Presentation to the Treasury Borrowing Advisory Committee › resource-center › data... · Money rates have come down since August, but volatility remains with a potential penalty

Presentation to the Treasury Borrowing Advisory Committee

U.S. Department of the TreasuryOffice of Debt Management

October 30, 2007

2Office of Debt Management

- FY 2007 budget deficit was $163 billion - OMB expects improvement to budget deficits after FY 2008

Projected Budget Results(+ Deficit/- Surplus)

-50

0

50

100

150

200

250

300

2006 2007 2008 2009 2010 2011 2012

$ billions


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

Fiscal Year Individual and Corporate Tax ReceiptsChange From Previous Fiscal Year

0%

5%

10%

15%

20%

25%

2004 2005 2006 2007

$207 billion

$73 billion

$136 billion

$192 billion


Still, FY 2007 tax receipts were almost 10 percent higher than in FY 2006

Individual and Corporate Tax Receipts Fiscal Year to Date

0

200

400

600

800

1000

1200

1400

1600

1800

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

$ billions

0

200

400

600

800

1000

1200

1400

1600

1800$ billions

FY 2003FY 2004FY 2005FY 2006FY 2007


FY 2007 outlays were less than 3 percent higher than in FY 2006

Total Outlays Fiscal Year to Date

0

500

1000

1500

2000

2500

3000

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

$ billions

0

500

1000

1500

2000

2500

3000

$ billions

FY 2003FY 2004FY 2005FY 2006FY 2007

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

FY 2006 FY 2007 % changeSocial 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)


Net coupon issuance is at the lowest level since FY 2001

Net Coupon Issuance

-300

-200

-100

0

100

200

300

400

500

2000 2001 2002 2003 2004 2005 2006 2007

End of Fiscal Year

$ B

illio

ns


State and Local Government Non-Marketable issuance in 2008 remains uncertain given recent volatility

State and Local Governments (SLGS) Calendar year

0

10

20

30

40

50

60

$ B

illio

ns

Gross IssuesRedemptions

-10

-5

0

5

10

15

20

25

30

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 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

$ B

illio

ns

Net SLGs


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

Money Rates Weekly Averages

4.60

4.80

5.00

5.20

5.40

5.60

5.80

6.00

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

9/28

/07

10/1

2/07

10/2

6/07

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


Similarly, short term rates have displayed increased volaitlityacross sectors

Weekly Average Commercial Paper Rates

4.60

4.80

5.00

5.20

5.40

5.60

5.80

6.00

6.20

6.40

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

9/15

/07

9/29

/07

10/1

3/07

Percent

1-d ABCP 7-d ABCP

15-d ABCP 1-mo ABCP

1-d FCP 7-d FCP

15-d FCP 1-mo FCP

1-d NFCP 7-d NFCP

15-d NFCP 1-mo NFCP


Credit concerns this past August created stress across short term markets – including the Treasury Bill market

4-Week Bills

0

5

10

15

20

25

30

35

1/3/20

071/1

7/200

71/3

0/200

72/1

3/200

72/2

7/200

73/1

3/200

73/2

7/200

74/1

0/200

74/2

4/200

75/8

/2007

5/22/2

007

6/5/20

076/1

9/200

77/3

/2007

7/17/2

007

7/31/2

007

8/14/2

007

8/28/2

007

9/11/2

007

9/25/2

007

10/10

/2007

$ Billions

0.00

1.00

2.00

3.00

4.00

5.00

6.00Percent

Auction Size (LHS)CMTs (RHS)

