Presenta

Treasury Borrowing Advisory 

U.S. Department o

Office of Deb

Ja
Office of Debt Management

Fiscal Outlook
Office of Debt Management

Revenue from individual and corporate tax receiptto grow, though at a more moderate pace...

Individual and Corporate Tax Receipts 

Fiscal Year to Date

0

200400600800

10001200140016001800

Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug 

$ billions

$ b

FY 200FY 200FY 200FY 200FY 200FY 200

2004 2005 2006 2007 2008

4.9% 15.0% 11.8% 12.4% 4.8%

Year-Over-Year Growth in Cumulative Receipts 

End of FY Q1
Office of Debt Management

While the pace of expenditures has accelerated

Total Outlays 

Fiscal Year to Date

0

500

10001500200025003000

Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug 

$ billions

$ b

FY 2003FY 2004FY 2005FY 2006FY 2007FY 2008

2004 2005 2006 2007 2008

6.2% 6.0% 7.6% 0.7% 8.8%

Year-Over-Year Growth in Cumulative Outlays 

End of FY Q1
Office of Debt Management

Year-over-year growth in outlays has exceeded that since October, reversing the trend of the past fiscal y

Federal Outlays and Net Receipts

 Year over Year % Change

0.0%2.5%5.0%7.5%

10.0%12.5%15.0%

Oct-06

Nov-06

Dec-06

Jan-07

Feb-07

Mar-07

Apr-07

May-07

Jun-07

Jul-07

Aug-07

Sep-07

Oct-07

Nov-07

Outlays Net Receipts
Office of Debt Management

Mitigating volatility in cash balances resulting from receipts, redemptions, and other factors remains c

Treasury Daily Operating Cash Balance

0

255075

100125

Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug 

$ billions

FY 2006FY 2007FY 2008

Note: Data through January 24, 200
Office of Debt Management

Treasury’s bill issuance increased in the first quarFY 2008

Weekly Bills Outstanding

FY 2004-2008

$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

12/19

12/26

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

O

 

 

