507 1,258 2,005 14,083 9,313

2018 3,489 2,041 1,579 2,548 1,594 1,313 2,157 14,720 9,657

2019 3,474 2,146 1,686 2,668 1,713 1,398 2,325 15,409 9,972

2020 3,545 2,273 1,645 2,876 1,801 1,413 2,571 16,124 10,339

2021 3,674 2,211 1,886 2,962 1,855 1,466 2,835 16,889 10,733

2022 3,611 2,487 1,939 3,067 1,932 1,494 3,148 17,678 11,104

2023 3,888 2,532 1,995 3,109 1,989 1,518 3,469 18,500 11,524

2024 3,974 2,644 2,031 3,251 2,117 1,545 3,782 19,344 11,900

2025 4,046 2,716 2,082 3,528 2,154 1,578 4,132 20,235 12,371
This scenario does not represent any particular course of action that Treasury is expected to follow. Instead, it is intended to demonstrate the basic 29

trajectory of average maturity absent changes to the mix of securities issued by Treasury. See table on following page for details.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

20152016201720182019202020212022202320242025

Percent Compositioin

Projected Maturity Profile from end of Fiscal Year

<= 1yr (1,2] (2,3] (3,5] (5,7] (7,10] > 10
30

Recent and Projected Maturity Profile, percent

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. Portfolio composition by original issuance type 

and term can be found in the appendix (Page 43).

End of Fiscal Year <= 1yr (1,2] (2,3] (3,5] (5,7] (7,10] > 10 (0,3] (0,5]

2007 36.2 14.4 7.7 12.3 6.0 10.8 12.6 58.3 70.6

2008 41.2 13.6 5.4 12.5 5.9 9.6 11.8 60.2 72.7

2009 38.6 11.1 9.5 13.7 8.0 9.2 9.9 59.1 72.9

2010 30.2 13.4 10.5 15.0 10.7 10.1 10.0 54.2 69.2

2011 27.2 13.9 10.2 16.0 11.1 10.9 10.6 51.3 67.3

2012 27.5 12.8 10.3 16.9 11.3 10.3 11.0 50.5 67.4

2013 25.4 13.1 10.7 17.0 12.5 9.8 11.5 49.2 66.2

2014 23.9 14.2 10.7 18.0 11.7 9.1 12.4 48.8 66.8

2015 24.3 13.8 10.4 18.5 11.5 8.7 12.8 48.5 67.0

2016 23.5 13.5 11.5 17.9 11.2 8.8 13.5 48.6 66.5

2017 22.9 14.6 10.9 17.7 10.7 8.9 14.2 48.4 66.1

2018 23.7 13.9 10.7 17.3 10.8 8.9 14.7 48.3 65.6

2019 22.5 13.9 10.9 17.3 11.1 9.1 15.1 47.4 64.7

2020 22.0 14.1 10.2 17.8 11.2 8.8 15.9 46.3 64.1

2021 21.8 13.1 11.2 17.5 11.0 8.7 16.8 46.0 63.5

2022 20.4 14.1 11.0 17.4 10.9 8.5 17.8 45.5 62.8

2023 21.0 13.7 10.8 16.8 10.8 8.2 18.7 45.5 62.3

2024 20.5 13.7 10.5 16.8 10.9 8.0 19.5 44.7 61.5

2025 20.0 13.4 10.3 17.4 10.6 7.8 20.4 43.7 61.1
Section V:

Demand

31
32

*Weighted averages of Competitive Awards.

**Approximated using prices at settlement and includes both Competitive and Non-Competitive Awards. For TIPS’ 10-year equivalent, a 

constant auction BEI is used as the inflation assumption.

Summary Statistics for Fiscal Year 2015 Q3 Auctions

Security 

Type Term Stop Out 

Rate (%)*

Bid-to-Cover 

Ratio*

Competitive 

Awards 

($bn)

% 

Primary 

Dealer*

% 

Direct*

% 

Indirect*

Non-Competitive 

Awards ($bn)

SOMA 

Add Ons 

($bn)

10-Year 

Equivalent 

($bn)**

Bill 4-Week 0.009 3.9 424.2 70.8 5.1 24.1 3.3 0.0 3.7

Bill 13-Week 0.017 4.3 303.1 71.3 6.6 22.1 4.8 0.0 8.7

Bill 26-Week 0.088 4.3 300.9 51.0 5.4 43.6 4.2 0.0 17.5

Bill 52-Week 0.263 3.8 73.9 57.7 4.8 37.5 0.4 0.0 8.4

Bill CMBs 0.050 3.9 30.0 84.6 6.3 9.2 0.0 0.0 0.1

Coupon 2-Year 0.627 3.3 77.3 41.7 14.0 44.3 0.4 0.1 17.5

Coupon 3-Year 0.997 3.3 71.3 38.3 10.8 50.9 0.2 0.5 24.2

Coupon 5-Year 1.550 2.5 104.7 34.2 7.0 58.8 0.1 0.1 56.9

Coupon 7-Year 1.954 2.4 87.0 32.9 12.2 54.9 0.0 0.1 64.1

Coupon 10-Year 2.209 2.7 65.9 26.7 14.4 58.9 0.1 0.5 67.0

Coupon 30-Year 2.935 2.3 42.0 37.8 10.9 51.3 0.0 0.4 95.6

TIPS 5-Year -0.335 2.3 18.0 32.3 6.3 61.5 0.0 0.1 10.1

TIPS 10-Year 0.358 2.3 13.0 28.4 4.5 67.1 0.0 0.0 13.8

TIPS 30-Year 1.142 2.5 7.0 24.9 4.3 70.8 0.0 0.0 20.7

FRN 2-Year 0.073 3.9 41.0 42.3 1.3 56.4 0.0 0.1 0.0

Total Bills 0.050 4.1 1,132.1 65.2 5.6 29.2 12.7 0.0 38.4

Total Coupons 1.608 2.8 448.0 35.1 11.3 53.6 1.0 1.8 325.3

Total TIPS 0.174 2.3 37.9 29.6 5.3 65.1 0.1 0.1 44.6

Total FRNs 0.073 3.9 41.0 42.3 1.3 56.4 0.0 0.1 0.0
1

1.5

2

2.5

3

3.5

4

4.5

5

5.5

6

Jun-05Jun-06Jun-07Jun-08Jun-09Jun-10Jun-11Jun-12Jun-13Jun-14Jun-15

Bid-to-Cover Ratio

Bid-to-Cover Ratios for Treasury Bills

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

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

33
2

2.5

3

3.5

4

4.5

5

5.5

6

Jan-14

Feb-14

Mar-14

Apr-14

May-14

Jun-14

Jul-14

Aug-14

Sep-14

Oct-14

Nov-14

Dec-14

Jan-15

Feb-15

Mar-15

Apr-15

May-15

Jun-15

Bid-to-Cover Ratio

Bid-to-Cover Ratios for FRNs

34
35

1

1.5

2

2.5

3

3.5

4

4.5

Jun-10

Sep-10

Dec-10

Mar-11

Jun-11

Sep-11

Dec-11

Mar-12

Jun-12

Sep-12

Dec-12

Mar-13

Jun-13

Sep-13

Dec-13

Mar-14

Jun-14

Sep-14

Dec-14

Mar-15

Jun-15

Bid-to-Cover Ratio

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

(6-Month Moving Average)

2-Year 3-Year 5-Year
36

1

1.5

2

2.5

3

3.5

Jun-10

Sep-10

Dec-10

Mar-11

Jun-11

Sep-11

Dec-11

Mar-12

Jun-12

Sep-12

Dec-12

Mar-13

Jun-13

Sep-13

Dec-13

Mar-14

Jun-14

Sep-14

Dec-14

Mar-15

Jun-15

Bid-to-Cover Ratio

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

(6-Month Moving Average)

7-Year 10-Year 30-Year
1

1.5

2

2.5

3

3.5

Jun-01Jun-02Jun-03

Jun-04

Jun-05Jun-06Jun-07Jun-08

Jun-09

Jun-10Jun-11Jun-12Jun-13Jun-14Jun-15

Bid-to-Cover Ratio

Bid-to-Cover Ratios for TIPS

5-Year 10-Year (6-month moving average) 20-Year 30-Year

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

Pension and Insurance.

