Presenta

Treasury Borrowing Advisory 

U.S. Department o

Office of Deb

Oc
Office of Debt Management

- FY 2007 budget deficit was $163 billion - OMB expects improvement to budget deficits afte

Projected Budget Results

(+ Deficit/- Surplus)

-50

0

50

100150200250300

2006 2007 2008 2009 2010 2011 

$ billions
Office of Debt Management

Growth in tax receipts continued in FY 2007 but at slower pace versus recent years

Fiscal Year Individual and Corporate Tax Receipts

Change From Previous Fiscal Year

0%5%

10%15%20%25%

 2004 2005 2006 2007

$207 billion

$73 billion

 $136 billion

 $192 billion
Office of Debt Management

Still, FY 2007 tax receipts were almost 10 percent hin FY 2006

Individual and Corporate Tax Receipts 

Fiscal Year to Date

0

200400600800

10001200140016001800

Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug 

$ billions

FFFFF
Office of Debt Management

FY 2007 outlays were less than 3 percent higher th2006

Total Outlays 

Fiscal Year to Date

0

500

10001500200025003000

Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug 

$ billions

FY 2FY 2FY 2FY 2FY 2

FY07 Outlays smallest year-over-year growth rate in recent years

FY 2006 FY 2007 % change

Social Security Benefits 545 577 6%

Defense 499 530 6%

Medicare 382 441 15%

 Net Interest 228 238 4%

Education 93 66 -29%

Top 5 Expenditure Categories

($ Billions, Y-O-Y % change)
Office of Debt Management

Net coupon issuance is at the lowest level since F

Net Coupon Issuance

-300-200-100

0

100200300400500

2000 2001 2002 2003 2004 2005 2006 

End of Fiscal Year

$ Billions
Office of Debt Management

State and Local Government Non-Marketable issua2008 remains uncertain given recent volatility

State and Local Governments (SLGS) 

Calendar year

0

102030405060

$ Billions

Gross IssuesRedemptions

-10

-5

05

1015202530

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 

$ Billions

Net SLGs
Office of Debt Management

Money rates have come down since August, but voremains with a potential penalty to growth

Money Rates 

Weekly Averages

4.604.805.005.205.405.605.806.00

1/5/07

1/19/07

2/2/07

2/16/07

3/2/07

3/16/07

3/30/07

4/13/07

4/27/07

5/11/07

5/25/07

6/8/07

6/22/07

7/6/07

7/20/07

8/3/07

8/17/07

8/31/07

9/14/07

O/N LIBOR ($, avg %)1-mo LIBOR ($, avg %)3-mo LIBOR ($, avg %)6-mo LIBOR ($, avg %)Fed Funds (effective,avg %)
Office of Debt Management

Similarly, short term rates have displayed increaseacross sectors

Weekly Average Commercial Paper Rates

4.604.805.005.205.405.605.806.006.206.40

1/6/07

1/20/07

2/3/07

2/17/07

3/3/07

3/17/07

3/31/07

4/14/07

4/28/07

5/12/07

5/26/07

6/9/07

6/23/07

7/7/07

7/21/07

8/4/07

8/18/07

9/1/07

Percent

1-d ABCP 7-d ABCP15-d ABCP 1-mo ABCP1-d FCP 7-d FCP15-d FCP 1-mo FCP1-d NFCP 7-d NFCP15-d NFCP 1-mo NFCP
Office of Debt Management

Credit concerns this past August created stress acterm markets – including the Treasury Bill market

4-Week Bills

05

101520253035

1/3/2007 1/17/2007 1/30/2007 2/13/2007 2/27/2007 3/13/2007 3/27/2007 4/10/2007 4/24/2007 5/8/2007 5/22/2007 6/5/2007 6/19/2007 7/3/2007 7/17/2007 7/31/2007 8/14/2007 8/28/2007 9/11/2007 9/25/2007 10/10/2007

$ Billions

0.001.002.003.004.005.006.00

Percent

Auction Size (LHS)CMTs (RHS)

