Overview of U.S. Treasury Debt Management Karthik Ramanathan Director Office of Debt Management June 2008

Overview of U.S. Treasury Debt Management

Karthik RamanathanDirector

Office of Debt Management

June 2008

2Office of Debt Management

Contents

I. Overview and Objectives

II. Composition of Portfolio

III. Determinants of Borrowing Needs and Policy Tools

IV. International Investments

V. Overview of TIPS Program


I. Overview and Objectives

Size of Operations is Hard to Grasp

$4.4 trillion issued in 219 auctions in FY 2007

$238 billion paid in net interest in FY 2007

• represented 8.7% of Government expenditures

More than $1 trillion moved between accounts on NBES daily

More than $565 billion traded daily (primary dealers)

• For comparison total global equity trading is under $420 billion daily

$4.6 trillion in marketable debt outstanding as of May 31, 2008

• represents roughly a quarter of U.S. credit markets

* includes holdings by the Federal Reserve


Treasury Issuance Objectives and Constraints

Our Objective • Lowest cost of financing over time

Constraints• Uncertainty: Forecast errors, legislation, etc. all create uncertainty in deficit

forecasts, debt limit problems• Size: Treasury is too large to behave opportunistically• Fluctuations in non-marketable debt: Savings Bonds, State and Local

Government Securities• Short-term balances: Adequate cash balances to cover expenses


Flexibility is Key as a Result of Large Swings in the Deficit

Annual Deficits as of FY 2008

-500,000

-400,000

-300,000

-200,000

-100,000

0

100,000

200,000

300,000

1950

1952

1954

1956

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Years

$ M

illio

ns

-7

-6

-5

-4

-3

-2

-1

0

1

2

3

Per

cen

t o

f G

DP

OMB Estimates

Surplus/Deficits$ millions (LHS)

Surplus/Deficits as a Percentage of GDP (RHS)


Lowest Cost over Time Implies a Diversified Debt Portfolio

Spread debt across maturities to…

• Reduce risk• Diversify the investor base• Improve cash management• Facilitate regular and predictable issuance


Promote market transparencyProvide a structured framework for investor participationBe available to customers for feedback and guidanceListen and be credible

Ensure regulationBroadly speaking, to protect investorsEstablish consistent, fair practices across marketsCreate a level playing fieldInstill investor confidence in markets

But don’t over regulate Don’t interfere with price discoveryLet bond market participants develop trading practicesLet market participants work through problems—don’t overreact.Encourage solutions and innovation through market based, private working

groups

Deep, Liquid Markets Promote Capital Flows


Treasury Issuance Outcomes

Policy Outcomes• We are regular market participants, not market timers -- “Regular and

predictable”• We don’t react to interest rate levels• We need flexibility• We strive for transparency


Transparency and PredictabilityLeads to Greater Investor Participation over the Long Run

Source: FRB-NY

Average Daily Trading Volume of U.S. Treasury Securities (annual)

0

100

200

300

400

500

600

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

*

$ B

illio

ns

Average 2007 Daily Trading Volume = $565 Billion


II. Composition of Portfolio

Marketable Debt• $4.6 trillion outstanding, can be traded in the secondary market• Sold at auction, rates set via competitive bidding

Non-Marketable Debt• $515 billion outstanding • Can only be sold to Treasury• Sold by subscription, rates set administratively • Savings bonds, State and Local Government Series (SLGS)

Government Account Series• Approximately $4.2 trillion (mostly special non-marketables) in 135 funds

Federal Old Age Survivors Fund $2.1 trillion

Civil Service Retirement Fund $679 billion

Hospital Insurance Trust Fund $323 billion


Non-Marketable Treasury Securities

State and Local Government Series (SLGS)• $280 billion outstanding• Special securities issued to municipalities to assist them with compliance on arbitrage-

rebate regulations

U.S. Savings Bonds• $195 billion outstanding• Both Series E and Series I (inflation protected)• Targeted at small retail investors

Foreign Government Series and Other (ex Govt Acct)• $40 billion, (e.g., Brady bond zeros)