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

Jun-11

Aug-11

Oct-11

Dec-11

Feb-12

Apr-12

Jun-12

Aug-12

Oct-12

Dec-12

Feb-13

Apr-13

Jun-13

Aug-13

Oct-13

Dec-13

Feb-14

Apr-14

Jun-14

Aug-14

Oct-14

Dec-14

Feb-15

Apr-15

Jun-15

13-week moving average

Percent Awarded in Bill Auctions by Investor Class 

(13-Week Moving Average)

Other Dealers and Brokers Investment Funds Foreign and International 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.

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Jun-11

Aug-11

Oct-11

Dec-11

Feb-12

Apr-12

Jun-12

Aug-12

Oct-12

Dec-12

Feb-13

Apr-13

Jun-13

Aug-13

Oct-13

Dec-13

Feb-14

Apr-14

Jun-14

Aug-14

Oct-14

Dec-14

Feb-15

Apr-15

Jun-15

6-month moving average

Percent Awarded in 2-, 3-, and 5-Year Nominal Security 

Auctions by Investor Class (6-Month Moving Average)

Other Dealers and Brokers Investment Funds Foreign and International Other
40 Excludes SOMA add-ons. The “Other” category includes categories that are each less than 2%, which include Depository Institutions, Individuals, 

Pension and Insurance.

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Jun-11

Aug-11

Oct-11

Dec-11

Feb-12

Apr-12

Jun-12

Aug-12

Oct-12

Dec-12

Feb-13

Apr-13

Jun-13

Aug-13

Oct-13

Dec-13

Feb-14

Apr-14

Jun-14

Aug-14

Oct-14

Dec-14

Feb-15

Apr-15

Jun-15

6-month moving average

Percent Awarded in 7-, 10-, 30-Year Nominal Security Auctions 

by Investor Class (6-Month Moving Average)

Other Dealers and Brokers Investment Funds Foreign and International Other
41 Excludes SOMA add-ons. The “Other” category includes categories that are each less than 2%, which include Depository Institutions, Individuals, 

Pension and Insurance.

0%

10%

20%

30%

40%

50%

60%

70%

Jun-11

Aug-11

Oct-11

Dec-11

Feb-12

Apr-12

Jun-12

Aug-12

Oct-12

Dec-12

Feb-13

Apr-13

Jun-13

Aug-13

Oct-13

Dec-13

Feb-14

Apr-14

Jun-14

Aug-14

Oct-14

Dec-14

Feb-15

Apr-15

Jun-15

6-month moving average

Percent Awarded in TIPS Auctions by Investor Class

(6-Month Moving Average)

Other Dealers and Brokers Investment Funds Foreign and International Other
42 Excludes SOMA add-ons. 

25%

30%

35%

40%

45%

50%

55%

60%

65%

70%

75%

Dec-10

Feb-11

Apr-11

Jun-11

Aug-11

Oct-11

Dec-11

Feb-12

Apr-12

Jun-12

Aug-12

Oct-12

Dec-12

Feb-13

Apr-13

Jun-13

Aug-13

Oct-13

Dec-13

Feb-14

Apr-14

Jun-14

Aug-14

Oct-14

Dec-14

Feb-15

Apr-15

Jun-15

% of Total Competitive Amount Awarded

Primary Dealer Awards at Auction

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

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

TIPS (6-month-moving average)
43 Excludes SOMA add-ons. 

0%

5%

10%

15%

20%

25%

30%

Dec-10

Feb-11

Apr-11

Jun-11

Aug-11

Oct-11

Dec-11

Feb-12

Apr-12

Jun-12

Aug-12

Oct-12

Dec-12

Feb-13

Apr-13

Jun-13

Aug-13

Oct-13

Dec-13

Feb-14

Apr-14

Jun-14

Aug-14

Oct-14

Dec-14

Feb-15

Apr-15

Jun-15

% of Total Competitive Amount Awarded

Direct Bidder Awards at Auction

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

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

TIPS (6-month-moving average)
44 Foreign includes both private sector and official institutions.

0

20

40

60

80

100

120

140

160

Jul-10

Sep-10

Nov-10

Jan-11

Mar-11

May-11

Jul-11

Sep-11

Nov-11

Jan-12

Mar-12

May-12

Jul-12

Sep-12

Nov-12

Jan-13

Mar-13

May-13

Jul-13

Sep-13

Nov-13

Jan-14

Mar-14

May-14

Jul-14

Sep-14

Nov-14

Jan-15

Mar-15

May-15

$ bn

Total Foreign Awards of Treasuries at Auction, $ billions

Bills 2,3,5 7,10,30 TIPS FRN
Appendix

45
This scenario does not represent any particular course of action that Treasury is expected to follow. Instead, it is intended to demonstrate the basic 46

trajectory of average maturity absent changes to the mix of securities issued by Treasury. See table on following page for details.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

20152016201720182019202020212022202320242025

End of Fiscal Year

Projected Portfolio Composition by Issuance Type, Percent

Bills 2,3,5 7,10,30 TIPS (principal accreted to projection date) FRN
47

Recent and Projected Portfolio Composition by Issuance Type, Percent

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. 

End of Fiscal 

Year Bills 2-, 3-, 5-Year 

Nominal Coupons

7-, 10-, 30-Year 

Nominal 

Coupons

Total 

Nominal 

Coupons

TIPS (principal accreted 

to projection date) FRN

2007 21.6 38.9 29.2 68.1 10.3 0.0

2008 28.5 34.5 26.9 61.4 10.0 0.0

2009 28.5 36.2 27.4 63.6 7.9 0.0

2010 21.1 40.1 31.8 71.9 7.0 0.0

2011 15.4 41.4 35.9 77.3 7.3 0.0

2012 15.0 38.4 39.0 77.4 7.5 0.0

2013 13.2 35.8 43.0 78.7 8.1 0.0

2014 11.5 33.0 46.0 79.0 8.5 1.0

2015 10.8 29.4 48.8 78.2 8.8 2.2

2016 10.4 27.6 50.6 78.2 9.0 2.4

2017 9.9 27.1 51.3 78.4 9.3 2.3

2018 9.5 27.1 51.7 78.7 9.5 2.2

2019 9.1 27.5 51.6 79.1 9.7 2.1

2020 8.7 27.8 51.8 79.6 9.7 2.0

2021 8.3 27.9 52.3 80.2 9.6 1.9

2022 7.9 27.8 53.1 80.8 9.4 1.9

2023 7.6 27.8 53.7 81.5 9.2 1.8

2024 7.2 27.7 54.4 82.1 9.0 1.7

2025 6.9 27.6 55.3 82.8 8.6 1.6
*Weighted averages of Competitive Awards. 48

**Approximated using prices at settlement and includes both Competitive and Non-Competitive Awards.

Issue Settle Date Stop Out 

Rate (%)*

Bid-to-Cover 

Ratio*

Competitive 

Awards ($bn)

% Primary 

Dealer* % Direct* % 

Indirect*

NonCompetitive 

Awards ($bn)

SOMA 

Add Ons 

($bn)