4-Week Bills

Auction Tails vs. CMTs

-0.50

0.000.501.001.502.002.50

1/3/2007 1/17/2007 1/31/2007 2/14/2007 2/28/2007 3/14/2007 3/28/2007 4/11/2007 4/25/2007 5/9/2007 5/23/2007 6/6/2007 6/20/2007 7/4/2007 7/18/2007 8/1/20

Basis Points

Auction DataCMTs
Office of Debt Management

Treasury’s bill issuance increased in the last quartFY 2007

Weekly Bills Outstanding

FY 2004-2007

$750$800$850$900$950

$1,000$1,050$1,100

10/3

10/10 10/1710/24

10/31

11/7

11/14

11/21

11/29

12/5

12/12

12/1

12/

1/2

1/9

1/16

1/23

1/30

2/6

2/13

2/20

2/27

3/6

3/13

3/20 3/27 4/10 4/3 4/17 4/24

5/1

5/8

5/15

5/22

5/29

6/5

6/12

6/19

6/26

7/3

7/10

7/17

7/24

7/31

8/7

8/14

8/21

8/28

9/4

9/11

9/18 9/25

FY '04FY '05FY '06FY '07FY '08
Office of Debt Management

Cash volatility remains a major factor driving bill isvolatility

Treasury Daily Operating Cash Balance

0

255075

100125

Jan Feb Mar Apr May Jun Jul Aug 

$ billions

FY 2005FY 2006FY 2007FY 2008

Note: Data through October 2
Office of Debt Management

Net foreign purchases of US securities declined in 

Net Foreign Purchases of US Long-Term Securities

-50

0

50

100150200

Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 

$ Billions
Office of Debt Management

Interestingly, however, 4 of the top 5 holders of Trhave increased their holdings from a year ago

Top 5 Holders of Treasury Debt

0

100200300400500600700800

Jan-2004 Jan-2005 Jan-2006 Jan-2007

$Billions

Japan (LHS) China (LHS) UK (RHS) Oil Exporters (RHS) Brazil (RHS)

Aug. 2006 Aug. 2007 % change

Japan 623.5 585.6 -6%

China 386.5 400.2 4%

UK 54.6 244.0 347%

Oil Exporters 116.6 123.3 6%

Brazil 43.1 106.7 148%

Change in Holdings of Treasury Securities

($ Billions, Y-O-Y % change)
Office of Debt Management

The economic outlook impacts future financing anconsiderations

 Treasury constantly revisits its assumptions and forecasts 

making debt issuance decisions, but overall strategy rema

consistent

 Debt issuance changes are transmitted to the market as 

transparently as possible

 During rapid changes to the economy, such changes may 

more pronounced

 Treasury maintains a bias towards the shorter end of the c The deficit has been cut in half ahead of schedule, and O

forecasts a balanced budget by 2012

 We aim to preserve flexibility to address a range of fiscal 
Office of Debt Management

 In light of intermediate and longer-term fiscal trends, as w

recent economic and market conditions, what advice wou

Committee give in terms of Treasury’s debt issuance?
Treasury Borrowing Advisory Committee Pres

the U.S. Treasury

Securitization, Ratings Agencies and the Money M

October 30, 2007
10452 

Securitization, Rating Agencies and the Money Markets

What are the Committee’s views regarding recent ma

dislocations in short term credit markets and their relatio

if any, with increased securitization, rating agency evalu

and money market financing structures? 
10452 

Loan 1Loan 2Loan 4Loan 5

Loan 5000++

Loan 3

Reference Pool

of Assets #1

(Mortgage Loans)

The Basic Building Blocks of Securitization

Residual

Tranches

A Tranches

AA Tranches

AAA Tranches

ABS 1

Tranched

BBB Tranches

Pr

In

Po
10452 

The Securitization Market Has Grown Explosively*As of June 30Source: The Securities Industry and Financial Markets AssociationOutstanding US ABS Issuance US ABS Issuance by Segment

0.00.51.01.52.02.53.0

96 97 98 99 00 01 02 03 04 05 06 07*

$ Trillions

Other (includes 

ABS CDOs)

41% 

Auto L

8%

Manufactur

Housing

1%

Student Loans

9%
10452 

Geographical Breakdown of Issuance

Share of Issuance (1996–Oct 2007) 

