Presentation to the Treasury Borrowing Advisory Committee · 2020. 11. 4. · UNITED STATES DEPARTMENT OF THE TREASURY Presentation to the Treasury Borrowing Advisory Committee U.S

UNITED STATES DEPARTMENT OF THE TREASURY

Presentation to theTreasury Borrowing Advisory Committee

U.S. Department of Treasury

Office of Debt Management

August 2, 2011


Agenda

• Fiscal Developments

• Auction Demand & Market Trends

• Portfolio Metrics

2


FISCAL DEVELOPMENTS

3


Individual Tax Receipts Slowed in Q3 FY 2011

4

-40%

-20%

0%

20%

40%

60%

-40%

-20%

0%

20%

40%

60%

Mar-

00

Jun-0

0

Sep-0

0

Dec-0

0

Mar-

01

Jun-0

1

Sep-0

1

Dec-0

1

Mar-

02

Jun-0

2

Sep-0

2

Dec-0

2

Mar-

03

Jun-0

3

Sep-0

3

Dec-0

3

Mar-

04

Jun-0

4

Sep-0

4

Dec-0

4

Mar-

05

Jun-0

5

Sep-0

5

Dec-0

5

Mar-

06

Jun-0

6

Sep-0

6

Dec-0

6

Mar-

07

Jun-0

7

Sep-0

7

Dec-0

7

Mar-

08

Jun-0

8

Sep-0

8

Dec-0

8

Mar-

09

Jun-0

9

Sep-0

9

Dec-0

9

Mar-

10

Jun-1

0

Sep-1

0

Dec-1

0

Mar-

11

Jun-1

1

Withheld Taxes Nonwithheld Taxes Corporate Taxes

Q

Quarterly Tax ReceiptsYear-over-Year Percentage Change

A closer look at Q3 FY11 (ending June 2011):Withheld Taxes: -0.3%Nonwithheld Taxes: 23.2%Corporate Taxes: -7.8%

Source: Monthly Treasury StatementNotes: Adjusted for 9/11/01 Corporate Tax Receipts disruption;Data plotted is year-over-year changes in quarterly receipts


Public Non-Marketable Redemptions Continued in Q3 FY 2011

5

Source: Monthly Treasury Statement

-$30

-$20

-$10

$0

$10

$20

$30

Q1FY2005

Q3 Q1FY2006

Q3 Q1FY2007

Q3 Q1FY2008

Q3 Q1FY2009

Q3 Q1FY2010

Q3 Q1FY2011

Q3

Savings Bond Foreign Series SLGS

Net Non-marketable IssuanceIn Billions $


FY2011 Budget Summary through June 2011 (in Billions $)

6

Note: Figures may not add due to rounding

Budget Category

Current Month Fiscal Year-to-Date

Jun 2010 Jun 2011 Differences: FY2010 FYTD2011 Differences:

Act Act $ % Act Act $ %

Individual

Withheld & FICA $142 $135 -$7 -5% $1,248 $1,300 $52 4%

Other & SECA $43 $49 $6 14% $269 $316 $46 17%

Refunds (-) $6 $4 -$2 -33% $244 $226 -$18 -7%

Other Social Ins Taxes $2 $1 -$1 -28% $42 $51 $10 24%

Corporate

Corporate Taxes $57 $51 -$6 -10% $210 $189 -$21 -10%

Refunds (-) $5 $2 -$3 -64% $77 $55 -$22 -29%

Excise, Customs, & Other $18 $19 $1 3% $149 $159 $10 7%

Total Budget Receipts $251 $250 -$1 -1% $1,597 $1,734 $137 9%

Defense $56 $57 $1 2% $499 $506 $7 1%

Social Security Benefits $67 $69 $2 3% $564 $584 $20 4%

Medicaid $24 $27 $3 14% $203 $216 $13 6%

Medicare $43 $51 $8 20% $380 $403 $22 6%

Interest on Debt $107 $111 $4 4% $355 $386 $31 9%

Labor $14 $9 -$5 -33% $131 $102 -$29 -22%

Agriculture $10 $11 $1 14% $101 $108 $7 7%

Education $9 -$20 -$29 -334% $78 $46 -$32 -41%

Veterans Affairs $9 $10 $1 13% $81 $91 $10 12%

Federal Deposit Insurance Corp. $1 $0 -$1 -77% -$21 -$1 $20 96%

Treasury-EIC/CC/Other Credits $3 $2 -$1 -43% $110 $106 -$4 -4%

EESA/HERA $16 $5 -$11 n/a -$79 -$28 $51 65%

Other -$38 -$39 -$1 2% $197 $185 -$12 -6%

Total Budget Outlays $319 $293 -$27 -8% $2,601 $2,705 $104 4%


Government Deficit and Borrowing Estimates

7

FY 2011-2013 Deficit and Borrowing Estimates (In Billions $)