Absolute Percent C
Office of Debt Management

Maturing 3-year and 5-year notes create large outfcash management challenges

Coupons Maturing

January 15, 2008-May 15, 2037

0

20406080

100120

15-JAN-2008

31-JAN-2008

15-FEB-2008

29-FEB-2008

31-MAR-2008

30-APR-2008

15-MAY-2008

31-MAY-2008

30-JUN-2008

31-JUL-2008

15-AUG-2008

31-AUG-2008

15-SEP-2008

30-SEP-2008

15-OCT-2008

31-OCT-2008

15-NOV-2008

30-NOV-2008

15-DEC-2008

31-DEC-2008

15-JAN-2009

31-JAN-2009

15-FEB-2009

28-FEB-2009

15-MAR-2009

31-MAR-2009

15-APR-2009

30-APR-2009

15-MAY-2009

31-MAY-2009

15-JUN-2009

30-JUN-2009

15-JUL-2009

31-JUL-2009

15-AUG-2009

31-AUG-2009

15-SEP-2009

30-SEP-2009

15-OCT-2009

31-OCT-2009

15-NOV-2009

30-NOV-2009

15-DEC-2009

31-DEC-2009

15-JAN-2010

15-FEB-2010

15-MAR-2010

15-APR-2010

15-MAY-2010

15-JUN-2010

15-JUL-2010

15-AUG-2010

15-SEP-2010

15-OCT-2010

15-NOV-2010

15-DEC-2010

15-JAN-2011

15-FEB-2011

28-FEB-2011

31-MAR-2011

15-APR-2011

30-APR-2011

31-MAY-2011

30-JUN-2011

31-JUL-2011

15-AUG-2011

31-AUG-2011

30-SEP-2011

31-OCT-2011

30-NOV-2011

31-DEC-2011

15-JAN-2012

31-JAN-2012

15-FEB-2012

29-FEB-2012

31-MAR-2012

15-APR-2012

30-APR-2012

31-MAY-2012

30-JUN-2012

15-JUL-2012

31-JUL-2012

15-AUG-2012

31-AUG-2012

30-SEP-2012

31-OCT-2012

15-NOV-2012

30-NOV-2012

31-DEC-2012

15-FEB-2013

15-MAY-2013

15-JUL-2013

15-AUG-2013

15-NOV-2013

15-JAN-2014

15-FEB-2014

15-MAY-2014

15-JUL-2014

15-AUG-2014

15-NOV-2014

15-JAN-2015

15-FEB-2015

15-MAY-2015

15-JUL-2015

15-AUG-2015

15-NOV-2015

15-JAN-2016

15-FEB-2016

15-MAY-2016

15-JUL-2016

15-AUG-2016

15-NOV-2016

15-JAN-2017

15-FEB-2017

15-MAY-2017

15-JUL-2017

15-AUG-2017

15-NOV-2017

15-MAY-2018

15-NOV-2018

15-FEB-2019

15-AUG-2019

15-FEB-2020

15-MAY-2020

15-AUG-2020

15-FEB-2021

15-MAY-2021

15-AUG-2021

15-NOV-2021

15-AUG-2022

15-NOV-2022

15-FEB-2023

$ Billions

10 YR IIS NOTE 10 YR NOTE 2 YR NOTE20 YR IIS BOND 3 YR NOTE 30 YR BON30 YR IIS BOND 5 YR IIS NOTE 5 YR NOTE
Office of Debt Management

Net international purchases of US securities increaSeptember, October and November

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

In addition, international demand was robust acrosTreasury, Agency and Corporate Securities

Net Foreign Purchases of Long-Term Mktble US Treas 

Bonds & Notes (Mil.$) 

-30,000-20,000-10,000

0

10,00020,00030,00040,00050,00060,000

May-01

Jan-02

Sep-02

May-03

Jan-04

Sep-04

May-05

Jan-06

Sep-06

May-07

Net Foreign Purchases of GSE 

(Mil.$) 

-10,000

0

10,00020,00030,00040,00050,000

May-01

Jan-02

Sep-02

May-03

Jan-04

S04

Net Foreign Purchases of US Corporations & Other 

Bonds (Mil.$) 

-10,000

0

10,00020,00030,00040,00050,00060,00070,00080,000

May-01

Jan-02

Sep-02

May-03

Jan-04

Sep-04

May-05

Jan-06

Sep-06

May-07
Office of Debt Management

Foreign Holdings of US Treasury Securities (Bil.$) 

0

50

100150200250300350400450500550600650700750

May-02

Jan-03

Sep-03

May-04

Jan-05

Sep-05

May-06

Jan-07

Japan: Holdings of US Treasury Securities (Bil.$) China: Holdings of US Treasury Securities (Bil.$) United Kingdom: Holdings of US Treasury Securities (Bil.$) OPEC: Holdings of US Treasury Securities (Bil.$) Caribbean Banking Centers: Holdings of US Treasury Securities (Bil.$) Brazil: Holdings of US Treasury Securities (Bil.$) 

The increases in year-over-year holdings of TreasuUK, Brazil and Oil Exporters continue to be large

Nov. 2006 Nov. 2007 % change

Japan 615.9 580.9 -6%

China 393.8 386.8 -2%

UK 72.6 313.1 331%

Oil Exporters 106.4 127.6 20%

Brazil 51.0 120.6 136%

Change in Holdings of Treasury Securities

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

Estimates of the FY 2008 deficit have risen from $2in November 2007 to $326 recently

FY 08 Deficit Estimates 

Primary Dealers* CBO 

Current: 326 219 Range based on average absolute forecast error 242-410 142-296 Estimates as of: January 08 January 08 

Note: Ranges based on errors from 2003-2007.

* Primary Dealers reflect average estimate.
Office of Debt Management

In 2001 – 2002, Treasury financed an increasing deficthrough increases in bill and shorter-term coupon is

Changes in Issuance in Response to Increasing Deficits:

2001 Revisited

$5.0

$10.0$15.0$20.0$25.0$30.0

1/2/2001

2/2/2001

3/2/2001

4/2/2001

5/2/2001

6/2/2001

7/2/2001

8/2/2001

9/2/2001

10/2/2001

11/2/2001

12/2/2001

1/2/2002

2/2/2002

3/2/2002

4/2/2002

5/2/2002

Size of Last Offering (billions)

3-Month (Weekly) 6-Month (Weekly) 2-Year (Monthly) 5-Year (Monthly)

Security January 2001 (bil) July 2002 (bil) Change in 18 months (bil)

3-Month $12.5 $17.0 $4.5

6-Month $10.0 $15.0 $5.0

2-Year $10.0 $27.0 $17.05-Year $12.0 $22.0 $10.0

Issuance Sizes and Speed of Change in a Changing Deficit Environment
Office of Debt Management

Potential Financing Considerations in FY 2008

 Increase bills as a percent of the portfolio Increase nominal coupons from current low levels Potentially issue longer-dated cash management bills to b

points in cash balances during tax refund season and if pfiscal stimulus is enacted
Office of Debt Management

Given recent trends in the fiscal outlook, what are the TBAthoughts on Treasury’s debt issuance? In addition, Treaslike the Committee’s views on the proposed fiscal stimulusuch stimulus could be financed by Treasury.
Office of Debt Management