$4.6 trillion outstanding

Bills, $1,114,547, 24%

Notes, $2,475,730, 53%

Bonds, $580,983, 12%

TIPS, $494,202, 11%

Composition of Marketable Debt



Foreign Series, $3,286, 0%

R.E.A Series, $1, 0%

SLGS Series, $280,017, 6%

Savings Bonds, $195,225, 4%

Government Account Series, $4,190,825, 89%

Other, $4,265, 0%

Domestic Series, $29,995, 1%

Composition of Non-Marketable Debt


Composition of Total Debt Outstanding


Bills, 1,119,245 , 12%

Notes, 2,476,584 , 26%

Bonds, 581,059 , 6%

TIPS, 494,295 , 5%

FFB, 14,000 , 0%

Domestic Series, 29,995 , 0%

Foreign Series, 3,286 , 0%

R.E.A Series, 1 , 0%

SLGS Series, 280,017 , 3%

Savings Bonds, 195,225 , 2%

Government Account Series, 4,190,825 , 46%

Other, 4,265 , 0%


Interest Costs on Marketable Debt


III. Determinants of Borrowing Needs and Policy Tools

Changes in Cash Balance

Budget Deficit/Surplus

Economic Outlook

Volume of Maturing Issues (rollover of existing issues)


…And, Volatility in Cash Balances

Key Receipt Dates

1st of Month – Individual withheld taxes

Mar. 15, Jun. 15, Sept. 15, Dec. 15- Corporate Taxes

Jan. 15, Apr. 15, Jun. 15, Sept. 15 Individual Non-withheld Taxes

Key Outlay Dates

1st of each month – Medicare, SSI, VA, CSRDF

3rd of each month Main Social Security payments

2nd/3rd/4th Wed of each month Soc. Sec. cycle payments

Feb. 15, May 15, Aug. 15, Nov. 15 Interest payment dates—

Feb 1 - April 15 – Individual tax refunds

Treasury Daily Operating Cash Balance

0

25

50

75

100

125

150

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

$ billions

0

25

50

75

100

125

150

FY 2006

FY 2007

FY 2008

$ billions

Note: Data through June 4, 2008.


Estimating Financing Needs

Each morning, the Office of Fiscal Projections (OFP) updates its forecasts for government financing using the latest available data

Revenues Outlays(Deficit)/Surplus

Corporate Taxes

Individual Taxes

Excise Taxes

Estate and Gift Taxes

Customs Duties

Defense Spending

Education Expenses

Social Security

Medicare/Medicaid

Federal employee payroll

ETC…

=

FY2008 $2.52 trillion FY2008 ($2.93 trillion) FY2008 ($410 billion)+ =Based on OMB’s Budget of the United States Government FY2009


Average Absolute Federal Budget Forecast ErrorsFY 1997-2006

Months Until End of Fiscal Year Average Error14 Months $124 billion11 Months $100 billion8 Months $93 billion5 Months $62 billion2 Months $25 billion

*Average Error for FY 1997 – 2006 based on forecasts by CBO, OMB, and Primary Dealers


Debt Management Policy Tools

Auction Sizes Auction Frequency Security Offering Menu Auction Regulations Market monitoring, consultation, and surveillance


IV. International Investments


Foreign Holdings as a Percent of Total Marketable Debt


V. Overview of TIPS Program

First TIPS were issued in January 1997. Treasury now is the largest issuer of inflation linked bonds globally.

26 issues ranging from 2009 to 2032. The TIPS curve is complete out to 10 years.

To date only three TIPS issues have matured – in July 2002, January 2007, and January 2008.

As of May 31, 2008 TIPS market capitalization totaled over $494 billion; or about 11% of marketable Treasuries outstanding.

Average daily trading volume in 2008 is near $10 billion according to primary dealer estimates .

There is a higher concentration of dealer volume relative to nominal Treasuries. TIPS ownership is also more concentrated.


Additional Information

Office of Debt Management• http://www.treas.gov/offices/domestic-finance/debt-management/

Federal Reserve Information• http://www.newyorkfed.org/• http://www.federalreserve.gov/

Documents

Overview of U.S. Treasury Debt Management Karthik Ramanathan Director Office of Debt Management June 2008