PrimaryDealers* CBO OMB

FY 2011 Deficit Estimate 1,358 1,480 1,645

FY 2012 Deficit Estimate 1,131 1,100 1,101

FY 2013 Deficit Estimate 940 704 768

FY 2011 Deficit Range 1,249-1,592

FY 2012 Deficit Range 950-1,400

FY 2013 Deficit Range 700-1,300

FY 2011 Marketable Borrowing Range 980-2,055

FY 2012 Marketable Borrowing Range 950-2,100

Estimates as of: Jul-11 Jan-11 Feb-11

*Based on July 29, 2011 Primary Dealer feedback. Deficit estimates are averages.


AUCTION DEMAND & MARKET TRENDS

8


Coverage Ratios Have Remained Strong in FY 2011

9

Source: Treasury Auction Data

$0

$500

$1,000

$1,500

$2,000

$2,500

0

0.5

1

1.5

2

2.5

3

3.5

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Weighted Average Coverage Ratio on Nominal Notes and BondsIn Billions $, Coverage Ratio

Gross Private Issuance (R) Weighted Average Coverage Ratio (L)

Note: Through 6/30/2011


Foreign Participation in Nominal Coupon Auctions Remains Steady

10

Source: Treasury Investor Class Data; Data through 6/30/2011*FY2006 through FY2010

SOMA 9%

DepositoryInstitutions 1%

Individuals 1%

Primary Dealers52%

Other Dealers &Brokers 4%

Investment Funds14%

Foreign &International 19%

Five-Year Average of Investor Class Allotments*

SOMA 3%

Primary Dealers47%

OtherDealers &Brokers

10%

InvestmentFunds 17%

Foreign &International

22%

FY2011 YTD: Average Investor Class Allotments


Primary Dealers Remain the Largest Purchaser of Treasury Bills

11

Source: Treasury Investor Class Data; Data through 6/30/2011*FY2006 through FY2010