4-Week BillsAuction Tails vs. CMTs

-0.50

0.00

0.50

1.00

1.50

2.00

2.50

1/3/20

071/1

7/200

71/3

1/200

72/1

4/200

72/2

8/200

73/1

4/200

73/2

8/200

74/1

1/200

74/2

5/200

75/9

/2007

5/23/2

007

6/6/20

076/2

0/200

77/4

/2007

7/18/2

007

8/1/20

078/1

5/200

78/2

9/200

79/1

2/200

79/2

6/200

710

/10/20

07

Bas

is P

oint

s

0.00

1.00

2.00

3.00

4.00

5.00

6.00

Perc

ent

Auction DataCMTs


Treasury’s bill issuance increased in the last quarter of FY 2007

Weekly Bills OutstandingFY 2004-2007

$750

$800

$850

$900

$950

$1,000

$1,050

$1,10010/3

10/10 10/1710/24

10/3111/7

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

2/273/6

3/133/20

3/274/34/104/174/24

5/15/8

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

9/49/11

9/189/25

FY '04

FY '05

FY '06

FY '07

FY '08


Cash volatility remains a major factor driving bill issuance volatility

Treasury Daily Operating Cash Balance

0

25

50

75

100

125

Jan Feb Mar Apr May Jun Jul Aug Sep

$ billions

0

25

50

75

100

125

FY 2005FY 2006FY 2007FY 2008

$ billions

Note: Data through October 24, 2007.


Net foreign purchases of US securities declined in August

Net Foreign Purchases of US Long-Term Securities

-50

0

50

100

150

200

Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07

$ Billions

-50

0

50

100

150

200

$ Billions


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

Top 5 Holders of Treasury Debt

0

100

200

300

400

500

600

700

800

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

$Billions

0

50

100

150

200

250

300$ Billions

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

Aug. 2006 Aug. 2007 % changeJapan 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)


The economic outlook impacts future financing and portfolio considerations

Treasury constantly revisits its assumptions and forecasts when making debt issuance decisions, but overall strategy remains consistentDebt issuance changes are transmitted to the market as transparently as possibleDuring rapid changes to the economy, such changes may become more pronouncedTreasury maintains a bias towards the shorter end of the curveThe deficit has been cut in half ahead of schedule, and OMB forecasts a balanced budget by 2012We aim to preserve flexibility to address a range of fiscal outcomes


In light of intermediate and longer-term fiscal trends, as well as recent economic and market conditions, what advice would the Committee give in terms of Treasury’s debt issuance?

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

Securitization, Ratings Agencies and the Money MarketsOctober 30, 2007

10452 1

Securitization, Rating Agencies and the Money Markets

What are the Committee’s views regarding recent market dislocations in short term credit markets and their relationship, if any, with increased securitization, rating agency evaluations,

and money market financing structures?

10452 2

Loan 1

Loan 2

Loan 4

Loan 5

Loan 5000++

Loan 3

Reference Poolof Assets #1

(Mortgage Loans)

The Basic Building Blocks of Securitization

ResidualTranches

A Tranches

AA Tranches

AAA Tranches

ABS 1

Tranched

BBB Tranches

Principaland

Interest

PortfolioLoss

10452 3

The Securitization Market Has Grown Explosively

*As of June 30Source: The Securities Industry and Financial Markets Association

Outstanding US ABS Issuance US ABS Issuance by Segment

0.0

0.5

1.0

1.5

2.0

2.5

3.0

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

$ Tr

illio

ns

Home Equity Loans25%

Other (includes ABS CDOs)

41% Equipment Leases

2%

Auto Loans8%

Credit Card Receivables

14%

Manufactured Housing

1%

Student Loans9%

10452 4

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

Asia8%

Europe 31%

US61%

10452 5

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 Sheets$ Trillions

Commercial and Industrial Loans

Mortgages,Consumer Loansand Other Loans

$7.2

$1.6

$4.4

ABCP$1.2

Student Loans9%

CDOs, CLOs6%

Consumer Loans

5%

Other15%

Residential Mortgages

9%Corporate

Loans13%

Auto-Related Loans14%

Trade Receivables

14%

Credit Cards15%

10452 6

The Benefits of Securitization

Investors:

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 7

Subprime: Who Holds the Risk?

