Presentation to the Treasury Borrowing Advisory Committee · Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 $ billions Data through

Presentation to the Treasury Borrowing Advisory Committee

U.S. Department of the TreasuryOffice of Debt Management

November 4, 2008

2Office of Debt Management

Fiscal Outlook


Volatility across credit markets remains though there have been signs of pressures easing

J P Y /U S D : S p o t Ex c h a n g e R a t e N Y C lo s e

9 0

9 5

1 0 0

1 0 5

1 1 0

1 1 5

1 2 0

1 2 5

Oct

-06

Dec

-06

Feb-

07

Mar

-07

May

-07

Jun-

07

Aug-

07

Sep-

07

Nov

-07

Jan-

08

Feb-

08

Apr-

08

May

-08

Jul-0

8

Aug-

08

Oct

-08

C B O E M a r k e t V o la t i l i t y In d e x , V IXL a s t : 7 9 .1 3

51 01 52 02 53 03 54 04 55 05 56 06 57 07 58 0

Oct

-06

Dec

-06

Jan-

07

Mar

-07

May

-07

Jun-

07

Aug-

07

Sep-

07

Nov

-07

Dec

-07

Feb-

08

Mar

-08

May

-08

Jun-

08

Aug-

08

Sep-

08

3 0 - Y e a r T r e a s u r y N o t e a t C o n s t a n t M a t u r it y

3 .7 5

4 .0 0

4 .2 5

4 .5 0

4 .7 5

5 .0 0

5 .2 5

5 .5 0

Oct

-06

Dec

-06

Feb-

07

Mar

-07

May

-07

Jun-

07

Aug-

07

Sep-

07

Nov

-07

Jan-

08

Feb-

08

Apr-

08

May

-08

Jul-0

8

Aug-

08

Oct

-08

3-Month LIBOR (London Bid) (% p.a.)

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

5.50

6.00

Oct

-06

Dec

-06

Jan-

07

Feb-

07

Mar

-07

May

-07

Jun-

07

Jul-0

7

Aug-

07

Oct

-07

Nov

-07

Dec

-07

Jan-

08

Mar

-08

Apr-08

May

-08

Jun-

08

Aug-

08

Sep-

08

Oct

-08

3-month LIBOR: 3.52


The economic outlook continues to present challenges

C o n f e r e n c e B o a r d : C o n s u m e r C o n f id e n c e P r e s e n t S it u a t io n a n d Ex p e c t a t io n s

2 5

5 0

7 5

1 0 0

1 2 5

1 5 0

1 7 5

2 0 0

Aug-

98

Jun-

99

Apr-

00

Feb-

01

Dec

-01

Oct

-02

Aug-

03

Jun-

04

Apr-

05

Feb-

06

Dec

-06

Oct

-07

Aug-

08

P r e s e n t S it u a t io n : 5 8 .8 ( - 6 .2 0 )Ex p e c t a t io n s : 6 0 .5 ( + 6 .4 0 )

N o n f a r m P a y r o ll C h a n g e ( S A , T h o u s ) m o n t h o v e r m o n t h c h a n g e a n d C iv il ia n U n e m p lo y m e n t R a t e

- 3 5 0

- 2 5 0

- 1 5 0

- 5 0

5 0

1 5 0

2 5 0

3 5 0

4 5 0

Jan-

02

Jun-

02

Nov

-02

Apr-

03

Sep-

03

Feb-

04

Jul-0

4

Dec

-04

May

-05

Oct

-05

Mar

-06

Aug-

06

Jan-

07

Jun-

07

Nov

-07

Apr-

08

Sep-

08

3 .5

4 .0

4 .5

5 .0

5 .5

6 .0

6 .5N o n f a r m P a y r o ll C h a n g e : - 1 5 9 ,0 0 0 L H SU n e m p lo y m e n t R a t e : 6 .1 % R H S

N A R T o t a l Ex is t in g H o m e S a le s , U n it e d S t a t e s ( S A A R , T h o u s ) a n d Y e a r o v e r Y e a r C h a n g e