10-Year 

Equivalent 

($bn)*

4-Week 4/9/2015 0.015 3.83 29.7 69.7 5.8 24.5 0.3 0.0 0.3

4-Week 4/16/2015 0.015 4.02 29.7 65.2 4.9 29.9 0.3 0.0 0.3

4-Week 4/23/2015 0.015 4.01 29.8 60.3 6.4 33.3 0.2 0.0 0.3

4-Week 4/30/2015 0.000 4.25 28.9 65.3 4.4 30.3 0.3 0.0 0.3

4-Week 5/7/2015 0.000 3.83 29.7 79.9 4.1 16.0 0.3 0.0 0.3

4-Week 5/14/2015 0.010 3.95 39.7 63.5 5.1 31.4 0.3 0.0 0.3

4-Week 5/21/2015 0.015 3.38 44.8 78.2 6.1 15.6 0.2 0.0 0.4

4-Week 5/28/2015 0.010 3.35 43.8 75.8 5.3 18.9 0.2 0.0 0.4

4-Week 6/4/2015 0.005 3.51 34.7 82.0 4.9 13.1 0.3 0.0 0.3

4-Week 6/11/2015 0.005 3.79 34.7 60.5 5.1 34.5 0.3 0.0 0.3

4-Week 6/18/2015 0.000 4.64 24.8 80.1 6.2 13.7 0.2 0.0 0.2

4-Week 6/25/2015 0.000 4.80 24.0 69.7 2.8 27.5 0.2 0.0 0.2

4-Week 7/2/2015 0.015 3.73 29.7 67.8 3.8 28.4 0.3 0.0 0.3

13-Week 4/9/2015 0.020 4.23 23.7 74.2 6.4 19.4 0.3 0.0 0.7

13-Week 4/16/2015 0.025 4.07 23.4 61.1 5.1 33.8 0.4 0.0 0.7

13-Week 4/23/2015 0.025 4.21 23.6 77.4 10.8 11.8 0.4 0.0 0.7

13-Week 4/30/2015 0.020 4.31 22.8 65.8 7.9 26.2 0.4 0.0 0.7

13-Week 5/7/2015 0.015 4.13 23.5 77.7 5.9 16.4 0.4 0.0 0.7

13-Week 5/14/2015 0.020 4.43 23.4 61.3 3.4 35.4 0.4 0.0 0.7

13-Week 5/21/2015 0.015 4.40 23.6 73.7 4.7 21.6 0.3 0.0 0.7

13-Week 5/28/2015 0.015 4.70 22.7 69.4 5.5 25.1 0.3 0.0 0.7

13-Week 6/4/2015 0.010 4.49 23.5 69.6 4.1 26.3 0.3 0.0 0.7

13-Week 6/11/2015 0.015 4.29 23.6 79.3 7.9 12.8 0.4 0.0 0.7

13-Week 6/18/2015 0.010 4.57 23.5 75.1 9.2 15.7 0.4 0.0 0.7

13-Week 6/25/2015 0.010 4.16 22.6 68.8 10.0 21.2 0.4 0.0 0.7

13-Week 7/2/2015 0.015 3.96 23.2 73.2 4.9 21.8 0.4 0.0 0.7

26-Week 4/9/2015 0.095 4.05 23.2 66.2 9.7 24.1 0.3 0.0 1.3

26-Week 4/16/2015 0.105 4.32 23.2 42.6 4.9 52.5 0.3 0.0 1.3

26-Week 4/23/2015 0.090 4.49 23.1 54.1 6.3 39.6 0.3 0.0 1.3

26-Week 4/30/2015 0.095 4.61 22.9 36.2 1.0 62.8 0.3 0.0 1.4

26-Week 5/7/2015 0.070 3.94 23.1 57.2 9.3 33.4 0.3 0.0 1.3

26-Week 5/14/2015 0.085 4.25 23.3 41.0 3.4 55.6 0.4 0.0 1.4

26-Week 5/21/2015 0.080 4.51 23.4 40.8 3.4 55.8 0.3 0.0 1.3

26-Week 5/28/2015 0.085 4.45 22.7 58.7 1.6 39.8 0.3 0.0 1.3

26-Week 6/4/2015 0.070 4.58 23.3 48.7 4.8 46.4 0.3 0.0 1.3

26-Week 6/11/2015 0.080 4.49 23.4 47.9 4.6 47.4 0.3 0.0 1.3

26-Week 6/18/2015 0.100 4.19 23.4 67.4 7.0 25.5 0.3 0.0 1.3

26-Week 6/25/2015 0.080 4.29 22.7 47.8 7.5 44.7 0.4 0.0 1.3

26-Week 7/2/2015 0.110 3.84 23.2 54.3 5.8 39.9 0.3 0.0 1.3

52-Week 4/30/2015 0.245 4.11 24.5 51.1 1.9 47.0 0.1 0.0 2.8

52-Week 5/28/2015 0.255 3.78 24.6 57.1 6.6 36.3 0.2 0.0 2.8

52-Week 6/25/2015 0.290 3.44 24.8 64.9 5.9 29.3 0.1 0.0 2.8

CMBs 6/3/2015 0.050 3.86 30.0 84.6 6.3 9.2 0.0 0.0 0.1

Bills
49

*Weighted averages of Competitive Awards.

**Approximated using prices at settlement and includes both Competitive and Non-Competitive Awards. For TIPS’ 10-Year Equivalent, a 

constant auction BEI is used as the inflation assumption.

Issue Settle Date Stop Out 

Rate (%)*

Bid-to-Cover 

Ratio*

Competitive 

Awards ($bn)

% Primary 

Dealer* % Direct* % 

Indirect*

NonCompetitive 

Awards ($bn)

SOMA 

Add Ons 

($bn)

10-Year 

Equivalent 

($bn)*

2-Year 4/30/2015 0.540 3.30 25.7 47.3 14.6 38.1 0.2 0.1 5.9

2-Year 6/1/2015 0.648 3.40 25.8 40.5 17.2 42.3 0.1 0.0 5.8

2-Year 6/30/2015 0.692 3.28 25.8 37.2 10.1 52.6 0.1 0.0 5.8

3-Year 4/15/2015 0.865 3.25 23.8 39.5 11.1 49.4 0.1 0.0 8.0

3-Year 5/15/2015 1.000 3.34 23.8 35.7 11.6 52.7 0.1 0.5 8.3

3-Year 6/15/2015 1.125 3.33 23.7 39.6 9.7 50.7 0.1 0.0 8.0

5-Year 4/30/2015 1.380 2.56 35.0 33.2 5.6 61.2 0.0 0.1 19.2

5-Year 6/1/2015 1.560 2.46 34.8 31.6 10.0 58.5 0.1 0.0 18.8

5-Year 6/30/2015 1.710 2.39 34.8 37.9 5.6 56.6 0.1 0.0 18.9

7-Year 4/30/2015 1.820 2.44 29.0 33.0 12.8 54.1 0.0 0.1 21.7

7-Year 6/1/2015 1.888 2.49 29.0 34.2 12.0 53.8 0.0 0.0 21.2

7-Year 6/30/2015 2.153 2.38 29.0 31.5 11.9 56.6 0.0 0.0 21.3

10-Year 4/15/2015 1.925 2.62 21.0 32.2 9.3 58.5 0.0 0.0 21.0

10-Year 5/15/2015 2.237 2.72 24.0 18.9 20.9 60.2 0.0 0.5 25.1

10-Year 6/15/2015 2.461 2.74 21.0 30.0 12.1 57.9 0.0 0.0 21.0

30-Year 4/15/2015 2.597 2.18 13.0 41.8 7.0 51.3 0.0 0.0 30.4

30-Year 5/15/2015 3.044 2.20 16.0 38.0 11.1 50.8 0.0 0.4 36.7

30-Year 6/15/2015 3.138 2.54 13.0 33.6 14.4 52.0 0.0 0.0 28.5

2-Year FRN 4/30/2015 0.074 3.81 15.0 36.9 0.4 62.7 0.0 0.1 0.0

2-Year FRN 5/29/2015 0.069 4.01 13.0 48.5 2.3 49.2 0.0 0.0 0.0

2-Year FRN 6/26/2015 0.076 3.74 13.0 42.5 1.2 56.4 0.0 0.0 0.0

Issue Settle Date Stop Out 

Rate (%)*

Bid-to-Cover 

Ratio*

Competitive 

Awards ($bn)

% Primary 

Dealer* % Direct* % 

Indirect*

NonCompetitive 

Awards ($bn)

SOMA 

Add Ons 

($bn)

10-Year 

Equivalent 

($bn)*

5-Year TIPS 4/30/2015 (0.335) 2.27 18.0 32.3 6.3 61.5 0.0 0.1 10.1

10-Year TIPS 5/29/2015 0.358 2.33 13.0 28.4 4.5 67.1 0.0 0.0 13.8

30-Year TIPS 6/30/2015 1.142 2.45 7.0 24.9 4.3 70.8 0.0 0.0 20.7

Nominal Coupons

TIPS
The Meaning and Implications of “Regular and 

Predictable” (R&P) as a Tenet of Debt Management

August 2015
2

A pillar of Treasury’s debt management policy has been to operate in a “regular 

and predictable” manner. However, as a precise definition of “regular and 

predictable” has not been provided, the meaning of “regular and predictable” is 

subject to interpretation. 