Low Interest Rate Environment
Office of Debt Management

Stress Across Financing Markets

1- Month and 3 Month AA Financial CP Spread 

versus 1m and 3m LIBOR 

0.000.200.400.600.801.00

02-Apr-03W

24-Sep-03W

17-Mar-04W

08-Sep-04W

02-Mar-05W

24-Aug-05W

15-Feb-06W

09-Aug-06W

31-Jan-07W

25-Jul-07W

16-Jan-08W

Asset Backed Commercial Paper Outstand

 (SA, Bil$) 

400500600700800900

100011001200

02-Apr-03W

24-Sep-03W

17-Mar-04W

08-Sep-04W

02-Mar-05W

24-Aug-05W

15-Feb-06W

09-Aug-06W

2-Year Treasury versus AAA 2-Year Mun

2.002.503.003.504.004.505.005.50

1/3/2005

3/3/2005

5/3/2005

7/3/2005

9/3/2005

11/3/2005

1/3/2006

3/3/2006

5/3/2006

7/3/2006

9/3/2006

11/3/2006

1/3/2007

3/3/2007

5/3/2007

2-Year CMT2-Year Muni

Moody's Seasoned Baa/Aaa Corporate Bond Spread

0.700.800.901.001.101.201.30

Feb-06

Apr-06

May-06

Jul-06

Aug-06

Oct-06

Nov-06

Jan-07

Feb-07

Apr-07

May-07

Jul-07

Aug-07

Oct-07

Dec-07

Jan-08
Office of Debt Management

In 2001 and 2003, increases in fails were seen wheFunds rate was declining and remained at low leve

Primary Dealer Treasury Security Settlement Fai

Interest Rate Environment

0

50

100150200250300350

1/4/1995

7/4/1995

1/4/1996

7/4/1996

1/4/1997

7/4/1997

1/4/1998

7/4/1998

1/4/1999

7/4/1999

1/4/2000

7/4/2000

1/4/2001

7/4/2001

1/4/2002

7/4/2002

1/4/2003

7/4/2003

1/4/2004

7/4/2004

1/4/2005

7/4/2005

1/4/2006

7/4/2006

$ Billions

Weekly Effective Fed Funds Rate

Average Daily Fails to Receive

Correlation Coefficient = -0.51873

Source: FRBNY FR2004 Settlement Fails Data & FRB H.15
Office of Debt Management

Fails also occurred in other sectors of the financiaduring the low rate environment

Primary Dealer Settlement Fails

Interest Rate Environment

0

20406080

100120140160180

1/4/1995

7/4/1995

1/4/1996

7/4/1996

1/4/1997

7/4/1997

1/4/1998

7/4/1998

1/4/1999

7/4/1999

1/4/2000

7/4/2000

1/4/2001

7/4/2001

1/4/2002

7/4/2002

1/4/2003

7/4/2003

1/4/2004

7/4/2004

1/4/2005

7/4/2005

1/4/2006

7/4/2006

$ Billions

Avg. Daily Agency Receive (LHS)Avg. Daily MBS Receive (LHS)Avg. Daily Corporate Receive (LHS)Weekly Effective Fed Funds Rate (RHS)

Source: FRBNY FR2004 Settlement Fails Data & FRB H.15
Office of Debt Management

Since the last era of lower rates...

 FICC standardization of netting procedure for broker deal Establishment of the Treasury Market Practices Group Issuance of Treasury Market Best Practices

– “We recommend that all Treasury market participants inc

best practices into their operations in order to promote tr

integrity and support a efficient marketplace.”

 Changes to SOMA Securities Lending Program Limits
Office of Debt Management

Considerations

 Buy-in Rule Negative Rate Repo Trading Increased coordination of settlement among custodians, a

managers, clearing corporations, etc.

 Other private sector/public sector initiatives
Office of Debt Management

Current market conditions, coupled with the potential for linterest rates raises the potential risk of systemic fails, a rbelieve could impair liquidity and raise our cost of borrowShould any additional steps be taken to minimize the likeimpact of systemic fails so that overall market liquidity is nnegatively impacted by Treasury repo financing?
Treasury Borrowing Advisory Committ

Presentation to the U.S. Treasury

Cyclical Influences on Federal Finances

January 29, 2008
Overview

• Economic cycles generally produce larger than anticipated swings in federal budge

the volatility seems to have increased even as the economy has become less cyclextreme volatility of the last cycle is not likely to be repeated, it is a cautionary bac

highlights real upside risks to funding needs.