Securitization/liquidity enabled each link in the securitization chain to have less and less of a 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 collects a fee

Liquidity in the system created an insatiable demand from the CDO buyers for ABS product, fuelling the housing boom

Originators responded to the demand from the CDOs with more and more product with lower underwriting standards because the CDOs, bankers/underwriters and rating agencies didn’t insist on it

10452 8

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 $200

Thrifts 750 50

Finance Companies 400 50

Credit Unions 200 —

REITs 150 50

Asset-Backed Securities 1,900* 850

Total $9,100 $1,200

SubprimeHome Mortgages

10452 9

Loan 1

Loan 2

Loan 4

Loan 5

Loan 5000++

Loan 3

Reference Poolof Assets #1

(Mortgage Loans)

Expanding the Role of SecuritizationReference Pool

of Assets #2(BBB-Rated ABS)

BBB ABS 1

BBB ABS 2

BBB ABS 4

BBB ABS 5

BBB ABS 125

BBB ABS 3

ResidualTranches

A Tranches

AA Tranches

AAA Tranches

ABS 1

Tranched

BBB Tranches

Tranched

ResidualTranches

A Tranches

AA Tranches

AAA Tranches

CDO

BBB Tranches

ResidualTranches

A Tranches

AA Tranches

AAA Tranches

SIV/HG CDOs

BBB Tranches

Residual

A Tranches

AA Tranches

AAA Tranches

Mezz CDOs

BBB Tranches

Principaland

Interest

PortfolioLoss

10452 10

Role of the Rating Agencies: What Were the Fundamental Problems?

Optimistic assumptions were made on new untested types of mortgages

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

Most assumptions were predicated on gradual deflation of the housing bubble

10452 11

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 (1989–2006)

Moody’s 2006 Vintage Rating Transitions

Aaa Aa A Baa Ba B Caa or below

Aaa 96% 2% 1% 0% 0% 0% 1%Aa 10% 76% 8% 3% 1% 0% 2%A 2% 8% 76% 6% 4% 2% 2%Baa 0% 1% 5% 64% 9% 4% 16%Ba 0% 2% 1% 6% 64% 6% 21%

Orig. Rating Aaa Aa A Baa Ba B Caa or below

Aaa 100% 0% 0% 0% 0% 0% 0%Aa 0% 100% 0% 0% 0% 0% 0%A 0% 0% 44% 28% 18% 10% 0%Baa 0% 0% 0% 17% 19% 32% 32%Ba 0% 0% 0% 0% 6% 19% 75%

Source: Moody’s and AB

Includes home equity ABS securitizations

10452 12

Role of the Rating Agencies: Contributing Factors

There 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 required subordination

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

Rating agencies cannot keep up with innovation and have increasingly been modelling the performance of new structures based on subjective readings of limited historical data

Rating agencies take data from bankers/issuers “as is.” They have no independent audit function/requirement to test a sample of the data for authenticity

10452 13

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 comfort from models

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 agencies

Investors

In some cases investors placed too much reliance on the agencies and derived a false sense of comfort from their ratings and the highly reputable investment banks marketing securitized deals

Investors saw assets offering attractive returns for a given rating, and faced with regulatory constraints and other motives, engaged in “rating arbitrage”

Recently, investors were also caught out because they were suddenly forced to mark to market illiquid securities; they did not realize at some point they may be forced to sell

10452 14

A Reminder: Securitization Risk Is Different from Traditional Corporate Risk

CDS 1

CDS 2

CDS 4

CDS 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*

ContractuallyTranched

Reference Pool of Assets (DJ CDX IG 10-Year)

Average Rating: BBB+

*Implied S&P rating**Not rated

PortfolioLoss

Securitization Offers Diversification/Yield Enhancement Index vs. AA-Tranche Loss:Tranche Size: 7% to 10%, Recovery = 50%

0

20

40

60

80

100

120

0 2 4 6 8 10 12 14 16 18 20 22 24

Number of Defaults

Per

cent

Portfolio Loss

Tranche Loss

10452 15

Potential Threats as Result of Securitization

Securitization is of tremendous benefit to the financial system because it distributes risk globally to capital that is seeking returns

But because the risk is so widely distributed to both regulated and unregulated parties there is little transparency as to where the risks reside

