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