$486 $489

$80

US Europe Asia

Global Long-Term ABS Issuance (Jan–Oct 2007): $ Billions Source: JPMorgan Chase

Asia

8%

Europe 

31%
10452 

ABCP Composition and Impact on Bank Balance Sheets

ABCP Composition*

$1.5 Trillion** 

As of July 2007*Representative sample of multiseller ABCP; accounts for half of ABCP outstanding**All ABCP outstandingSource: Fitch, Lehman Brothers and UBS

Bank Balance Sh

$ Trillions 

$7.2$1.6$4.4$1.2 

Student Loans

9%

CDOs, CLOs

6%Consumer 

Loans

5%

Other

15%

Residential 

Mortgages

9% Corporate Loans

13%

Auto-Related 

Loans

14%

Trade 

Receivables

14%

Credit Cards

15%
10452 

The Benefits of SecuritizationInvestors: Diversification Access to a broader array of asset classes Customization of cash flows (term, rating, etc.)

 Capital efficiency for regulated institutions Wider yield spread versus corporate debt

Originators: Diversify funding base Broader array of investors Engineers capacity in the financial system A global investor base
10452 

Subprime: Who Holds the Risk?Securitization/liquidity enabled each link in the securitization chain to have les

financial stake in the process as time went by:

 A borrower doesn’t put any equity in the house A mortgage broker gets a commission An originator/bank securitizes the risk fully and frees up its balance sheet An investment bank fully places the mortgage securitization and retains no risk An investment bank works with an asset manager to structure and sell a CDO and colle

Liquidity in the system created an insatiable demand from the CDO buyers for 

fuelling the housing boom 

Originators responded to the demand from the CDOs with more and more pro

underwriting standards because the CDOs, bankers/underwriters and rating ainsist on it
10452 

An Example: Subprime Mortgage Risk*Mortgage insurers have first-loss exposure on approximately $700 billion of GSEs and $100 billion of ABSSource: Federal Reserve, Lehman Brothers and AB$ Billions

GSEs $4,300* Banks 1,400 $20Thrifts 750 5Finance Companies 400 5Credit Unions 200 REITs 150 5Asset-Backed Securities 1,900* 85Total $9,100 $1,20

Home Mortgages Sub
10452 

Loan 1Loan 2Loan 4Loan 5

Loan 5000++

Loan 3

Reference Pool

of Assets #1

(Mortgage Loans)

Expanding the Role of Securitization

Reference Pool

of Assets #2

(BBB-Rated ABS)

BBB ABS 1BBB ABS 2

BBB ABS 4

BBB ABS 5

BBB ABS 125

BBB ABS 3

Residual

Tranches

A Tranches

AA Tranches

AAA Tranches

ABS 1

Tranched

BBB Tranches

Tranched

Residual

Tranches

A Tranches

AA Tranches

AAA Tranches

CDO

BBB Tranches

Principal

and 

Interest

Portfolio

Loss
10452 

Role of the Rating Agencies: What Were the Fundamental ProOptimistic assumptions were made on new untested types of mortgages

An actuarial approach to evaluating risk with limited historical data led to a flaw

Most assumptions were predicated on gradual deflation of the housing bubble
10452 

Moody’s Rating Volatility Analysis

Includes 1st Lien, 2nd Lien, HELOC, NIM, HLTV. Withdrawn ratings were added back to matrix at last rating level.

US Subprime ABS Five-Year Rating Transition Matrix by Original Rating (19

Moody’s 2006 Vintage Rating Transitions 

Aaa Aa A Baa Ba B 

Aaa 96% 2% 1% 0% 0% 0% Aa 10% 76% 8% 3% 1% 0% A 2% 8% 76% 6% 4% 2% Baa 0% 1% 5% 64% 9% 4% Ba 0% 2% 1% 6% 64% 6% 

Orig. Rating Aaa Aa A Baa Ba B Aaa 100% 0% 0% 0% 0% 0% Aa 0% 100% 0% 0% 0% 0% A 0% 0% 44% 28% 18% 10% Baa 0% 0% 0% 17% 19% 32% Ba 0% 0% 0% 0% 6% 19% 