We would like the Committee to comment on the meaning of “regular and 

predictable” and its implication for debt managers’ ability to alter auction sizes. 

At what point does the added flexibility of moving these auction sizes violate 

the Treasury’s fundamental paradigm of “regular and predictable?” 

TBAC Charge
3

Outline

• Debt Management Goals and History of R&P

• Current Operating Environment

• Benefits and Potential Opportunity Costs of R&P

• Boundaries of R&P Framework

• Conclusion 
4

Treasury’s Debt Management Goals

• To fund the deficit and refinance maturing debt at the lowest cost to taxpayers over time

• Manage Treasury’s cash flows in an uncertain environment

• Uncertain net financing needs

• Uncertain auction demand conditions

• Uncertain market liquidity, in light of recent regulatory and market micro-structure changes

• Uncertain economic and financial market outlook

• Uncertain Federal Reserve policies going forward

• Manage the risk profile of outstanding debt 
5

In the Mid-1970s, Treasury Began Transitioning to an R&P 

Auction Framework

• Analysis by Garbade1 shows that up until the mid-1970s, Treasury exercised more tactical discretion in the timing, maturity, and size of 

new issues in response to perceived market opportunities, unforeseen variations in its cash needs, or to manage the WAM of its 

outstanding securities

• By the mid-1970s, the costs of tactical discretion in terms of generating potential market disruptions came more into focus, tilting the 

debate in favor of adopting a more “regular and predictable” auction process

• The size of the deficit to be financed increased significantly 

• The tactical and discretionary issuance left market participants unprepared and collided with private sector issuance of securities 

with similar credit ratings and tenors (i.e. close substitutes)

1. Kenneth D. Garbade, “The Emergence of ‘Regular and Predictable’ as a Treasury Debt Management Strategy,” FRBNY Economic Policy Review, 

March 2007. 

U.S. Treasury Issuance1

1970 - 1981
6

Since the Transition, Treasury Has Adhered to an R&P 

Auction Framework

• Regular auctions with a set schedule—standardized communication process around the size of auctions 

• As much forward guidance regarding future auction sizes as is feasible

• Generally communicated as part of the Quarterly Refunding announcement 

• Much longer lead times in communicating decisions to introduce or eliminate particular maturities or instruments

• Generally, lead times of anywhere from one quarter to several years

U.S. Treasury Issuance—Regular and Predictable

January 1980 – April 2015 Maturity

0

5

10

15

20

25

30

Source: U.S. Treasury. 

Notes/Bonds

Bills

Inflation 

Protected 

Securities 

Issue Date
7

Treasury’s Current Operating Environment

• Potential variability in budget deficits

• Sizeable stock of outstanding debt to roll over

• Potential structural changes in investor demand over time

• Changes in the financial regulatory environment and market structure that affect market liquidity and auction demand conditions

• Federal Reserve decisions in terms of policy rates and its balance sheet going forward

• Constraints periodically posed by the debt ceiling

Treasury needs to retain enough flexibility within its current R&P framework to be able to adjust 

to these uncertain conditions over time
8

Benefits and Potential Opportunity Costs of R&P

Benefits of the current R&P framework

• Lowers Treasury borrowing costs

• Provides a reliable liquid benchmark curve that benefits other markets, e.g. corporate bonds and Treasury 

derivatives (futures & options)

• Helps reduce rollover risk by spreading out maturities in a predictable fashion

Potential opportunity cost of retaining the current R&P framework

• Prevents Treasury from quickly reacting to 

• Breakdowns in market functioning

• Potential relative value opportunities 

• Structural dislocations in the curve driven by market segmentation 

• Possible market timing opportunities
9

• Removes uncertainty, allowing investors to plan for future issuance

• Encourages broad-based auction participation

• Treasury has saved an estimated $27 billion1 since 1998 by capturing liquidity premia for on-the-runs

• Although liquidity premia has tended to narrow over this period, given the sharp increase in Treasury’s gross borrowing 

needs since 2008, the dollar amount of savings has remained significant 

Following an R&P Framework Has Lowered Treasury 

Borrowing Costs

1. Committee participant’s estimate.

2. Richness of on-the-run Treasury versus fourth old. 

Source: Committee participant’s models.

Liquidity Premia2

(6 month trailing average) Treasury's Estimated Savings from 

Liquidity Premia2

Bps $Bn

-1.50

-1.00

-0.50

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00 30 yr 10 yr 7 yr 5 yr 3 yr 2 yr Total

-30

-25

-20

-15

-10

-5

0

5

10

2yr 3 yr

5 yr 7 yr

10 yr 30 yr

* Year-to-date as of April 2015. 

*
10

• Provides a reliable liquid benchmark curve that benefits other markets, e.g. corporate bonds and Treasury derivative markets

• Availability of liquid benchmark Treasuries, which R&P enables, provides a basis for hedging interest rate risk and pricing credit risk

• Dependence of these markets on a liquid Treasury benchmark curve creates structural demand for on-the-run Treasuries that at 

least partly accounts for their liquidity premia

• Maintaining R&P Treasury issuance will help retain on-the-run Treasuries as the benchmark for other markets, enabling the Treasury to 

continue to benefit from their richness

• Treasury might benefit from exploring the possibility of issuing at additional maturities that match corporate funding needs

• Some corporate issuers have recently found it effective to issue at maturities between 10 and 30 years, suggesting Treasury might benefit 

from introducing another benchmark maturity in this range

R&P Framework Creates Positive Externalities

Source: Barclays.

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 23 24 25 26 27 28 29 30 31 32 33 34 35+

Corp Issuance Treasury Issuance

Corporate and Treasury Issuance by Tenor 

(Share of Total Issuance Greater Than Two Years)

1998 - 2014 
11

R&P Framework Creates Liquid Benchmarks for Private 

Sector Issuance 

1. Richness of on-the-run Treasury versus fourth old. 

Source: Committee participant’s models. 