While the size of the problem can be deduced in raw numbers from the size of a particular market (Subprime ABS $850 billion), it may be difficult to predict how risk holders will behave in times of distress

Information and transparency are lost in each step of the securitization process—from mortgage origination to mortgage securitization to the CDO. Each step is dependent on the other but relies heavily on the statistics provided by the previous holder of the risk

At present, money market lenders, asset-backed commercial paper issuers (including SIVs), sponsors and rating agencies are still sorting out the recent market disruption associated with “mark-to-market” and short-term funding needs

10452 16

Necessity of Securitization

Securitization makes the financial system more resilient to shocks by dispersing risk

US subprime risk is being borne by German and Chinese banks, hedge funds, insurance companies, etc. This is much preferred to mortgage risk being concentrated in the hands of one industry—the banks(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. This helps lower the cost of borrowing for the consumer

Increased availability—home ownership has increased to 69% from 64% in the mid 1990s

Securitization and ratings help create a common language and framework for investors to trade on

Securitization enables entrepreneurs to establish originators with much less capital than would otherwise be required. This allows for innovation and competitiveness within the system

Securitization also allows larger/regulated banks to leverage their lending and servicing expertise without deploying as much capital as they otherwise would. This in theory should free up bank capital to lend in other areas, which in turn should be positive for the economy

10452 17

What Can Be Done in the Future?

The root cause of the current debacle is a bubble in lending. Weaknesses in the rating agency model exacerbated the situation but did not cause it

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

Agencies should consider adding a “liquidity score” to their ratings, granting a high score only if there is a listed and well-quoted market

Repo counterparts should be encouraged to be more cautious with respect to “pledged” collateral. Regulators should consider mandating capital charges on certain instruments that are commensurate with liquidity scores

On the heals of over two million sub-prime owners struggling to keep their homes, “truth in lending” practices should be re-evaluated by policy makers

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

O C T O B E R 30, 2 0 0 7

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

Current and future demand for US Treasuries

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

Annual US budget surplus/deficit and current account surplus/ deficit (USD bln; fiscal year total with CBO and consensus estimates for 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 2006

20

40

60

80

100

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, 12-mon avg) and USD real effective exchange rate

Net foreign total purchases (USDbln, 12-mon avg) and USD real effective exchange rate

Source: US Treasury and JPMorgan

Net foreign UST purchases (USDbln, 12-mon avg) and USD real effective exchange rate

Net foreign UST purchases (USDbln, 12-mon avg) and USD real effective exchange rate

-5

0

5

10

15

20

Jan90

Jan92

Jan94

Jan96

Jan98

Jan00

Jan02

Jan04

Jan06

80

85

90

95

100

105

110

Net foreign UST purchases12-mon avg

USD REER

0

10

20

30

40

50

60

Jan90

Jan92

Jan94

Jan96

Jan98

Jan00

Jan02

Jan04

Jan06

80

85

90

95

100

105

110

Total net foreign purchases12-mon avg

USD REER

-200

0

200

400

600

800

1000

1200

1400

1980 1985 1990 1995 2000 2005

-1400

-1200

-1000

-800

-600

-400

-200

0

200

Defic its

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

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

-45

-25

-5

15

35

55

75

95

115

135

155

175

Jan 02 May 03 Sep 04 Jan 06 May 07

Total Official Total Private

-45

-25

-5

15

35

55

75

95

115

135

155

175

Jan 02 May 03 Sep 04 Jan 06 May 07

Total Official Total Private

Foreign demand for Treasuries has evolved over time

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

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

Source: TIC

12-month moving average of total monthly net purchases of US Treasuries by foreigners, and 12-month moving average of monthly net purchases by China, Japan, Caribbean, and UK; $bn

12-month moving average of total monthly net purchases of US Treasuries by foreigners, and 12-month moving average of monthly net purchases by China, Japan, Caribbean, and UK; $bn

Source: TIC

-10

0

10

20

30

40

Jan 80 Aug 85 Feb 91 Aug 96 Feb 02 Aug 07-10

0

10

20

30

40

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

Total

China

Japan

Caribbean

UK

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 Treasury securities ($bln)Major foreign holders of Treasury securities ($bln)