SOMA 12%Individuals 4%

Primary Dealers54%


Investment Funds13%


10%

Other 1%

Five-Year Average of Investor Class Allotments*

SOMA 4% Individuals 2%

Primary Dealers55%


Investment Funds14%


13%

FY2011 YTD: Average Investor Class Allotments


PORTFOLIO METRICS

12


Nominal Coupons and Bills as a Percentage of the Portfolio

13

69%

50%

55%

60%

65%

70%

75%

80%

Jan-0

0

Apr-

00

Jul-00

Oct-

00

Jan-0

1

Apr-

01

Jul-01

Oct-

01

Jan-0

2

Apr-

02

Jul-02

Oct-

02

Jan-0

3

Apr-

03

Jul-03

Oct-

03

Jan-0

4

Apr-

04

Jul-04

Oct-

04

Jan-0

5

Apr-

05

Jul-05

Oct-

05

Jan-0

6

Apr-

06

Jul-06

Oct-

06

Jan-0

7

Apr-

07

Jul-07

Oct-

07

Jan-0

8

Apr-

08

Jul-08

Oct-

08

Jan-0

9

Apr-

09

Jul-09

Oct-

09

Jan-1

0

Apr-

10

Jul-10

Oct-

10

Jan-1

1

Apr-

11

Nominal CouponsPercentage of Total Portfolio

Average 2000 - 2007

Last: 76% as of 6/30/2011

24%

15%

20%

25%

30%

35%

40%

Jan-0

0

Apr-

00

Jul-00

Oct-

00

Jan-0

1

Apr-

01

Jul-01

Oct-

01

Jan-0

2

Apr-

02

Jul-02

Oct-

02

Jan-0

3

Apr-

03

Jul-03

Oct-

03

Jan-0

4

Apr-

04

Jul-04

Oct-

04

Jan-0

5

Apr-

05

Jul-05

Oct-

05

Jan-0

6

Apr-

06

Jul-06

Oct-

06

Jan-0

7

Apr-

07

Jul-07

Oct-

07

Jan-0

8

Apr-

08

Jul-08

Oct-

08

Jan-0

9

Apr-

09

Jul-09

Oct-

09

Jan-1

0

Apr-

10

Jul-10

Oct-

10

Jan-1

1

Apr-

11

BillsPercentage of Total Portfolio

Average 2000 - 2007Last: 16% as of 6/30/2011

Notes: Bills includes SFP and CMBs; Percentage figures are rounded


Treasury has Suspended the SFP Due to Debt Limit Negotiations

14

$0

$100

$200

$300

$400

$500

$600

Sep-0

8

Oct-

08

Nov-

08

Dec-0

8

Jan-0

9

Feb-0

9

Mar-

09

Apr-

09

May-

09

Jun-0

9

Jul-09

Aug-0

9

Sep-0

9

Oct-

09

Nov-

09

Dec-0

9

Jan-1

0

Feb-1

0

Mar-

10

Apr-

10

May-

10

Jun-1

0

Jul-10

Aug-1

0

Sep-1

0

Oct-

10

Nov-

10

Dec-1

0

Jan-1

1

Feb-1

1

Mar-

11

Apr-

11

May-

11

Jun-1

1

Jul-11

Treasury Supplementary Financing Program Cash BalanceIn Billions $

Max: $560B10/10/2008

Min: $5B12/30/09

$200B $0B7/28/11


TIPS Issuance Will Continue to Increase

15

Note: Data through 7/31/2011

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

0%

3%

6%

9%

12%

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011YTD

TIPSCalendar Year Issuance in Billions $, Percentage of Portfolio

5-Year (R) 10-Year (R) 20-Year (R) 30-Year (R) TIPS as % of the Portfolio (L)


Average Maturity of the Debt Continues to Lengthen

16


40

45

50

55

60

65

70

75

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Average Maturity of Marketable DebtIn Months

Average Maturity Without SFP Bills Average Maturity (Outstanding)

Current 61.9 as of 7/2011

Average 58.1

Min 42.4 in 4/1980

Max 70.9 in 5/2001

Statistics on Average Maturity since CY1980


Percentage of Debt Maturing in the Near-Term Remains at Historic Lows

17


20%

30%

40%

50%

60%

70%

Jan-9

0

Jul-90

Jan-9

1

Jul-91

Jan-9

2

Jul-92

Jan-9

3

Jul-93

Jan-9

4

Jul-94

Jan-9

5

Jul-95

Jan-9

6

Jul-96

Jan-9

7

Jul-97

Jan-9

8

Jul-98

Jan-9

9

Jul-99

Jan-0

0

Jul-00

Jan-0

1

Jul-01

Jan-0

2

Jul-02

Jan-0

3

Jul-03

Jan-0

4

Jul-04

Jan-0

5

Jul-05

Jan-0

6

Jul-06

Jan-0

7

Jul-07

Jan-0

8

Jul-08

Jan-0

9

Jul-09

Jan-1

0

Jul-10

Jan-1

1

Percentage of Debt Maturing in Next 12 to 36 Months

Maturing in 12 Months Maturing in 24 Months Maturing in 36 Months


Treasury Refinancing Needs will be Elevated in Coming Years

18

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

20

21

20

22

20

23

20

24

20

25

20

26

20

27

20

28

20

29

20

30

20

31

20

32

20

33

20

34

20

35

20

36

20

37

20

38

20

39

20

40

20

41

Maturity Profile of Outstanding DebtCalendar Year in Billions $



LONG-TERM CHALLENGES

19

UNITED STATES DEPARTMENT OF THE TREASURY20

What adjustments to debt issuance, if any, should Treasury make inconsideration of its financing needs in the short-, medium-, and long-term?

U.S. Treasury Borrowing Advisory Committee Presentation to TreasuryPresentation to Treasury

August 2, 2011

Charge:Charge:

Cost and Benefits of Extending Average MaturityCost and Benefits of Extending Average Maturity

In past meetings the Committee has expressed a desire toIn past meetings, the Committee has expressed a desire to Treasury to continue to lengthen the average maturity of debt outstanding. Please discuss the costs and benefits of extending h i d f k f if i hthe average maturity and frameworks for quantifying those costs and benefits.