• Corporate issuers prefer to price off of liquid benchmark issues

• Ultimately enhances Treasury on-the-run liquidity premia

• A mutually beneficial relationship exists between corporate issuance and on-the-run Treasuries—both parties benefit 

-25

-20

-15

-10

-5

0

0% 5

50%

100%

150%

200%

250%

300%

350%

400%

5 yr Corp issuance as % of qtrly Treas 

Issuance

Average of 5yr rich / cheap (bps; RHS)

Five-Year

-30

-25

-20

-15

-10

-5

0

0% 5

100%

200%

300%

400%

500%

600%

10 yr Corp issuance as % of qtrly Treas 

Issuance

Average of 10yr rich / cheap (bps; RHS)

Ten-Year

Seven-Year 

-5

-4

-3

-2

-1

0

1

2

0% 3

5%

10%

15%

20%

25% 7 yr Corp issuance as % of qtrly Treas 

Issuance

Average of 7yr rich / cheap (bps; RHS) 

Bps

Bps Bps

Quarterly Corporate Issuance (as % of Treasury Issuance) Compared to Liquidity Premia1
12

• Budget surpluses at the time reduced financing needs, leading first to reduced auction sizes and finally a suspension of 30-year issuance

• Market participants were aware suspension was possible, but were nonetheless surprised by the announcement in October 2001

• Looking beyond the market’s immediate reaction to the suspension, the full implications and costs of suspending 30-year issuance were 

not apparent until years later, despite resumed issuance in 2006

• The Treasury curve currently has a gap in the 15- to 20-year part of the curve

• Delivery requirements for futures contracts were consequently forced to be modified as deliverables became limited due to the 5 year gap in 30-

year issuance—issuance gap created substantial richness for off-the-run securities that are cheapest to deliver for settlement of futures contracts

• This effect has reduced the liquidity premia that Treasury is capturing from 30-year Treasury issuance

R&P Helps Maintain A Full Curve of Liquid Benchmark Issues

Suspension of 30–year issuance in 2001 illustrates the unintended consequences of deviating from R&P

Richness / Cheapness of Treasuries 

by Maturity vs. Fitted Curve 

Impact on Treasuries of Futures Market 

Rich/Cheap 

(bps)

Rich/Cheap 

(bps)

Years to Maturity

Suspension of 30-year 

issuance between 2001 

and 2006

CTD of classic 

futures contract

Summer of 2013 CME 

announces study of 

deliverables considering 

the upcoming 5-year gap

Denotes current 

on-the-run

-25

-20

-15

-10

-5

0

5

10

15

4.500 02/15/36

On-the-run 30yr

-15

-10

-5

0

5

10

0 5 10 15 20 25 30

As of July 24, 2015. Source: Committee participant’s models. 

 
13

Potential Opportunity Costs of Retaining Current R&P 

Monetizing substantial market dislocations

• Treasury has occasionally deviated from R&P when markets have suffered from severe illiquidity (e.g. reopening of several 

Treasury issues in 2008)

• Can serve a valuable purpose by restoring market function and by ensuring sustained confidence and liquidity for 

Treasury securities

Extracting value from rich parts of the curve

• R&P issuance does not capture demand dynamics that create richness at certain parts of the curve

• Given the efficiency of markets and Treasury’s sizable gross issuance needs, it is extremely difficult for Treasury to 

extract relative value from tactical opportunities in the market

• However, persistent dislocations driven by market segmentation or shifting preferred habitats of market participants over 

time may provide opportunities for the Treasury to modulate issuance gradually and transparently

Responding to changes in term premia

• Yields on longer-dated securities tend to include term premia, therefore raising their ex-ante costs as a source of funding 

when compared to shorter-dated securities

• However, trying to reduce this cost would require taking views and timing the markets, which is difficult to do sustainably 

over the long-run 

• There is a substantial variation in approaches and resulting estimates of term premia embedded in the curve

Responding to changes in inflation risk premia

• TIPS securities have embedded inflation risk premia that, at times, could be significantly undervalued given the market 

environment 

• Maintaining static issuance when risk premia may be undervalued could potentially be a cost to Treasury 

• Gauging investor demand along with embedded inflation premia could be one area of modulation (size relative to 

nominal coupon issuance) within the R&P framework

Attempts at market timing could damage credibility of the auction process and increase uncertainty for market 

participants, potentially resulting in higher borrowing costs over the long run
14

2008 Reopening of Several Treasury Issues Alleviated Market 

Dislocations

Illustrates Difficulties Treasury Faces In Capturing Relative Value Opportunities

• Several Treasury issues were experiencing a substantial shortage of supply in 2008; Treasury announced reopenings of these 

issues which provided much-needed liquidity to alleviate the severe squeezes

• Treasury was able to alleviate severe strain and restore a well-functioning market by deviating from its usual R&P framework

• However, the market priced in the impact almost instantaneously after the announcement, eliminating the richness of those 

securities ahead of the actual reopening

• Treasury was not able to extract any benefit from the market-driven relative value opportunity as the market re-priced the securities 

before the reopening

Richness/Cheapness vs. Fitted Curve

Source: Committee participant’s models. 

Bps

-50

-45

-40

-35

-30

-25

-20

-15

-10

-5

0

4.125 05/15/15 4.250 08/15/15

October 8—Treasury 

re-opens the May and 

August 2015 issues 

Auction 

Date Coupon Maturity

Size

($bn)

10/07/08 

Close 

Yield

1PM WI

Bids

Stopout

Yield

BP 

Tail

11:30am 

Auction -

PrevClose

10/08/08 4.125 05/15/15 $ 10.0 2.686 2.800 3.310 51.0 62.4

10/08/08 4.250 08/15/15 $ 10.0 2.795 3.330 3.440 11.0 64.5
15

Boundaries Within Which the Treasury Can Deviate From the 

Current R&P Framework

• Five parameters potentially to modulate 

• Size

• Frequency

• Maturity

• Instrument (Bills, Coupons, TIPS, Floating Rate Notes)

• Lead-time in notifying market

• Considerations when Treasury is contemplating potential changes in any of these parameters

• Auction tails provide insights into market depth and the potential for variance in auction sizes

• Sufficient communication is critical for keeping any changes in auction parameters within the bounds of R&P

• Primary Dealers play an important role and constraints need to be appropriately considered

• Monetary policies particularly with respect to Fed balance sheet management 

• Sustainability of demand across all interest rate cycles

• Adopting a formulaic approach is unlikely to generate persistent benefits to the Treasury and could possibly raise 

Treasury borrowing costs by introducing greater complexity and thus uncertainty into the auction process
16

Auction Tails May Provide Insight for Modulating Auction Sizes 

U.S. Auction Tails1

• Auction price tails, as measured by allotted yield minus median yield, can provide guidance on market depth, identifying parts of the 

curve that can absorb greater supply as well as the potential cost of increasing issuance at certain parts of the curve

• Persistently elevated tails may be a good way to identify market segmentation, and assess opportunities to modulate size while still 

remaining within the bounds of R&P 

• Other metrics that may be useful in identifying market segmentations and modulating auction sizes include: persistent richness /

cheapness of certain parts of the curve and inflation breakeven levels

• In addition, available float of deliverable bonds into futures contracts can provide guidance on the lower bound for issue sizes

• Dealer surveys are useful in gaining insight on market’s ability to absorb variations in auction sizes—recent survey seems to indicate 

greater potential for increasing 2 year and 3 year auction sizes, consistent with the auction tail analysis 

Bps

-

2 

4 

6 

8 

10 

12 

14 

2yr

3yr

5yr

7yr

10yr

30yr

Longer-dated issues have 

recently had notably higher and 

more variable tails, suggesting 

higher costs 0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

0 5.0

5

10

15

20

25

2yr 3yr 5yr 7yr 10yr 30yr

Survey Max minus Current

Avg Tail (Last 6 months) (rhs)

Potential Increase in Auction Size 

From Dealer Survey2

$ Billions Bps (Inverted)

1. Source: Bloomberg. Allotted yield minus median yield, as of March 31, 2015.

2. Source: U.S. Treasury. Primary Dealer Auction Size Perspectives for March 19, 2015. 

1
17

Treasury Communications is a Critical Parameter

• Treasury can generally modulate most auction parameters as long as sufficient lead time and transparency are provided

• Encourages widespread participation and better enables primary dealer participation in the auction process 

• Treasury should continue its current practice of providing as much lead time as possible 

• Communication lead time should be commensurate with the magnitude of the change

• Treasury should continue its current communication practices, including:

• As much transparency and lead-time as possible in announcing auction sizes and, to the extent possible, providing guidance as to 

whether and how current auction sizes are likely to change over time 

• Alterations to any of the other auction parameters—e.g. frequency, introduction or elimination of new maturities or instruments—

requires sufficient lead-time for adequate study and discussion with market participants

• To the extent possible, communicate broad medium- to longer-term objectives to market participants, e.g. medium-term goals 

regarding the WAM or desired maturity/instruments composition of outstanding debt 

• Communication tools can help market participants better digest potential changes in issuance thereby lowering cost to Treasury
18

Altering the Current R&P Framework Can Affect the Primary 

Dealer System 

• Primary dealers are the ultimate liquidity providers during auctions; they are required to bid a pro rata share of each auction

• However, they operate under capital and other balance sheet constraints

• While primary dealer allotments have declined recently, they are still running at levels that are substantially greater than pre-crisis levels

• A reasonable degree of R&P is necessary given the requirements of the primary dealer system

Auction Allotments By Investor Class For Marketable Treasury Coupon Securities

(Notes/Bonds) 

Total 

Awarded

Amount ($bn)

Source: U.S. Treasury. 

