bitsberger Dec 0704

Treasury Debt Management

Timothy Bitsberger Deputy Assistant Secretary October 2, 2003

Perspective Where We are‌

Size of Operations Hard to Grasp • $3.7 trillion raised in 176 auctions in 2002 • $171 billion paid in net interest in 2002 – represented 8.5% of Government expenditures

• $462 billion in Treasuries are traded daily • $3.4 trillion in marketable debt outstanding – represents approximately a quarter of U.S. credit markets

Percentage Breakdown of Nonfinancial Credit Market Debt 40%

40%

35%

35%

30%

30%

25%

25%

20%

20%

15%

15%

10%

10%

5%

5%

0% 1960

0% 1963 Treasuries

1966

1969 Muni's

1972

1975

1978

Corporates

1981

1984

1987

Consumer Credit

1990

1993 Other

1996

1999

2002

Home Mortgages

2006

2004

2002

2000

1998

1996

1994

1992

-7.0% 1990

-7.0% 1988

-6.0%

1986

-6.0%

1984

-5.0%

1982

-5.0%

1980

-4.0%

1978

-4.0%

1976

-3.0%

1974

-3.0%

1972

-2.0%

1970

-2.0%

1968

-1.0%

1966

-1.0%

1964

0.0%

1962

0.0%

1960

1.0%

1958

1.0%

1956

2.0%

1954

2.0%

1952

3.0%

1950

3.0%

2008

Surplus/Deficit as a Percentage of GDP

Debt Held by the Public as a Percentage of GDP 90%

80%

70%

60%

50%

40%

30%

20% 1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

Financing Projections

FINANCING RESIDUALS GIVEN CURRENT ISSUANCE

$700 billions

600

700 $ billions

Deficits plus Avg. Absolute Error

600

500

500 FY04 OMB MSR Deficit Forecast

400

300

400

Deficits minus Avg. Absolute Error

300

200

200

100

100

0

-100

0

-100

Bars Indicate Additional Financing Required In Given Year For Different Deficit Outcomes

-200

-200

-300

-300 2003

2004

2005

2006 Fiscal Year

2007

2008

BILLS AS A PERCENTAGE OF TREASURY'S MARKETABLE DEBT

1

45%

45%

40%

40%

35%

35% Assuming OMB '04 Budget MSR Deficit Forecasts Plus Avg. Absolute Error

30%

30%

25%

25% Assuming OMB '04 MSR Baseline Deficit Forecasts

20%

20%

15% 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

15%

THE AVERAGE MATURITY OF TREASURY'S MARKETABLE DEBT AND ISSUANCE1

100 Months

90

100 Months

90

AVERAGE MATURITY OF ISSUANCE (4 quarter moving average)

80

80

70

70

60

60

50

50 AVERAGE MATURITY OF MARKETABLE DEBT

40

40 '04 Budget Forecast/Quarterly 3s, 5s, and 10s

30

30

'04 Budget Forecast/Quarterly 3s, Monthly 5s, Reopen 10s MSR Forecast/Quarterly 3s, Monthly 5s, Reopen 10s

20 1981

20 1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

1/ The average maturity of issuance is the average maturity eventually achieved if nominal issuance is held constant going forward.

2007

Does Issuance Long-Term Securities Meet the Goals of Treasury?

Treasury’s Debt Management Low borrowing cost over time Regular pattern of issuance Predictable issuance sizes

Flexibility Need ability to raise and pay-down cash

Strategy Not Affected By… • Current interest rates • Annual deficit • Short-term fluctuations in demand

Implementation • Auction dates known in advance  Reduces investor uncertainty

• Changes in auction sizes are transparent  Allows intermediaries to adjust to changes in supply.

• Auction sizes large  Assures investors of good liquidity

• Market consultation  Reduces investor uncertainty

Low Cost Over Time: Longer Maturities More Expensive on Average Spread Between 10-Year Notes and 1-Year Bills Rolled Ten Times 700 points basis

700 basis points

600

600

500

500

400

400

300

300

200

200

100

100

0

0

-100

-100

-200

-200

-300 1954 1957 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002

-300

Includes Forward Rates as of May 21, 2003

Low Cost Over Time: 10yr-30yr Spread Has Widen As Rates Have Fallen Spread Between the 30-Year Bond and the 10-Year Note 100 bps

100 bps

80

80

60

60

40

40

20

20

0

0

-20

-20

-40

-40

-60

-60

-80 1977

-80 1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

Low Cost Over Time: Requires a Diversified Debt Portfolio Spread debt across maturities to…  Ensure regular and predictable issuance  Reduce event risk  Diversify investor base  Improve cash management  Reduce operational risk

Low Cost Over Time: Treasury Has a Diversified Debt Portfolio Distribution of Debt by Security 35%

35%

30%

30%

25%

25%

20%

20%

15%

15%

10%

10%

5%

5% Projections 2003-2008

0%

0% 1980

1982

1984

BILLS

1986

1988

2-3 YR NOTES

1990

1992

1994

4-7 YR NOTES

1996

1998

2000

8-10 YR NOTES

2002

2004

BONDS

2006 TIPS

2008

Low Cost Over Time: Bond Issuance Low But Impact Grows Over Time...