• If the economy avoids recession and the stock market does not deteriorate further 

though still reasonable scenario - the deficits in both 2008 and 2009 could still app

• If a full scale recession and market correction plays out – a scenario that many now 

the 2009/2010 deficits could hit $800bl or more and approach the levels of the earl

share of GDP. It would be worth paying a deficit price in 2008, if this significantly re

chances of recession and much higher deficits in 2009 and beyond. However fiscadifficult to time and can be inefficient.

• Treasury funding changes have tended to lag swings in funding needs and a quick

this time is appropriate. Planning for $400bl deficits, with an eye to the possibility t

considerably higher is a prudent course.

• Stock market and economic developments over the next 3-6 months should provid

warning of greater funding needs ahead.
Tax receipts are highly cyclical

• Receipts are more volat

and were particularly vocycle.

• While the weakness in G

recessions makes both rspending swing as a % o3⁄4 of the cyclical deficit soccurs on the revenue s

• The start of recession-in

weakness in revenues is coincident with the downcontinues well into the rebecause counter-cyclicatended to be “late” and brevenues (particularly noincome taxes) tend to la

15%18%21%24%

69 73 77 81 85 89 93 97 01 05

Federal Receipts as % of GDP (4-qtr total)Federal Outlays as % of GDP (4-qtr total)
Budget Balances have become more volatile desp

moderate economic cycles

• While GDP has becom

volatile over time, budgbalances have become volatile. The swing in tdeficit over the past bucycle was the largest wseen.

2001 recession Average 1954-95 

Change in Budget BaPeak of Economic Ex

Trough of Deficit (% 

-6%-3%

0%3%

54 58 62 66 70 74 78 82 86 90 94 98 02 06

Federal Budget Balance as% of GDP (4-qtr total)
Budget balance projections show large cyclical 

• CBO projections (as well a

have typically under predidownturns (even after factlegislation).

• The errors have tended to 

positive during upturns anout the period of weaknes

• The extreme volatility of th

and the size of the forecascycle are a cautionary bacforecasts in the current cy

• The fact that the size of th

the current cycle are similpast cycle (although they as long and thus are not clarge) is also cautionary wthe deficit implications of a recession.

Projection Error on Budget Balance (Bn $)

-500-400-300-200-100

0

100200300

1983 1986 1989 1992 1995 1998 2001 2004 2007

Current Fiscal YearNext Fiscal Year
Equity markets are a more significant source of 

revenues

0%

25%50%75%

100%125%150%175%200%225%

52 56 60 64 68 72 76 80 84 88 92 96 00 04

 Stock Market Wealth as % of GDP

• When considering the cur

the deficit to cyclical weakgood reasons not to expelast cycle’s extreme volatitime, the impact would likeconsiderable and greater thought.

• The magnitude of the swin

market in the last cycle waand presumably was a kereceipts surged during the collapsed in the recessioncapital gains. Stock optionrelated pay have grown anshare of personal income

• The rise in the equity mar

considerably less this time still much greater than earsuggesting less vulnerabihouse prices is unlikely to anywhere near the same revenue.
Personal tax receipts vulnerable, but not as much as la

• The effective persona

risen, however it is uone percentage poinpost rebate clean 200compared to the threthe previous cycle. 

• However the rise is m

than it was in the late good portion would preversed in the face oand market downturnthe late 1970s, reflecbracket creep impact high inflation.)

9

101112131415

75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07

Individual Income Taxes as a % ofPersonal Income
In particular, withheld receipts seem less vulne

• The major differen

current cycle is thawithheld tax rate hsignificantly in the cycle.

• This suggests that 

coincident impact oon withheld taxes wanywhere near as that in the past cyc

789

1011

75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07

Withheld Individual Income Taxes as a %of Personal Income
Within individual, nonwithheld receipts seem mos

• Nonwithheld receipts a

by capital gains and irrof income and have rismuch as during the 199suggests a clear vulne

• Even in a mild recessio

a moderate equity marnonwithheld receipts copercentage point of GD

• Since final settlements 

component of nonwithh2009 receipts that are astill good equity performshould support the Aprsettlement). Weakness payments during 2008 warning that 2009 recevulnerable.