- 2 5 %

- 1 5 %

- 5 %

5 %

1 5 %

2 5 %

Jan-

02

Nov

-02

Sep-

03

Jul-0

4

May

-05

Mar

-06

Jan-

07

Nov

-07

Sep-

08

0

2 0 0 0

4 0 0 0

6 0 0 0

8 0 0 0

Ex is t in g H o m e S a le s : 5 1 8 0Y e a r o v e r Y e a r C h a n g e : 1 .4 %

L E I 1 -m o n th % c h a n g e

-1 .5

-1

-0 .5

0

0 .5

1

1 .5

2

1998

- Ja

n

1998

- Ju

l

1999

- Ja

n

1999

- Ju

l

2000

- Ja

n

2000

- Ju

l

2001

- Ja

n

2001

- Ju

l

2002

- Ja

n

2002

- Ju

l

2003

- Ja

n

2003

- Ju

l

2004

- Ja

n

2004

- Ju

l

2005

- Ja

n

2005

- Ju

l

2006

- Ja

n

2006

- Ju

l

2007

- Ja

n

2007

- Ju

l

2008

- Ja

n

2008

- Ju

l


From a fiscal perspective, borrowing requirements have steadily increased

Fiscal Year to Date Deficits (monthly data)

-49

-162

-258

-148-121

-157 -163

-56

-154

-106-88

-311

-152

-319

-269

-371

-483

-81

-274

-80

-42

-122

-263

-455

-600

-500

-400

-300

-200

-100

0

Oct

-06

Nov

-06

Dec

-06

Jan-

07

Feb-

07

Mar

-07

Apr-

07

May

-07

Jun-

07

Jul-0

7

Aug

-07

Sep-

07

Oct

-07

Nov

-07

Dec

-07

Jan-

08

Feb-

08

Mar

-08

Apr-

08

May

-08

Jun-

08

Jul-0

8

Aug

-08

Sep

-08

$ Billions

-100%

-50%

0%

50%

100%

150%

200%

2007 Y-O-Y % Change2008


In FY08, growth in receipts was negative for the first time since FY03, and growth in outlays accelerated to its highest pace since FY06

Individual and Corporate Tax Receipts Fiscal Year to Date

0

200

400

600

800

1000

1200

1400

1600

1800

Oct Nov D ec Jan Feb Mar Apr May Jun Jul Aug Sep

$ billions

0

200

400

600

800

1000

1200

1400

1600

1800$ billions

FY 2004FY 2005FY 2006FY 2007FY 2008

Total OutlaysFiscal 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

3500$ billions

FY 2004FY 2005FY 2006FY 2007FY 2008


Withheld and corporate tax receipts continue to decelerate

Rolling 12-Month Growth Rates

-30%

-20%

-10%

0%

10%

20%

30%

40%

Dec-81

Dec-82

Dec-83

Dec-84

Dec-85

Dec-86

Dec-87

Dec-88

Dec-89

Dec-90

Dec-91

Dec-92

Dec-93

Dec-94

Dec-95

Dec-96

Dec-97

Dec-98

Dec-99

Dec-00

Dec-01

Dec-02

Dec-03

Dec-04

Dec-05

Dec-06

Dec-07

Dec-08

Period ending

Corp Taxes WH Tax


Mitigating volatility in cash balances remains challenging

Daily Treasury Operating Cash Balances

0

100

200

300

400

500

600

700

800

Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08

$ billions Data through Oct 30, 2008.

Cash Balance with SFPs

Treasury Daily Operating Cash Balance

0

25

50

75

100

125

150

175

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

$ billions

FY 2007FY 2008FY 2009

$ billions

Note: Data through October 30, 2008.


Primary dealer estimates of the FY 2009 deficit rose to $988 billion, and marketable borrowing estimates range between $1.1 trillion and $2.1 trillion

FY 09 Deficit Estimates $ billionsPrimary Dealers* CBO OMB

Current: 988 438 482Range based on average absolute forecast error** 863 - 1,113 338 - 538 391 - 573FY 2009 Marketable Borrowing*** 1,400 - -FY 2009 Marketable Borrowing Range*** 1,100 - 2,100 - -Estimates as of: October 08 September 08 July 08* Primary Dealers reflect average estimate.** Ranges based on errors from 2004-2008.*** Based on Primary Dealer feedback on October 30, 2008.