0

100

200

300

400

500

600

700

Dealers and Brokers

Investment Funds

Foreign and International

SOMA

Individuals

Other
19

Treasury’s R&P Framework Given Monetary Policy Uncertainty 

• Providing the market with the stability of the current R&P framework may be particularly important in light of the uncertainty regarding 

Fed policies going forward

• The Fed’s current policy is to reinvest maturing Treasury securities at auction

• While Fed balance sheet policies going forward are uncertain, the Fed has indicated it intends to reduce its securities holdings “in a gradual 

and predictable manner primarily by ceasing to reinvest repayments of principal on securities held in the SOMA”1

• If the Fed's pace of reinvestments changes over time, the Treasury would need to adjust its auctions to offset

• In this case, the Treasury might find it advantageous over time gradually—and with as much transparency as possible—to alter the sizes of 

existing auctions, or even introduce/change maturities

• Similarly , if the Fed were to decide to outright sell any of its Treasury holdings, these sales could possibly compete for the same 

investor base as that of Treasury auctions

Impact of SOMA Actions on Projected Net Borrowing Assuming Future Issuance Remains Constant

With Fed Reinvestments ($bn) Without Fed Reinvestments ($bn)

1. Federal Reserve “Policy Normalization Principals and Plans,” September 2014.

Source of graphs: U.S. Treasury. 
20

Conclusions

• R&P has been an important and beneficial pillar of Treasury Debt Management 

• Ultimately the current R&P framework has helped reduce Treasury borrowing costs—estimated $27 billion1 since 1998

• The current R&P framework also provides a public good by benefiting other markets (corporate and futures markets)

• Tighter financial regulations and constrained balance sheets, large amounts of outstanding Treasury debt requiring rollover, 

changing market structure, and an uncertain path of Fed policy make R&P even more important today

• Some degree of flexibility over time is necessary to manage funding needs

• Flexibility is required to deal with uncertain funding needs and respond to structural changes in auction demand, market 

segmentations, and repair market malfunctions

• It appears to be impractical for the Treasury to attempt to capture relative value or market timing opportunities

• Flexible boundaries around the concept of R&P include:

• First Order Tool: Modulating size should be the primary tool (both across maturities and instruments), 

• Second Order Tool: Frequency of issuance should be kept more constant over the short term, requiring longer advance notice to 

market participants of potential changes

• Third Order Tool: New instruments or additional maturities can be introduced over a longer-period of time to address market 

segmentation after careful study and discussion with market participants

• R&P is not exclusive to issuance; it should also apply to buyback programs

• In all cases, providing the market with sufficient lead time commensurate with the magnitude of the contemplated change is 

important, except in rare instances when speed and timeliness are essential, e.g. in repairing severe market malfunctions

• There should be less flexibility in adopting any change that would interfere with maintaining a full curve of liquid, benchmark 

maturities

1. Committee participant’s estimate.
U.S. Treasury Borrowing Advisory Committee

Presentation to Treasury

August 4, 2015

1
Noting that long-term interest rates have declined to levels not seen since the 1960’s, many observers have suggested that 

Treasury issue more long-term debt, relative to short-term debt, in order to protect the government against higher interest costs 

in the future.

We would like the Committee to comment on this consideration as part of Treasury’s broader debt issuance strategy. Please 

elaborate on how this fits within Treasury’s mandate to fund the government at the lowest cost over time and maintain a “regular

and predictable” debt issuance schedule. What are the potential benefits and risks?

2

TBAC charge #2: Long-term issuance
 Feb 2011: Issuing 50y coupon bonds does not lengthen duration significantly

 Aug 2011: The term premium has been positive since the 1980s, implying the lowest cost strategy would be to borrow at the 

short end and avoid paying the term premium

 Aug 2011: The benefits of extension do not come for free. Historical analysis suggests that shorter term funding has at many 

times been both cheaper and the volatility costs have not been high

 Aug 2011: Previous periods of local low points in interest rates would not have provided dramatic benefit to an extension of 

average maturity

 Feb 2012: With interest rate risk premium currently near all time lows, savings [from FRN] are likely to be marginal

 Feb 2015: WAM does not fully capture the structure and risks of Treasury’s portfolio; the Treasury should publish other metrics 

to better reflect roll-over and concentration risk, and consider the portfolio WAM both gross and net of financial assets

3

Previous TBAC meetings have considered similar questions
Interest rates are low by historical standards

-15

-10

-5

0

5

10

15

1753 1773 1793 1813 1833 1853 1873 1893 1913 1933 1953 1973 1993 2013

BOE real base rate (%)

0

2

4

6

8

10

12

14

16

18

20

1962 1966 1971 1976 1981 1986 1991 1995 2000 2005 2010 2015

%

Potential GDP+Core CPI

10y Treasury yield

0

2

4

6

8

10

12

14

16

1871 1887 1903 1919 1935 1951 1967 1983 1999 2015

10y Treasury yield (%)

0

2

4

6

8

10

12

14

16

18

1694 1730 1766 1801 1837 1872 1908 1944 1979 2015

BOE base rate (%)

BOE base rates (1694-2015) BOE real base rates (1753-2015)

10-year Treasury yields (1871-2015) US nominal potential GDP vs. 10Y nominal Tsy yield (1962-2015)

4
Current Treasury issuance is skewed towards the belly of the curve

5

0

1

2

3

4

5

6

7

1998 1999 2001 2002 2003 2004 2006 2007 2008 2009 2011 2012 2013 2014

%

Weighted average coupon (1998-2015) Treasury TIPS FRN Total

2y 3y 5y 7y 10y 30y 5y 10y 30y 2y

Jan-15 26 24 35 29 21 13 15 15 178

Feb-15 26 24 35 29 24 16 9 13 176

Mar-15 26 24 35 29 21 13 13 13 174

Apr-15 26 24 35 29 21 13 18 15 181

May-15 26 24 35 29 24 16 13 13 180

Jun-15 26 24 35 29 21 13 7 13 168

Jul-15 26 24 35 29 21 13 15 15 178

Aug-15 25 23 35 29 24 16 16 13 181

Sep-15 24 22 35 29 21 13 13 13 170

Oct-15 24 22 35 29 21 13 15 159

Nov-15 24 22 35 29 24 16 13 7 13 183

Dec-15 24 22 35 29 21 13 16 13 173

Total 303 279 420 348 264 168 50 82 23 164 2101

% Distribution 14% 13% 20% 17% 13% 8% 2% 4% 1% 8% 100%

2010 487 449 472 373 275 175 73 15 0 2320

% Distribution 21% 19% 20% 16% 12% 8% 3% 1% 0% 100%
WAM has increased in recent years as the proportion of bills outstanding has declined

6

Average maturity of outstanding marketable Treasuries Bills outstanding as % of marketable Treasuries outstanding

Footnote: for projections, we assume that coupon sizes remain unchanged, 

and that FY15 deficits total $470bn
Factors that influence Treasury yields and borrowing costs

7

 Trend GDP growth

 Inflation

 Term premium

 Debt sustainability

 FX reserve status of the USD (50% of the debt stock is held by foreigners)

Primary drivers

Secondary drivers

 Liquidity premium

 Transparency and predictability of issuance (homogeneity of supply / benchmark issuance)

 Broad investor base (domestic and foreign)

 High turnover; liquid repo and derivatives markets

 Primary dealer network (incentives provided to PDs when issuing debt)

 Regulatory environment
Factors that influence the optimal maturity of borrowing

8

Factors influencing optimal maturity

• Shape of the yield curve

• Term premium in the curve

• Matching revenues with expenses (correlation of government receipts with interest rates)

• Asset / liability matching

•

When should we consider extending the average maturity of debt?