2345

75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07

Nonwithheld Individual Income Taxesas a % of Personal Income
Corporate receipts are another source of vulner

• Profit margins have 

to unusually high levcorporate sector is ggreater share of rev

• Corporate margins a

weaken - they alreathe financial sector - absence of a recessweakness of the dolwill be a supportive wasn’t there in 2001

• A one percentage p

drop in corporate renot be an unreasonaexpectation in a very recession. 1.0

1.52.02.53.03.5

70 73 76 79 82 85 88 91 94 97 00 03 06

Corporate Tax Receipts as a% of GDP
Incoming data do not yet suggest significant wea

• Growth in individu

holding up, while receipts growth hmuch worse than 

• The January pers

tax payment seemcoming in reasonand withheld receeased only very m

• However, it is too 

the full impact of sgrowth in corporathe impact of a wmarket in individuthese would show quarterly paymenMarch and April aparticularly in finain April 2009

-30000-20000-10000

0

10000200003000040000500006000070000

Mar06

Jun06

Sep06

Dec06

Mar07

Jun07

Sep07

Dec07

Individual Receipts (Diff Y/ Y)Corporate Receipts (Diff Y/ Y)
The 3T’s will Be Tricky to Accomplish

• Many observers have stressed that fiscal stimulus should be timely

targeted, and temporary. Yet is difficult to achieve efficient fiscal st

– Timely: The current proposal includes tax rebate checks sent 

households. Checks may reach households in June which is sconsiderable ways off. Monetary policy stimulus has been aggand will be taking effect as fiscal policy hits. Tax deductions on purchases were also included, however capital spending deciscannot be made on a dime and the impact would take time.

– Targeted: Each dollar should generate the maximum possible 

term GDP effect. Most analysis suggests that at most 2/3 of thprevious tax rebate was spent over a period of 2-3 quarters, wimpact of the business tax deduction having an even less certaimpact. While the impact on the deficit will be certain, the stimueconomy will not be.
The 3T’s will Be Tricky to Accomplish c

– Temporary: The deficit will not be impacted too sever

economic/market weakness in 2008 and can handle thof a stimulative fiscal package. By 2009 the deficit will for economic reasons and countercyclical fiscal stimulpotentially push the deficit to levels much higher than anticipate.

Bottom Line: In general monetary policy can address cy

fluctuations more efficiently than fiscal policy. There is as with 2003, there will be fiscal stimulus on top of aggmonetary stimulus which may have unwanted effects dline.
Treasury issuance challenging at cyclical turning 

• Bill issuance has tended to absorb swings in borrowing needs i

term

• Financing needs can change sharply, making issuance decision

Treasury Marketable Issuance, 4qtr moving average

-80-60-40-20

0

20406080

100120

Q4-1981

Q4-1982

Q4-1983

Q4-1984

Q4-1985

Q4-1986

Q4-1987

Q4-1988

Q4-1989

Q4-1990

Q4-1991

Q4-1992

Q4-1993

Q4-1994

Q4-1995

Q4-1996

Q4-1997

Q4-1998

Q4-1999

Q4-2000

Q4-2001

Q4-2002

Q4-20

Net Coupon IssuanceNet Bill Issuance 30yr cut 
Starting point – room to grow but...

• Room to grow:

– Gross coupon issuance has 

declined over the past several years

– Net bill issuance was negative in 

2005/06 and showed clear signs of supply/demand imbalance in 2007

• But...

– SLGS issuance, which took 

away nearly $60bn in marketable issuance needs in 2007, will likely not be significant in 2008

– Maturing debt is set to rise by over $50bn in 2008 so gross 

issuance already needed to increase by that just to keep net 

issuance steady

– Elimination of the 3yr, where $30bn was issued in 2007, will 

need to be made up in gross issuance elsewhere along the curve

-20-10

0

1020304050607080

2000 2001 2002 2003 2004 2005 

$bn

Net SLGS Issuance (fiscal year)

Gross Coupon Issuance

0

50

100150200250

Q1-1980

Q1-1983

Q1-1986

Q1-1989

Q1-1992

Q1-1995

Q1-1998

$bn

2-5yrs5-10yrOver 10 yrsTotal Gross Coupon Issuance
How Much Issuance Might Need to Change

Hypothetical Issuance Breakdown Under Various Deficit Projections

Hypothetical Auction Sizes (assuming no change from current schedule)

Deficit ($bn) Bills 2-under 5yr 5-10yr 

200 3700 310 330 400 3800 350 400 1000 4200 660 680 

Deficit ($bn) 2yr 5yr 10yr 30yr 5yr TIPS 10yr TI

200 26 16 12 8 8 8 400 29 20 14 10 8 9 1000 55 35 22 14 12 15 

• The current schedule appears adequate and flexible for an expected defic• At a $400bn expected deficit, the current schedule appears adequate, but 

enough to absorb downside surprises. Along with more frequent issuanceexample issuing monthly 10yr notes, adding an additional maturity point, sbringing back the 1yr bill or 3yr note should be considered.

• Beyond a $400bn deficit, additional maturity points would likely be needed 

functioning auctions.