2

Given a goal of funding the government as efficiently as possible over the long termefficiently as possible over the long term

Major Considerations are:

Total of interest expense over time

j

Total of interest expense over time

Volatility of interest expense through time

Impact on the real economyImpact on the real economy

Rollover/Liquidity Risk

3

Debt Service is a Function of Many VariablesDebt Service is a Function of Many Variables

Debt Service = Outstanding Debt * Average CouponDebt Service Outstanding Debt Average Coupon

This is a function of many variables

Some Treasury controls:Some Treasury controls:Past debt issuance

Current debt issuance strategy

Debt management communication policy

and many Treasury does not control:Outstanding stock of debt

Current deficitCurrent deficit

Interest rates

GDP growth

Inflation

4

Consider the Following Regression:

DebtServ_GDP = a + b1 * GDP_YY + b2 * FFR + b3 * Avg_Mat + b4 * Debt_GDP + e

Fig. 1 Definition and Summary StatisticsV i bl D fi i i M S d D Mi MVariable Definition Mean Std Dev Min Max

DebtServ_GDP Interest payment to nominal GDP Ratio (%) 3.8% 0.9% 1.7% 7.4%

GDP_YY Real GDP Y/Y Growth (%) 2.7% 1.7% ‐4.1% 5.4%

FFR Effective Fed Funds Rate (%) 4.3% 2.5% 0.1% 9.7%

A M t A M t it (M th ) 64 7 46 73

Fig. 2 Regression Results & Interpretation

Avg_Mat Average Maturity (Months) 64 7 46 73

Debt_GDP Debt to nominal GDP Ratio (%) 42.2% 7.1% 31.9% 63.8%

Variable Beta p-Value InterpretationIntercept ‐2.18

6 0

7.0

8.0Regression Fit

2 0

3.0

4.0

5.0

6.0

0.0

1.0

2.0

Dec‐86 Dec‐90 Dec‐94 Dec‐98 Dec‐02 Dec‐06 Dec‐10

Actuals (%) Fitted (%)

3.0

4.0

Residuals (%)

0.0

1.0

2.0

‐3.0

‐2.0

‐1.0

Dec‐86 Dec‐90 Dec‐94 Dec‐98 Dec‐02 Dec‐06 Dec‐10

Spike is caused by calendar effects from year end falling on a weekend which forced interest payments on non‐marketable debt to be pushed into January. 6

Data Series:

7

Observations from RegressionObservations from Regression

A M i i l f i bl h i d bAverage Maturity is only one of many variables that impacts debt service to GDP

Increasing Average Maturity increases debt service to GDPIncreasing Average Maturity increases debt service to GDP

Increasing Average Maturity can have a potential feedback effect through the real GDP variable via a “reverse LSAP”. The following pagesthrough the real GDP variable via a reverse LSAP . The following pages explore the magnitude of this effect during QE2 and under a maturity extension strategy.

8

Activity During QE2 Period

Fed's SOMA Portfolio Stock of Treasury Debt Treasury Stock ‐ SOMA

11/12/10 to 6/30/2011

Change 11/12/10 to 6/30/2011 Change 11/12/10 to 6/30/2011 Change 11/12/10 to 6/30/2011

Maturity Face Amt DV01 Face Amt DV01 Face Amt DV01

2Y 52,044 8,699,000 245,000 40,789,000 192,956 32,090,000

3Y 156,082 40,646,000

256,000 67,621,000 99,918 26,975,000

5Y 184,369 83,701,000

280,000 127,362,000 95,631 43,661,000

7Y 196,428 121,372,000

232,000 144,474,000 35,572 23,102,000

10Y 137,149 113,012,000 177,000 155,712,000 39,851 42,700,000

30Y 32,555 52,276,000 113,000 190,549,000 80,445 138,273,000

758,627 419,706,000 1,303,000 726,507,000 544,373 306,801,000

Face amount measured in millions, DV01 measured in $/bp at current yield levels

9

Maturity extension during LSAP2 added 75‐115 million of longer duration DV01s

Based on the OLS approach in Gagnon, J., M. Raskin, J. Remache and B. Sack (2010), this is pp g , , , ( ),equivalent to a change in the term premium from 4.0 to 6.1 bp

The calculation method is described with a concrete numerical example on page 25 of Gagnon, J., M. Raskin, J. Remache and B. Sack (2010)

“the Federal Reserve will have purchased a total of approximately $850 billion in 10‐year equivalents. This is roughly 6 percent of 2009Q4 nominal GDP, which implies that asset purchases reduced the term premium by 38 basis points.”