Source: Moody’s and AB

Includes home equity ABS securitizations
10452 

Role of the Rating Agencies: Contributing FactorsThere is an inherent conflict of interest in the ratings business:

 Agencies get paid per deal (based on deal size) The higher the rating, the more deals that the rating agency will be asked to rate Underwriters get paid per deal, and reward agencies for higher ratings and lower requir

Rating agency models can be gamed: bankers try to outsmart the models

Bankers will also shop agencies. The “norm” is that both S&P and Moody’s ar

tranches, but at certain times bankers will select one over the other. There is a the spurned agency will often change its criteria to regain market share

Rating agencies cannot keep up with innovation and have increasingly been m

performance of new structures based on subjective readings of limited historic

Rating agencies take data from bankers/issuers “as is.” They have no indepen

function/requirement to test a sample of the data for authenticity
10452 

Role of the Rating Agencies: Who Was Behind the Curve?

The Agencies History already shows that ratings within structured finance were in some cases flawed Perception is that they built ratings based on weak historical data and derived false comfo There was probably a desire not to “say no” to issuers or bankers

 Past episodes in the credit markets came and went with little consequence for the ratings 

Investors In some cases investors placed too much reliance on the agencies and derived a false se

their ratings and the highly reputable investment banks marketing securitized deals

 Investors saw assets offering attractive returns for a given rating, and faced with regulato

other motives, engaged in “rating arbitrage”

 Recently, investors were also caught out because they were suddenly forced to mark to m

securities; they did not realize at some point they may be forced to sell
10452 

A Reminder: Securitization Risk Is Different from Traditional Co

CDS 1CDS 2CDS 4CDS 5

CDS 125

CDS 3

0% to 3% Tranche

(Equity**)

3% to 7% Tranche

(Junior Mezzanine) B-*

7% to 10% Tranche

(Mezzanine) AA-*

10% to 15% Tranche

(Senior Mezzanine) AAA*

15% to 30% Tranche

(Senior) AAA*

30% to 100% Tranche

(Super Senior) AAA*

Contractually

Tranched

Reference Pool of Assets 

(DJ CDX IG 10-Year)

Average Rating: BBB+

*Implied S&P rating**Not rated

Portfolio

Loss

Securitization Offers Diversification/Yield Enhancement 

Index vs. AA-Tranche Loss:Tranche Size: 7% to 10%, Recovery = 

0

20406080

100120

0 2 4 6 8 10 12 14 

Number of Defa

Percent
10452 

Potential Threats as Result of SecuritizationSecuritization is of tremendous benefit to the financial system because it distr

to capital that is seeking returns

But because the risk is so widely distributed to both regulated and unregulated 

little transparency as to where the risks reside

While the size of the problem can be deduced in raw numbers from the size o

market (Subprime ABS $850 billion), it may be difficult to predict how risk holdtimes of distress

Information and transparency are lost in each step of the securitization proces

mortgage origination to mortgage securitization to the CDO. Each step is depeother but relies heavily on the statistics provided by the previous holder of the 

At present, money market lenders, asset-backed commercial paper issuers (in

sponsors and rating agencies are still sorting out the recent market disruption “mark-to-market” and short-term funding needs
10452 

Necessity of SecuritizationSecuritization makes the financial system more resilient to shocks by dispersi

 US subprime risk is being borne by German and Chinese banks, hedge funds, insuranc

This is much preferred to mortgage risk being concentrated in the hands of one industry

(as was the case with the Savings and Loan crisis)

 Allows all types of capital to find investors as opposed to just regulated bank capital. Th

cost of borrowing for the consumer

 Increased availability—home ownership has increased to 69% from 64% in the mid 199 Securitization and ratings help create a common language and framework for investors 

Securitization enables entrepreneurs to establish originators with much less c

otherwise be required. This allows for innovation and competitiveness within t

Securitization also allows larger/regulated banks to leverage their lending and 

expertise without deploying as much capital as they otherwise would. This in t

up bank capital to lend in other areas, which in turn should be positive for the 
10452 