Source: TIC

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2001 2002 2003 2004 2005 2006 2007

Other

Japan

ChinaUK

Oil exporters

Caribbean

Brazil

level share yr/yr changeJapan 585.6 26.2% -6.1%China 400.2 17.9% 3.5%United Kingdom 2/ 244.0 10.9% 346.9%Oil Exporters 3/ 123.3 5.5% 5.7%Brazil 106.7 4.8% 147.6%Caribbean Banking Centers4/ 76.3 3.4% -4.1%Luxembourg 63.9 2.9% 9.4%Hong Kong 56.2 2.5% 10.8%Taiwan 52.2 2.3% -15.7%Korea 48.9 2.2% -22.9%Germany 44.8 2.0% 0.2%Singapore 34.9 1.6% 0.6%Mexico 32.9 1.5% -18.4%Switzerland 31.3 1.4% -17.8%Turkey 27.6 1.2% 15.0%Canada 24.9 1.1% -12.0%Netherlands 21.2 1.0% 26.9%Thailand 20.1 0.9% 24.8%France 16.8 0.8% -28.8%Sweden 16.5 0.7% 22.2%Russia 13.1 0.6% 98.5%Poland 13.0 0.6% -3.0%Ireland 12.9 0.6% -14.6%Italy 12.7 0.6% -10.6%Israel 11.6 0.5% 87.1%Belgium 11.3 0.5% -22.1%India 10.9 0.5% -19.3%All Other 117.5 5.3% -13.7%Total 2231.2 100.0% 9.5%

Foreign Official 1427.6 64.0% -0.1% Foreign Official Bonds 1247.7 55.9% -5.4% Foreign Official Bills 179.8 8.1% 0.7%1/ Estimated foreign holdings of U.S. Treasury marketable and non-marketable bills, bonds, and notes reported under the Treasury International Capital (TIC) reporting system are based on annual Surveys of Foreign Holdings of U.S. Securities and on monthly data. 2/ United Kingdom includes Channel Islands and Isle of Man. 3/ Oil exporters include Ecuador, Venezuela, Indonesia, Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, the United Arab Emirates, Algeria, Gabon, Libya, and Nigeria. 4/ Caribbean Banking Centers include Bahamas, Bermuda, Cayman Islands, Netherlands Antilles and Pana Beginning with new series for June 2006, also includes British Virgin Islands.

August 2007 (end of period) 1/

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

Rolling 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

0.0

0.5

1.0

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

Rolling 12-month correlation between 3mon Tbill/10yr Treasury curve and net foreign purchases of UST

Rolling 12-month correlation between 3mon Tbill/10yr Treasury curve and net foreign purchases of UST

-1.0

-0.5

0.0

0.5

1.0

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

Source: JPMorgan and US Treasury

Structural factors, not market dynamics, have driven US Treasurydemand

Recent FX reserves accumulation in AsiaRecent 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

1,000,000

1,500,000

CNY HKD KRW TWD PHP TWD MYR SGD IDR INR

Jan 07Mar 07Sep 07

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

100

200

300

400

500

600

700

-10 10 30 50 70 90

WTI

Cur

rent

acco

unt

surp

lus

ofoi

lex

porte

rs,

US

Dbn

Regression of current account surplus of oil exporting countries(USDbln) and annual WTI average price ($/bbl) over last 15 years

Regression of current account surplus of oil exporting countries(USDbln) and annual WTI average price ($/bbl) over last 15 years

Source: IMF

30

80

130

180

230

280

90 94 98 02 06

Foreign exchange (minus gold) reserves, USDbln

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


Focus on BRIC – Brazil reserves appreciating most quickly



-20

0

20

40

60

80

100

120

140

160

Jan 03 Dec 03 Dec 04 Nov 05 Nov 06 Oct 07

Brazil

RussiaChina

India

0

10

20

30

40

50

60

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 USDCentral banks have marginally reduced % of reserves held in USD