 Real interest rates are low

 Term premium and/or liquidity premium is low

 Correlation between GDP growth (tax receipts) and interest rates is low...

 ...or rates follow growth with a lag (i.e. probability of being in a low growth and high interest rate environment is high)

 Asset-side of the Treasury balance sheet holds long maturity assets
Maturity and issuance profile of Treasuries

9

Current issuance pattern ($bn)

Current outstanding Treasuries ($bn) and weighted average cost of funds (by maturity)

Issuance pattern under two scenarios (%)

We include nominals, TIPS and FRNs in this table

Distribution of gross issuance

2s 3s 5s 7s 10s 30s Total

#2: uniform issuance 17% 17% 17% 17% 16% 16% 100%

#1: current pattern 22% 13% 22% 17% 16% 9% 100%

Difference -5% 4% -5% 0% 0% 7% 0%

Annual gross issuance ($bn)

2s 3s 5s 7s 10s 30s Total

#2: uniform issuance 357 357 357 357 336 336 2101

#1: current pattern 467 279 470 348 346 191 2101

Difference -110 78 -113 9 -10 145 0

Treasury TIPS FRN Total

2s 3s 5s 7s 10s 30s 5s 10s 30s 2s

Jan-15 26 24 35 29 21 13 15 15 178

Feb-15 26 24 35 29 24 16 9 13 176

Mar-15 26 24 35 29 21 13 13 13 174

Apr-15 26 24 35 29 21 13 18 15 181

May-15 26 24 35 29 24 16 13 13 180

Jun-15 26 24 35 29 21 13 7 13 168

Jul-15 26 24 35 29 21 13 15 15 178

Aug-15 25 23 35 29 24 16 16 13 181

Sep-15 24 22 35 29 21 13 13 13 170

Oct-15 24 22 35 29 21 13 7 15 166

Nov-15 24 22 35 29 24 16 13 13 176

Dec-15 24 22 35 29 21 13 16 13 173

Total 303 279 420 348 264 168 50 82 23 164 2101

% Distribution 14% 13% 20% 17% 13% 8% 2% 4% 1% 8% 100%

1546

1882

1346

1098 1138

764

749

411 370 380

48 49 73 78 28 16 7 0 0 0 26 38 48 65 191 197 202 192 191 171

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

0

500

1000

1500

2000

2500

3000

3500

1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 11Y 12Y 13Y 14Y 15Y 16Y 17Y 18Y 19Y 20Y 21Y 22Y 23Y 24Y 25Y 26Y 27Y 28Y 29Y 30Y

Average coupon rate

Debt outstanding ($bn)

Maturity bucket
Simulate cost of funds and weighted average maturity of Treasury debt over the next 30 years 

10

 Assumptions:

o Interest rates increase by 100bp/year in 1Y, and 25bp/year in 30Y sector (other maturities are linearly interpolated)

o Interest rates peak at 3%, 3.75% and 4% in bills, 10Y and 30Y sectors, respectively. Term premium settles at 100bps.

o Ratio of bills to total Treasury debt outstanding remains constant through time

o No rate impact from changing issuance pattern

 Scenarios:

o Scenario 1 (baseline): %issuance in a specific maturity remains constant through time (23%, 15%, 21%, 16%, 16% and 

9%).

o Scenario 2: %issuance is uniform (17%, 17%, 17%, 17%, 16%, 16%).

o Scenario 3: %issuance in a specific maturity remains constant through time, but rates are shocked instantaneously 

higher by 300bp relative to the base case outlined above.

o Scenario 4: %issuance in a specific maturity remains constant through time, but rates are shocked higher after 10 years

by 300bp relative to the base case outlined above.

o Scenario 5: %issuance is uniform, but rates are shocked higher after 10 years by 300bp relative to the base case 

outlined above.

 Output: Projected “Weighted average cost of funds (WAC)” and “Weighted average maturity of outstanding debt stock (WAM)” 

over time
Uniform issuance extends WAM by 2 years without significantly increasing cost

11

Average maturity (WAM; years) Cost of funds (WAC)

Takeaways:

• Uniform issuance results in roughly a 2Y maturity 

extension

• Much of the extension happens during the first 10 years

Takeaways:

• Uniform issuance increases the cost of debt very 

marginally (relative to current issuance)

• When rates are shocked, about 80% of the shock gets 

incorporated into the cost of funds within 5 years

• Cost of issuing longer maturity debt is currently low but 

insurance benefits appear to be marginal
Benefits and cost of extending debt maturity

12

Benefits

 Mitigates volatility of borrowing costs over time

 Reduces rollover risk

o Higher cash balances will alleviate this problem

 Addresses ALM mismatch with long-maturity student loan assets held by Treasury

Cost

 May be expensive depending on term premium and/or liquidity premium

 Higher rates are generally accompanied by an improving economy; so tax receipts may offset interest costs of shortmaturity issuance. 

o This suggests that extending maturity makes most sense when chances of stagflation are high

 Economic theory suggests that nominal interest rates should converge towards nominal GDP growth rates, and short 

maturity debt allows interest expense to converge more quickly towards changing nominal growth rates
Treasury receipts are correlated with front end rates

13

Tax receipts and interest expense

-3%

-2%

-1%

0%

1%

2%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

1985 1990 1995 2000 2005 2010

Change in tax receipts as % of GDP

3m T-Bill yield

3m T-Bill Tax receipts growth

Growth in tax receipts and 3-month T-Bill yield

500

1,000

1,500

2,000

2,500

3,000

3,500

200

250

300

350

400

450

500

1988 1991 1994 1997 2000 2003 2006 2009 2012

Tax receipts ($bn)

Interest expense ($bn)

Interest expense ($bn) Tax receipts ($bn)
Historically, bill funding is more closely aligned with nominal GDP growth than 10Y Tsy funding costs 

since only 10% of the Tsy stock rolls over in a given year

14

Footnotes: 1) We take 5Y MA of all series to eliminate noise in the data. 2) WAC of 10Y Tsy bonds is computed by taking the average 

of 10Y Tsy yields over the past 10 years under the assumption that 10% of the outstanding debt stock is rolled every year.