What Can Be Done in the Future? The root cause of the current debacle is a bubble in lending. Weaknesses in the rating ag

exacerbated the situation but did not cause it

 Issuers should be forced to prepay in full for ratings, and these ratings should all be

publicly disclosed or, when possible, relate payments to the long-term stability of ratings

 Ratings agencies and underwriters might be persuaded to adopt such measures as a

“voluntary code of good practice” in exchange for their almost duopolostic/oligopolistic sta

 Agencies should consider adding a “liquidity score” to their ratings, granting a high score 

listed and well-quoted market

 Repo counterparts should be encouraged to be more cautious with respect to “pledged” c

should consider mandating capital charges on certain instruments that are commensurate 

 On the heals of over two million sub-prime owners struggling to keep their homes, “truth i

should be re-evaluated by policy makers

 Ultimately, investors must recognize that structured finance events are low frequency but 

in nature
O C 

Treasury Borrowing Advisory Committee Presentation to the U.SCurrent and future demand for US Treasuries
Annual US budget surplus/deficit and current account surplus/ deficit (USD bln; fiscal year total with CBO and co

for 2007 and 2008*) versus US nominal broad effective exchange rateAnnual US budget surplus/deficit and current account surplus/ deficit (USD bln; fiscal year total with CBO and cofor 2007 and 2008*) versus US nominal broad effective exchange rate

Source: US Treasury, CBO, and JPMorgan; Consensus estimate for 2007 and 2008 provided by Consensus Economics Inc

Current account and budget deficits

-1100

-900-700-500-300-100

100

1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 

USD NEER

US budgetsurplus/deficit

US current accountsurplus/deficit
Total annual net purchases of Treasuries, and total annual net 

purchases of Agencies, Corporate bonds, and corporate stocks by foreigners ($bn, left axis) versus sum of US Current Account deficit and US Federal Budget Deficit (annual, $bn, right axis, inverted)Total annual net purchases of Treasuries, and total annual net purchases of Agencies, Corporate bonds, and corporate stocks by foreigners ($bn, left axis) versus sum of US Current Account deficit and US Federal Budget Deficit (annual, $bn, right axis, inverted)

Source: TIC, Bureau of Economic Analysis, Treasury Department

Strong foreign demand has funded the US deficit...

Net foreign total purchases (USDbln, effective exchange rateNet foreign total purchases (USDbln, effective exchange rate

Source: US Treasury and JPMorgan

Net foreign UST purchases (USDbln, 1effective exchange rateNet foreign UST purchases (USDbln, 1effective exchange rate

-5

05

101520

Jan

90

Jan

92

Jan

94

Jan

96

Jan

98

J

0

Net foreign UST purchases12-mon avg 

0

102030405060

Jan

90

Jan

92

Jan

94

Jan

96

Jan

98

J

Total net foreign purchases12-mon avg 

-200

0

200400600800

100012001400

1980 1985 1990 1995 2000 2005

-1400-1200-1000-800-600-400-2000200

DeficitsNet Treasury purchases Net Agency, Corporate, and Equity purchases 
...from both private and official sources 

Source: TIC

Net purchases of US securities by foreign official accounts and private investors, monthly data; $bn

Net purchases of US securities by foreign official accounts and private investors, monthly data; $bn

Source: TIC

Net purchases of Treasury secuand private investors, monthly 

Net purchases of Treasury secuand private investors, monthly 

-45-25

-5

1535557595

115135155175

Jan 02 May 03 Sep 04 Jan 06 May 07

Total Official Total Private

-45-25

-5

1535557595

115135155175

Jan 02 May 03 S

Total Official T
Foreign demand for Treasuries has evolved over time

12-month moving average of total net purchases of Treasuries by foreigners; $bn12-month moving average of total net purchases of Treasuries by foreigners; $bn

Source: TIC

12-month moving average of total mTreasuries by foreigners, and 12-mnet purchases by China, Japan, Car

12-month moving average of total mTreasuries by foreigners, and 12-mnet purchases by China, Japan, Car