Annual Bond Issuance Nominal Amounts and as a Percentage of Annual Issuance 7% percent

50 $ billions 45

6%

% of Annual Issuance (LHS)

Nominal Bond Issuance (RHS)

40

5%

35 30

4%

25 3%

20 15

2%

10 1% 5 0%

0 1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

Low Cost Over Time: Bonds Currently 17% of Treasury’s Marketable Debt Distribution of Treasury's Marketable Debt Outstanding By Security As of June 30, 2003 30%

30%

25%

25%

20%

20%

15%

15%

10%

10%

5%

5%

0%

0% Bills

2-year

3-year

5-year

10-year

10-year IIS

20-year

30-year

30-year IIS

Low Cost Over Time: Issuing Bonds Regularly Has Been Expensive Bonds as a Percentage of Marketable Debt and Interest Expenses 35%

35%

30%

30%

25%

25% Interest on Bonds as a Percentage of Interest Expenses on Marketable Debt

20%

20%

Nominal Bonds as a Percentage of Marketable Debt

15%

10%

5% 1977

15%

10%

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

5% 2003

Low Cost Over Time: Maturing Debt and Issuance Stable without Bond Annual Issuance as a Percentage of GDP and Percentage of Debt Maturing in 12 Months Issuance/ 20% GDP

Debt Maturing/ 55% Total Debt Issuance as a % of GDP (LHS)

18%

50%

16% 45% 14% 40% 12% % of Debt Maturing in 12 Months (RHS)

35%

10% Projections 2003-2008

8% Dec-80 Dec-82 Dec-84 Dec-86 Dec-88 Dec-90 Dec-92 Dec-94 Dec-96 Dec-98 Dec-00 Dec-02 Dec-04 Dec-06

30%

Flexibility: Fiscal Needs Volatile Weekly Receipts Minus Expenditures $50 Billions

50 $ Billions

40

40

30

30

20

20

10

10

-10

-10

-20

-20

-30

-30 FY2002

-40

-40

FY2003

-50 Oct-01

-50 Nov-01

Dec-01

Jan-02

Feb-02

Mar-02

Apr-02

*Expenditures exclude debt redemptions and unclassified withdrawals.

May-02

Jun-02

Jul-02

Aug-02

Sep-02

Flexibility: Future Financing Requirements Uncertain Average Absolute Federal Budget Forecast Errors 1997 - 2002 $180 billions

180 $ billions

160

160

140

140

120

120

100

100

80

80

60

60

40

40

CBO OMB

20

20

Primary Dealers

0

0 14 months

11 months

8 months 5 months months until end of fiscal year

2 months

Flexibility: Frequent Auctions of Shorter Maturities Year Over Year Change in Total Annual Issuance $ billions 250

$250 billions

Bills 2-Year

200

200

5-year 10-year

150

150

30-year

100

100

50

50

0

0

-50

-100 1990

-50

-100 1991

1992

1993

1994

1995

1996

* Nominal securities only. No inflation-indexed securities included.

1997

1998

1999

2000

2001

2002

2003

Flexibility: Longer Maturities Unsustainable During Surpluses Estimated Average Auction Size in 5 Years1 Based On Budget Forecast At The TIme

$35 billions

35 $ billions

30

30

25

25

20

20

15

15

10

10

5

5

0

0 1998/2003

1999/2004

Bills

2000/2005 2001/2006 Year of Forecast/Projected Year

2YR

3YR

5YR

1/ Issuance is based on securities being issued at time of forecast and includes SOMA.

2002/2007

10YR

30YR

2003/2008

Flexibility: Weight Issuance Towards Shorter Maturities

• Financing needs volatile and uncertain • Investor base for long-term debt ill-suited for high frequency auctions • Long-term debt hampers regular and predictable issuance in improving fiscal environments

Conclusions • Achieving the lowest cost over time requires the regular and predictable issuance of a diversified, flexible portfolio of debt • Weight issuance towards shorter maturities – Less costly – More flexible (i.e., frequent issue/maturity dates)

• Bonds do not meet our criteria – Expensive • Risk premium • Commitment to regular issuance in all rate environments has a large effect on Treasury’s portfolio of outstanding debt

– Inflexible • Infrequent auctions • Restricts other issuance in an improving fiscal environment

– Risks manageable without bonds