LSAP2 Lower Bound Upper Bound

Duration (01s) 75,000,000 115,000,000

01s/ 1million Notional 10y Note 850 850

Notional 10y Note Equivalents ‐850,000,000,000 88,250,000,000 135,300,000,000

Nominal GDP (Q4 2009) 14,277,000,000,000 14,277,000,000,000 14,277,000,000,000

10y Notes as Percent of GDP 5 95% 0 62% 0 95%10y Notes as Percent of GDP ‐5.95% 0.62% 0.95%

OLS Regression Coefficient (From Table 2, p. 34 Gagnon et al. 0.064 0.064 0.064

Change in Term Premium ‐38.1bp 4.0bp 6.1bp

Note that Chung, Laforte, Reifschneider and Williams (2011) estimate that there is a roughly 4 to 1 ratio between changes in the term premium and changes in the federal funds rate. Thornton (2011) has questioned the stability of this estimate.

10

Extending the Average Maturity to 70 months would add 375 million to 475 million additional duration to the market

Adding this much duration to the private sector would increase term premiums 19 to 24bp19 to 24bp

Lower Bound Upper Bound

Duration (01s) 375,000,000 475,000,000

01s/ 1million Notional 10y Note 850 850

Notional 10y Note Equivalents 441,200,000,000 558,800,000,000

Nominal GDP (Q1 2011) 15,018,000,000,000 15,018,000,000,000

10y Notes as Percent of GDP 2.94% 3.72%

OLS Regression Coefficient 0.064 0.064

Change in Term Premium 18.8bp 23.8bp

11

Interest Expense Over Time

Historical backtest of long vs. short maturity g ystrategieso Point‐in‐Time decision to issue a new 5Y bond or rolling 3M Tbills for 5

( h i fl )years (synthetic floater)

o Quarterly interest expense for a fixed size portfolio all in a single maturity

Omits the reverse LSAP feedback on GDP and rates

12

Lifetime cost of a new 5Y loanAssume a one‐time funding increase with a 5Y horizonCompute average rates over the next 5Y of a 5Y bond vs rolling 3M TbillsCosts and vol of lifetime costs are both lower for Tbills!

16

18

Costs and vol of lifetime costs are both lower for Tbills!

10

12

14

ed Rate %

6

8

CMT05Y

synthetic CMT05Y

CMT05Y Synthetic5Mean 6.86 5.70

StdDev 2 68 2 33

Ann

ualize

0

2

4StdDev 2.68 2.33

8/7/1961 1/28/1967 7/20/1972 1/10/1978 7/3/1983 12/23/1988 6/15/1994 12/6/1999 5/28/2005 11/18/2010

13

Lifetime cost of a new 10Y

18

Same experiment using 10Y bond and using average rates over the 10Y life of the bond

12

14

16

8

10

12

CMT10Y

nualized

Rate %

2

4

6 synthetic CMT10Y

CMT10Y Synthetic10

Mean 7.08 5.96 StdDev 2.57 2.02

An

0

8/7/1961

1/28/1967

7/20/1972

1/10/1978

7/3/1983

12/23/1988

6/15/1994

12/6/1999

5/28/2005

11/18/2010

14

Quarterly Cost of Long‐Term DebtQuarterly interest expense for a constant‐size debt funded with a single maturityTbills, 5Y with 5% auctioned each quarter, or 10Y with 2.5% auctioned each quarterPay Now or Pay Later – the late 70’s spike affects Tbills first, but it affects 5’s and

10’s more over time10 s more over time

14

16

8

10

12

d Ra

te %

4

6

8

regular auction CMT10Y

CMT03M

regular auction CMT05Y

Ann

ualized

Since '72 CMT03M Auction5 Auction10Mean 5.53 7.05 7.38

StdDev 3.25 2.47 2.04

0

2

1961

1967

1972

1978

1983

1988

1994

1999

2005

2010

15

8/7/1

1/28/1

7/20/1

1/10/1

7/3/1

12/23/1

6/15/1

12/6/1

5/28/2

11/18/2

Historical RatesSince '62 CMT03M CMT05Y CMT10Y

Mean 5.33 6.47 6.75 StdDev 2.99 2.84 2.65

Tenor extension has small effect on spot rate volThe advantage of longer tenors is in staggering maturities to average out the impact of each auction