Source: TIC

-10

0

10203040

Jan 80 Aug 85 Feb 91 Aug 96 Feb 02 Aug 07

-10

0

10203040

Jan 00 Aug 01 Feb 03 
Japan and China remain the largest holders of Treasuries 

Major foreign holders of Treasury securities (%) Major foreign holders of Treasury securities (%)

Source: TIC

Major foreign holders of Treas

Major foreign holders of Treas

Source: TIC

0%

10%20%30%40%50%60%70%80%90%

100%

2001 2002 2003 2004 2005 2006 2007

OtherJapan

China UK

Oil exporters

Caribbean

Brazil

level 

Japan 585.China 400.United Kingdom 2/ 244.Oil Exporters 3/ 123.Brazil 106.Caribbean Banking Centers4/ 76.Luxembourg 63.Hong Kong 56.Taiwan 52.Korea 48.Germany 44.Singapore 34.Mexico 32.Switzerland 31.Turkey 27.Canada 24.Netherlands 21.Thailand 20.France 16.Sweden 16.Russia 13.Poland 13.Ireland 12.Italy 12.Israel 11.Belgium 11.India 10.All Other 117.Total 2231.Foreign Official 1427. Foreign Official Bonds 1247. Foreign Official Bills 179.

1/ Estimated foreign holdings of U.S. Treasury m reported under the Treasury International Cap Surveys of Foreign Holdings of U.S. Securities  2/ United Kingdom includes Channel Islands an 3/ Oil exporters include Ecuador, Venezuela, Ind Saudi Arabia, the United Arab Emirates, Alger 4/ Caribbean Banking Centers include Bahamas Beginning with new series for June 2006, als

August 2007 
Rolling 12-month correlation between 1-month % change in USD 

real effective exchange rate and net foreign purchases of USTRolling 12-month correlation between 1-month % change in USD real effective exchange rate and net foreign purchases of UST

Source: JPMorgan and US Treasury

-1.0-0.5

0.00.51.0

Dec 88 Sep 92 Jun 96 Feb 00 Nov 03 Aug 07

Rolling 12-month correlation betwcurve and net foreign purchases oRolling 12-month correlation betwcurve and net foreign purchases o

-1.0-0.5

0.00.51.0

Dec 88 Sep 92 Jun 96 

Source: JPMorgan and US Treasury

Structural factors, not market dynamics, have driven US demand
Recent FX reserves accumulation in Asia Recent FX reserves accumulation in Asia

Reserve growth continues at rapid rate in emerging Asia...

0%

10%20%30%40%50%60%

INR PHP CNY THB IDR MYR SGD KRW HKD TWD

%yoy as of September

0

500,000

1,000,0001,500,000

CNY HKD KRW TWD PHP 

Total FX reserves (USD mln)

Source: Respective central banks Source: Respective central banks
Source: World Economic Outlook

Middle East aggregate foreign exchange reserves, ex-gold (USD, bln)

Middle East aggregate foreign exchange reserves, ex-gold (USD, bln)

...and in oil exporting countries 

-100

0

100200300400500600700

-10 10 30 

W

Current account surplus of oil exporters,

USDbn

Regression of current account surplu(USDbln) and annual WTI average prRegression of current account surplu(USDbln) and annual WTI average pr

Source: IMF

3080

130180230280

90 94 98 02 06

Foreign exchange (minus gold) reserves, USDbln
Year-over-year growth in FX reserves in Brazil, Russia, India and 

China (%)Year-over-year growth in FX reserves in Brazil, Russia, India and China (%)

Focus on BRIC – Brazil reserves appreciating most quickly

Year-over-year growth in FX rChina (%)Year-over-year growth in FX rChina (%)

-20

0

20406080

100120140160

Jan 03 Dec 03 Dec 0

Russia

China

0

102030405060

Jan 00 Aug 01 Feb 03 Sep 04 Mar 06 Oct 07

Source: IMF Source: IMF
Source: IMF

Central banks have marginally reduced % of reserves held in USD Central banks have marginally reduced % of reserves held in USD

Central bank reserve diversification

Currency composition of global official FX reserves

0%

10%20%30%40%50%60%70%80%90%

100%

99 01 03 05 07

USDEUR

JPY

GBP

Official foreign flows, by asset based on first 8 months of datOfficial foreign flows, by asset based on first 8 months of dat