0%

2%

4%

6%

8%

10%

12%

14%

1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014

5Y avg of nominal GDP lagged 5Y

5Y avg of 10Y Tsy yield

Nominal GDP vs. 10Y Treasury yield
Negative term premia would suggest that it is cheaper to issue intermediate debt, while low long 

term premia reflect low cost of protection against higher rates

15

 Caveat: It is difficult to estimate term premia because it is 1) time varying, and 2) hard to distinguish between expectations of drift to 

forwards vs. term premium

-1

0

1

2

3

4

5

6

1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2011 2015

10y term premium (%)

y = 0.30x - 0.31

R2 = 0.52

-1

0

1

2

3

4

5

6

0 2 4 6 8 10 12 14 16

10y term premium (%)

10y Treasury yield (%)

Kim-Wright term premium (past 20 years)

10-year ACM term premium (1961-2015) 10-year ACM term premium vs. yield (1961-2015)

Kim-Wright term premium vs. 10-year yield (past 20 years)

0.42

0.04

-0.04

-0.28 -0.28

0.57

-0.03 -0.14

-0.49 -0.51

0.81

-0.09

0.13

-0.38 -0.53

1.22

0.20

0.91

0.34

0.01

-0.80

-0.60

-0.40

-0.20

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1995 2005 2009 2010 Current

Term premium (%)

1Y Tsy TP 2Y Tsy TP 5Y Tsy TP 10Y Tsy TP
Treasury Bills offer “liquidity premium” over same maturity Notes and Bonds

16

 Liquidity premium may be quantified as 

 The yield spread between bill and short-maturity bonds, or

 The spread between hot-run and off-the-run bonds

 Eurodollar futures are all highly liquid at the front end, and so should boast only “term premium”

5-day average of richness/cheapness of bill yield relative to a Treasury par fitted curve; 

averaged over 1M, 3M and 6M hot-run bills; past 5Y; bp

Current

-18.3

Average

-8.8

-25

-20

-15

-10

-5

0

Jul-2010 Jul-2011 Jul-2012 Jul-2013 Jul-2014 Jul-2015
Simulations of 1Y and 1Yx1Y rates to test the likelihood of capturing term premium

17

Calibration inputs used to match averages of the past 20Y; 1Y vs 1Yx1Y swap rate

Levels as of 6 July 2015* Calibration inputs**

1Y 1Yx1Y 1Y 1Yx1Y

No. of simulations 5000 yrs

Starting yield 0.48% 1.21% 0.50% 1.25%

20Y average yield 3.13% 3.67% 3.10% 3.66%

20Y SD of 251-day chg in yield 1.28% 1.11% 1.27% 1.14%

20Y correl of 251-day yield changes 85% 84%

Drift of 1Y to 1Yx1Y forward over 251-days 1%

Mean reversion 5% 5%

 Number of simulations: 5,000 years

 Assumptions

o Zero lower bound does not apply

 Inputs

o Drift of 1Y rate towards the 1Yx1Y forward (0% - 100%)

o Mean reversion of 1Y and 1Yx1Y rates (5% constant) towards their past 20Y average

o SD of 251-day change in 1Y and 1Yx1Y rates to match their past 20Y average

o Correlation between 251-day change in 1Y and 1Yx1Y rate to match the past 20Y average

 Outputs

o Average and SD of interest savings resulting from issuing 1Y paper vs. 2Y paper over 5,000 years

o Probability that issuing 1Y paper will result in interest cost saving relative to issuing 2Y paper, over any 30Y period
The probability of saving on interest costs over any 30 year period quickly declines as the drift of 

1Y rates towards 1Yx1Y forwards increases

18

X-axis: drift of 1Y towards 1Yx1Y forwards over the next year*

* For example, if 1Y and 1Yx1Y are currently at 3% and 3.5%, then a 20% drift suggests that one-year from now, the 1Y rate will have a mean of 3% + 

(3.5% - 3%) * 20% = 3.10%

Note: Contrary to intuition, the probability of saving interest cost by issuing short maturity paper is slightly higher than 50% even with zero term 

premium in the curve (100% drift). This is because of mean reversion in rates, which ensures that average rates in the simulation don’t get too far out 

of line with observed 20Y average rates.

Simulated probability that issuing 1Y paper rather than 2Y paper will save Treasury issuance costs over the next 30 years 

vs. % drift of 1Y rates towards 1Yx1Y forwards

100% term premium Zero term premium

Y-axis:

Probability that issuing 1Y paper 

will result in interest cost saving 

relative to issuing 2Y paper, 

over any 30Y period

A higher number argues for issuing 

shorter maturity

A lower number argues for issuing 

longer maturity

Term premium is close to 

zero currently, suggesting 

that the probability of saving 

interest cost by issuing shortmaturity paper is only a tad 

over 50% at this time
These simulation results suggest there is a benefit to issuing short term debt, however, it is not as 

large as it has been historically

19

Realized front-end term premium* around the start of 

Fed tightening regimes is typically negative

*Footnote: realized front-end term premium is defined as 1Yx1Y 

swap rate minus realized 1Y rate after one-year

2Y Treasury term premium*

-4

-2

0

2

4

6

8

1991 1994 1997 2000 2003 2006 2009 2012 2015

Federal Funds target rate

Realized front-end term premium*

*Footnote: term premium is calculated by Don Kim and Jonathan 

Wright’s paper An Arbitrage-Free Three-Factor Term Structure Model 

and the Recent Behavior of Long-Term Yields and Distant-Horizon 

Forward Rates

-2

-1

0

1

2

3

4

1990 1995 2000 2005 2010 2015

Term premium for 10Y Treasury*

Term premium for 2Y Treasury*

Relative to history

Current Percentile Z-score

2Y -0.51% 18th %tile -1.1

10Y 0.01% 12th %tile -1.1
Summary and conclusions

20

 Interest rates are low on a historical basis, both on an absolute basis and relative to inflation and growth, 

and term premia are very low or negative across the yield curve.

 Higher short-term interest rates will lead to greater debt service burden, although the strong correlation 

between Treasury Bill yields and tax receipts helps alleviate the problem.

 Our simulations suggest that Treasury can extend WAM substantially while incurring only modest 

additional cost. However, insurance benefits are also low. Simulations also suggest a reduced probability 

of savings by issuing short.

 In the current interest rate environment intermediate issuance captures the lowest absolute term premia 

but longer maturities have comparable relative term premia.

 More work should be done on an asset liability framework for managing government debt and the 

durability of liquidity premium in the front end going forward.
Appendix

21
Simulation parameters

22

 Simulate cost of funds and weighted average maturity over the next 75 years (we only show progression over the next 30 years)

 Methodology / assumptions:

o Interest rates increase by 100bp/year in 1Y, and 25bp/year in 30Y sector (other maturities are linearly interpolated)

o Interest rates peak at 3%, 3.75% and 4% in bills, 10Y and 30Y sectors, respectively

o Gross issuance in a given year = Treasuries rolling out of the 1Y bucket + CBO projections of deficit + $120bn student issuance per 

year (growing at a constant 3%/year)

o Now split the gross issuance into seven maturity buckets: Bills, 2Y, 3Y, 5Y, 7Y, 10Y, and 30Y

o First determine net issuance in Bills.

• Assumption: Ratio of bills to Treasuries outstanding remains constant through time

• Bills outstanding at time T+1 = Bills outstanding at time T + (Net deficit) * (Ratio of bills to total Treasuries outstanding at 

time T)

o Next, determine gross issuance in the 2Y, 3Y, 5Y, 7Y, 10Y and 30Y sectors

• Scenario 1 (baseline): %issuance in a specific maturity remains constant through time (23%, 15%, 21%, 16%, 16% and 9%).

• Scenario 2: %issuance is uniform (17%, 17%, 17%, 17%, 16%, 16%).

• Scenario 3: %issuance in a specific maturity remains constant through time, but rates are shocked instantaneously higher 

by 300bp relative to the base case outlined above.

• Scenario 4: %issuance in a specific maturity remains constant through time, but rates are shocked higher after 10 years by 

300bp relative to the base case outlined above.

• Scenario 5: %issuance is uniform, but rates are shocked higher after 10 years by 300bp relative to the base case outlined 

above.

 Output: Projected “Weighted average cost of funds (WAC)” and “Weighted average maturity of outstanding debt stock (WAM)” over time
Simulated maturity distribution of outstanding debt for current vs. uniform issuance patterns

23

Scenario #1: %issuance in a specific maturity remains constant through time

Scenario #2: % issuance is uniform
Student loan assets on the Treasury balance sheet reduce the WAM by around 1 year

24

Gross & net maturity (years) for baseline scenario Gross & net maturity (years) for uniform %issuance scenario

Assumptions

• Student loan assets are currently at $1.175tn with net issuance of $120bn in 2016

• Net issuance grows by 3% per year indefinitely