14

16

18

10

12

d Ra

te %

4

6

8 CMT10Y

CMT03M

CMT05YAnn

ualized

0

2

7/1961

8/1967

0/1972

0/1978

3/1983

3/1988

5/1994

6/1999

8/2005

8/2010

8/7

1/28

7/20

1/10 7/3

12/23

6/15

12/6

5/28

11/18

16

What Strategy is Optimal Today?What Strategy is Optimal Today?

Since ‘62, issuing a synthetic floater beats issuing a 5Y 72% of , g y gthe time and a 10Y 60%

Locking in long rates only reduces cost when rates rise by more than the term premium

We can’t anticipate rate changes but we can measure the term premium now to decide which product is more favorable

17

Estimating the Term PremiumFrom Gagnon et al.

“For Treasury securities, the most important component of the risk premium is referred to as the ‘term premium,’ and it reflects the reluctance of investors to bear the interest rate risk associated with holding an asset that has a long duration. The term premium is the additional return investors require, over and above the average of expected future short‐term interest rates, for accepting a fixed long‐term yield.”

T‐bills represent Treasury’s short term borrowing rates but their future expected values are b bl i iunobservable quantities.

Forward Fed funds OIS (FF‐OIS) swap rates are the best proxy.

h b l l d h d ff b d lFF‐OIS term premium can then be calculated as the difference between quoted long term FF‐OIS swap rates and their equivalent calculated with estimated future expected FF‐OIS rates.

Fixed long term UST issuance requires an additional term premium over and above what is present in h l d f dthe long term Fed funds OIS swaps.

For any particular bond, we define the total term premium to be the sum of the FF‐OIS term premium and the bond’s FF‐OIS asset swap spread.

18

This calculation should represent a lower bound on the term premium because Tbill yields are typically below comparable FF‐OIS ratesy yp y p

19

Estimates of the Term Premium Using a Variation of Kim‐Orphanides Affine Term Structure ModelKim‐Orphanides Affine Term Structure Model

Note: Results are heavily dependent on model structure and parameter values20

Matched Maturity Asset Swap Spreads to FF‐OIS Curve

21

Total Term Premium(FF‐OIS term premium + FF‐OIS asset swap spread)

22

Longer Dated Term Premiums Appear Elevated

Asset swaps confirm premiums are high. Are high premiums due to macro factors or to supply/demand?due to macro factors or to supply/demand?

The following charts consider potential drivers such as

Risk Appetite

Risk ExpectationRisk Expectation

Inflation Expectation

P bli D bt DV01Public Debt DV01

Issuance DV01

23

10Y Total Term Premium vs. Risk Appetite

60

80

100

20

40

60

P

‐20

010Y

TTP

96‐02

2003‐Sep08

Oct08‐Jun11

‐60

‐40

‐80

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Risk AppetiteBBB‐AAA spreads as a percentage of historic max‐min(1996‐present)

24

100% equals maximum appetite

100

10Y Total Term Premium vs. Risk Expectation

60

80

40

0

20

10Y TTP

96‐02

2003‐Sep08

Oct08‐Jun11

‐40

‐20

‐80

‐60

0 10 20 30 40 50 60 70

25

0 10 20 30 40 50 60 70

Risk Expectation (Monthly Average of VIX Index)

100

10Y Total Term Premium vs. Inflation Expectations

60

80

20

40

20

0

10Y TTP

96‐02

2003‐Sep08

Oct08‐Jun11

‐40

‐20

‐80

‐60

0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50

26

Inflation Expectations5y5y Tips Breakevens (%)

100

120

10Y Fed Funds Term Premium vs. Public Debt DV01

40

60

80

100

0Y FF TP 96‐02

2003‐Sep08

0

20

40

0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00

T1

p

Oct08‐Jun11

‐20Privately Held Public Debt DV01 (bln$/bp)

40

10Y Excess Term Premium vs. Public Debt DV01

‐40

‐20

0

20

cess TP

‐120

‐100

‐80

‐60

10Y Exc 96‐02

2003‐Sep08

Oct08‐Jun11

27

‐140

0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00

Privately Held Public Debt DV01 (bln$/bp)