Source: TIC

-50

0

50

100150200250

Treasuries Agencies 

MBS

2004 2005 2006 

Diversification trends: 
Sovereign Wealth Funds: an alternative investment for cen

Top existing Sovereign Wealth Funds Top existing Sovereign Wealth Funds

Sources: Norges Bank, Saudi Arabian Monetary Agency, Ministry of Finance in Russia, Government of Singapore Investm

Investment Company (PIMCO), JPMorgan and Toloui (2007). Kuwait assets based on PIMCO estimates

Assets under management

Country Sovereign Wealth Funds (approximate, USDblns) UAE Abu Dhabi Investment Authority 500-1000 Norway Government Pension Fund more than 300 (as of April 2007) Kuwait Kuwait Investment Authority 150-250 Russia Oil Stabilization Fund 122 (as of June 2007) China China Investment Corporation 200 Singapore Government of Singapore Investment Corporation 200-330 Sovereign external assetsSaudi Arabia Monetary Agency and govt. institutions 276 
Private foreign UST purchases have remained robust even 

allocation has shifted

Private flows, by asset class ($on first 8 months of dataPrivate flows, by asset class ($on first 8 months of data

0

100200300400500

Treasuries Agencies 

MBS

2004 2005 2006 

Source: TIC

-30-15

0

15304560

Jan 02 Mar 03 Apr 04 Jun 05 Jul 06 Aug 07

Net purchases of US Treasuries by private accounts ($bn) Net purchases of US Treasuries by private accounts ($bn)

Source: TIC Source: TIC
The August TIC report

Net foreign purchases of long-term US securities by month; 2007 vsmedian purchase during 2001-2006, ($bn)Net foreign purchases of long-term US securities by month; 2007 vsmedian purchase during 2001-2006, ($bn) Net foreign purchases of US Trea

purchase during 2001-2006, ($bn

Net foreign purchases of US Treapurchase during 2001-2006, ($bn

Source: TIC

-10

0

10203040

Jan Feb Mar Apr May J

Source: TIC

-75-50-25

0

255075

100125150

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

20072001-06
3-month moving average of monthly net purchases of US Treasuries 

by Japan; $bn3-month moving average of monthly net purchases of US Treasuries by Japan; $bn

Source: TIC

3-month moving average of montby China; $bn

3-month moving average of montby China; $bn

Source: TIC

August showed a meaningful decline in Asian UST deman

-30-25-20-15-10

-5

05

101520253035

Jan 00 Aug 01 Feb 03 Aug 04 Feb 06 Aug 07

August 2007 

-$24bn 

-30-25-20-15-10

-5

05

101520253035

Jan 00 Aug 01 Feb 03 
...however, flows from other key regions remained support

3-month moving average of monthly net purchases of US Treasuries through UK; $bn3-month moving average of monthly net purchases of US Treasuries through UK; $bn

Source: TIC Source: TIC

3-month moving average of montthrough Caribbean countries; $b

3-month moving average of montthrough Caribbean countries; $b

-30-25-20-15-10

-5

05

101520253035

Jan 00 Aug 01 Feb 03 Aug 04 Feb 06 Aug 07

August 2007 

$33bn 

-30-25-20-15-10

-5

05

101520253035

Jan 00 Aug 01 Feb 03 
Recent Fed custody data suggest a moderate rebound in ne

purchases of Treasuries

Source: Federal Reserve Source: Federal Reserve

Fed custody holdings of Treasuries for foreign official accounts; $bn

Fed custody holdings of Treasuries for foreign official accounts; $bn Fed custody holdings of Treasurie

$bn Fed custody holdings of Treasurie

$bn

500700900

11001300

Jul 96 Oct 98 Jan 01 Apr 03 Jul 05 Oct 07

1200121012201230124012501260

07 Jun 05 Jul 02 Aug 
Key issues for gauging future Treasury demand

 International currency policy and FX reserve ac Investment of FX reserves Foreign private flows US economic outlook Geopolitical issues Pension fund demand Entitlement changes