Central bank reserve diversification

Currency composition of global official FX reserves

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60%

70%

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90%

100%

0703 050199

USD

EUR

JPYGBP

Official foreign flows, by asset class ($bln); 2007 full-year estimate based on first 8 months of data

Official foreign flows, by asset class ($bln); 2007 full-year estimate based on first 8 months of data

Source: TIC

-50

0

50

100

150

200

250

Treasuries Agencies (inclMBS)

Corporates Equities

2004 2005 2006 2007 est

Diversification trends:

Sovereign Wealth Funds: an alternative investment for central banks

Top existing Sovereign Wealth FundsTop existing Sovereign Wealth Funds

Sources: Norges Bank, Saudi Arabian Monetary Agency, Ministry of Finance in Russia, Government of Singapore Investment Corp., Pacific Management Investment Company (PIMCO), JPMorgan and Toloui (2007). Kuwait assets based on PIMCO estimates

Assets under managementCountry Sovereign Wealth Funds (approximate, USDblns) Source Inception yearUAE Abu Dhabi Investment Authority 500-1000 Oil 1976Norway Government Pension Fund more than 300 (as of April 2007) Oil 1990

Kuwait Kuwait Investment Authority 150-250 Oil 1960Russia Oil Stabilization Fund 122 (as of June 2007) Oil 2004China China Investment Corporation 200 Other 2007Singapore Government of Singapore Investment Corporation 200-330 Other 1981

Sovereign external assetsSaudi Arabia Monetary Agency and govt. institutions 276 Oil 1952

Private foreign UST purchases have remained robust even though asset allocation has shifted

Private flows, by asset class ($bln); 2007 full-year estimate based on first 8 months of data

Private flows, by asset class ($bln); 2007 full-year estimate based on first 8 months of data

0

100

200

300

400

500

Treasuries Agencies (inclMBS)

Corporates Equities

2004 2005 2006 2007 est

Source: TIC-30

-15

0

15

30

45

60

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: TICSource: 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 Treasuries by month; 2007 vs median purchase during 2001-2006, ($bn)

Net foreign purchases of US Treasuries by month; 2007 vs median purchase during 2001-2006, ($bn)

Source: TIC

-10

0

10

20

30

40

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

2007

2001-06

Source: TIC

-75

-50

-25

0

25

50

75

100

125

150

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; $bn

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

Source: TIC

3-month moving average of monthly net purchases of US Treasuries by China; $bn

3-month moving average of monthly net purchases of US Treasuries by China; $bn

Source: TIC

August showed a meaningful decline in Asian UST demand…

-30

-25

-20

-15

-10

-5

0

5

10

15

20

25

30

35


August 2007 -$24bn

-30

-25

-20

-15

-10

-5

0

5

10

15

20

25

30

35


August 2007 -$14bn

…however, flows from other key regions remained supportive

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

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

Source: TICSource: TIC

3-month moving average of monthly net purchases of US Treasuries through Caribbean countries; $bn

3-month moving average of monthly net purchases of US Treasuries through Caribbean countries; $bn

-30

-25

-20

-15

-10

-5

0

5

10

15

20

25

30

35


August 2007 $33bn

-30

-25

-20

-15

-10

-5

0

5

10

15

20

25

30

35


August 2007 $20bn

Recent Fed custody data suggest a moderate rebound in net foreign purchases of Treasuries

Source: Federal ReserveSource: Federal Reserve

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




500

700

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1100

1300

Jul 96 Oct 98 Jan 01 Apr 03 Jul 05 Oct 071200

1210

1220

1230

1240

1250

1260

07 Jun 05 Jul 02 Aug 30 Aug 27 Sep 25 Oct

Key issues for gauging future Treasury demand

International currency policy and FX reserve accumulation

Investment of FX reserves

Foreign private flows

US economic outlook

Geopolitical issues

Pension fund demand

Entitlement changes

Documents

Presentation to the Treasury Borrowing Advisory Committee › resource-center › data... · Money rates have come down since August, but volatility remains with a potential penalty