120

10Y Fed Funds Term Premium vs. Issuance DV01

60

80

100Y FF TP

96‐02

2003 Sep08

0

20

40

0 20 40 60 80 100 120

T10 2003‐Sep08

Oct08‐Jun11

‐20Monthly Issuance DV01 (6mAvg, mm$/bp)

40

10Y Excess Term Premium vs. Issuance DV01

‐40

‐20

0

20

s TP

120

‐100

‐80

‐60

10Y Xs 96‐02

2003‐Sep08

Oct08‐Jun11

28

‐140

‐120

0 20 40 60 80 100 120

Monthly Issuance DV01 (6mAvg, mm$/bp)

Preceding Analysis Illustrates Costs of Extension, What are the Benefits?

MacroNominal rates are low (even if term premium is high)

Higher debt levels imply greater exposure to rising interest rates

Risk of a rising nominal rate/low growth environment

Will reserve currency status continue?L C d F i O hi f D bLarge, Concentrated Foreign Ownership of Debt

o Foreign holders would like to diversifyo May view short‐term funding as less stable

Other large sovereigns are also increasing debt and competing for capitalOther large sovereigns are also increasing debt and competing for capital

Other sovereigns have longer average maturities

Rollover riskTraditional rollover risk is likely low since debt is denominated in dollars

Combination of high debt service and increasing rollover needs could trigger a funding crisis followed by a decline in currency

Floating rate notes could reduce rollover risk by decoupling the maturity and interest rate risk decisionsinterest rate risk decisions

29

Low Interest Rates Offer Attractive Longer Term Funding on an Absolute Basis

16.0016.00

Yield (%)Yield (%) A History of Long-Term U.S. Interest Rates: 1913 - July 29, 2011 (monthly) The image cannot be displayed. Your computer may not have enough memory to open the image, or the image may have been corrupted. Restart your computer, and then open the file again. If the red x still appears, you may have to delete the image and then insert it again.

Sources:1900-1976 30-year Prime Corporates1977-Present 30-year Bond Yield

Max 14.87%Sep. 1981

12.00

14.00

12.00

14.00

8.00

10.00

8.00

10.00

6.006.00Mean = 5.50%

July 29, 20114.18%

2.00

4.00

2.00

4.00

Min 2.45%Feb. 1947

30

0.000.001913 1920 1927 1934 1941 1948 1955 1962 1969 1976 1983 1990 1997 2004 2011

Shaded areas: U.S. RecessionsSource: BNY Mellon; Bloomberg; Global Financial Data; NBER 30

Treasury 5yr5yr vs. Spot 5yr & 10yr

7

8

5

6

3

4

2

3

0

1

Oct‐96 Oct‐97 Oct‐98 Oct‐99 Oct‐00 Oct‐01 Oct‐02 Oct‐03 Oct‐04 Oct‐05 Oct‐06 Oct‐07 Oct‐08 Oct‐09 Oct‐10

T5y5y 5Y 10Y

31

Treasury 10yr10yr vs. Spot 10yr

8

9

6

7

4

5

2

3

0

1

Oct‐96 Oct‐97 Oct‐98 Oct‐99 Oct‐00 Oct‐01 Oct‐02 Oct‐03 Oct‐04 Oct‐05 Oct‐06 Oct‐07 Oct‐08 Oct‐09 Oct‐10

32

T10y10y 10Y

Debt and Deficit Levels

5%

10% 0%

20%

‐5%

0% 1930

1940

1950

1960

1970

1980

1990

2000

2010

40%

60%

15%

‐10%

60%

80%

‐20%

‐15%100%

120%

‐30%

‐25%140%

Fiscal Balance / GDP ‐ right

Total Debt / GDP ‐ left (reverse order)

33

Source: OMB, Center for Financial Stability

Foreign Ownership Has Risen, Is Concentrated, and Is Likely Linked to Reserve Currency Status

34

What is Outlook for Reserve Currency Statusy

3.5

4

Swiss Franc/USD: January 1973 to July 2011

U.S. Dollar Losing Ground as a Safe Haven Currency3.5000

4.0000

U.S. Dollar/Brazilian Real: June 1994 to July 2011

Rise of Major EM Currencies to U.S. Dollar

1 5

2

2.5

3

3 5

1.5000

2.0000

2.5000

3.0000

0

0.5

1

1.5

an

-73

an

-75

an

-77

an

-79

an

-81

an

-83

an

-85

an

-87

an

-89

an

-91

an

-93

an

-95

an

-97

an

-99

an

-01

an

-03

an

-05

an

-07

an

-09

an

-11

0.0000

0.5000

1.0000

1.5000

un

-94

un

-95

un

-96

un

-97

un

-98

un

-99

un

-00

un

-01

un

-02

un

-03

un

-04

un

-05

un

-06

un

-07

un

-08

un

-09

un

-10

un

-11

As both safe haven and EM currencies outperform, the dollar’s status as the global reserve currency

Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja Ja

Ja

Ja

Ja

Ja Ja

Ja

Ja

Ja

Ja Ja

Source: BNY Mellon Global Markets

Ju Ju

Ju Ju

Ju Ju Ju Ju

Ju Ju

Ju Ju

Ju Ju

Ju Ju Ju Ju

Source: BNY Mellon Global Markets

As both safe haven and EM currencies outperform, the dollar s status as the global reserve currency appears to be slipping

The idea of a reserve currency is that it is built on strength, not typically that it is “best among poor choices”. The fact that there are not currently viable alternatives to the US dollar is a hollow victory and perhaps portends a deteriorating fate

3535

US Debt Mix is Most Short‐Term Funded Among OECD Nations

10 yrs

U.S. (2010) 71% 20% 9%

Spain 66% 3% 31%

G 59% 25% 16%Germany 59% 25% 16%

Netherlands 54% 27% 19%

Finland 53% 38% 9%

Belgium 51% 30% 18%

France 49% 29% 23%

Greece 46% 27% 26%

Italy 45% 26% 29%

U.S. (1946) 41% 24% 35%( )

Austria 40% 36% 23%

Portugal 39% 41% 21%

Ireland 36% 47% 19%

Average 49% 31% 21%

Many cite mid‐1940s high debt levels as proof that U.S. can withstand l f di d h th t it i k dl diff t

Sources: U.S. Treasury, Bloomberg, Center for Financial Stability Inc.

Average 49% 31% 21%

large funding needs, however the maturity mix was markedly different than today.

3636

While PERCENTAGE of total debt maturing is shrinking, the SIZE f t t l d bt t i / GDP i i i idlof total debt maturing / GDP is rising rapidly

35%70%Marketable Debt Maturing in Next 36 Months

30%65%As % of outstanding debt (LHS)

25%60%

20%55%

As % of GDP (RHS)

15%50%

Dec-9

9

Dec-0

0

Dec-0

1

Dec-0

2

Dec-0

3

Dec-0

4

Dec-0

5

Dec-0

6

Dec-0

7

Dec-0

8

Dec-0

9

Dec-1

0

37

'as % of outstanding debt' as % of GDP

Projected Interest Expense DifferentialsCurrent bill/coupon mix vs. moving to 50/50 mix over 2 years

250

billion

s

150

200

Following the forward curve

300bp shock at 5 years

500bp shock at 5 years

pense differen

tial in

50

100

years

Constant spot rates

Interest exp

‐50

0

‐150

‐100

38

2010

2012

2013

2014

2016

2017

2019

2020

2021

2023

Conclusion

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 highvolatility costs have not been high

Recent cycles of rising rates have not lasted long enough for maturity extension to pay offp y

It is possible, however, that “this time is different” becauseo Nominal rates are much closer to the zero bound than previous periodso Deficits are very high historically and rising interest expense less acceptableo Deficits are very high historically and rising interest expense less acceptableo Concentrated foreign ownership creates less reliable demando The benefits of funding attributable to being the reserve currency may be fading

While this presentation has focused exclusively on average maturity a topicWhile this presentation has focused exclusively on average maturity, a topic for future study is the impact of the distribution of maturities on total interest expense

39

Treasury TBAC Presentation FINAL.pdfTREASURY BORROWING ADVISORY COMMITTEE- August 2 2011-FINAL

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Presentation to the Treasury Borrowing Advisory Committee · 2020. 11. 4. · UNITED STATES DEPARTMENT OF THE TREASURY Presentation to the Treasury Borrowing Advisory Committee U.S