The decline in SOMA bill holdings, SFP related financing, and funding needs, have led to higher bill issuance, including cash management bills

Bills Outstanding

Total

SOMA

Private

$0

$400

$800

$1,200

$1,600

Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08

CMBs and SFP Outstanding(as of 10/31/08)

-$100

$0

$100

$200

$300

$400

$500

$600

$700

$800

7/1

8/1

9/1

10/1

11/1

12/1 1/1

2/1

3/1

4/1

5/1

6/1

7/1

8/1

9/1

10/1

11/1

12/1 1/1

2/1

3/1

4/1

5/1

6/1

CMBs SFPs

Bills: Issued and Net Cash Raised

-

1,000

2,000

3,000

4,000

2005 2006 2007 2008

FY

Am

ount

($, b

n)

Rollover Net cash

Total Bills Maturing

$50

$55

$60

$65

$70

$75

$80

$85

$90

Mar-08 Jun-08 Sep-08 Dec-08 Mar-09


The average maturity of marketable debt outstanding fell between August 31 and September 30 as short-term issuance increased

Average Maturity of Marketable Debt Outstanding

20

30

40

50

60

70

80

90

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

months

Quarte rly d ata through September 30, 2008.

52 monthsas of 9/30/2008


Nominal coupon security issuance has also been increased in response to borrowing needs

Coupon Issuance in 2007-2008

$10.00

$15.00

$20.00

$25.00

$30.00

$35.00

$40.00

4/2/

2007

5/2/

2007

6/2/

2007

7/2/

2007

8/2/

2007

9/2/

2007

10/2

/200

7

11/2

/200

7

12/2

/200

7

1/2/

2008

2/2/

2008

3/2/

2008

4/2/

2008

5/2/

2008

6/2/

2008

7/2/

2008

8/2/

2008

9/2/

2008

Size

of L

ast O

fferin

g (b

illio

ns)

2-Year (Monthly)

10-Year (Quarterly + Reopening)

5-Year (Monthly)

30-Year (Semi-Annual + Reopening)

Security Most Recent as of October 2007 (bil) Most Recent as of September 2008 (bil) Change in One Year (bil)2-Year $18.00 $34.00 $16.005-Year $13.00 $24.00 $11.0010-Year $21.00 $29.00 $8.0030-Year $14.00 $16.00 $2.00

Issuance Sizes and Speed of Change in a Changing Deficit Environment


TIPS’ share of the outstanding portfolio has stabilized at 10%

Year-over-Year Growth Rates

-5%

0%

5%

10%

15%

20%

25%

30%

35%

Oct-05 May-06 Nov-06 Jun-07 Dec-07 Jul-08

Rat

e

Noms TIPs Poly. (TIPs) Poly. (Noms)

TIPS Issuance and OutstandingFiscal Year

$0

$10

$20

$30

$40

$50

$60

$70

$80

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

$ Billions

$0

$100

$200

$300

$400

$500

$60010-Y 5-Y 20-Y 30-Y Inflation-Adjusted Outstanding (rhs) Par Outstanding (rhs)

$ Billions

D istribution of Marketable Debt Outstanding by SecurityFiscal Y ear

0%

5%

10%

15%

20%

25%

30%

35%

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 20130%

5%

10%

15%

20%

25%

30%

35%

BILLS 2-3 YR NOTES 4-7 YR N OTES 8-10 YR NOTES BONDS TIPS

Projected

Net financ ing projec tions for FY 2009-2013 are based on OM B 2009 MSR Budget es timates. Future residua l financing nee ds are spread proportionally ac ross auctione d securities and are d erived from hypothetical auction sizes . Initial sizes are based on anno unced coupon amo unts a s of September 3 0, 2008 and assume the outsta nd ing level of bills on Septembe r 30, 2008 . All pro jections exclude CM B issuance and ma turing amo unts.


Several estimates indicate that shorter dated TIPS are less beneficial from an issuer and investor perspective

Security Depository Institutions Individuals

Dealers & Brokers

Pension & Retirement funds & Ins.

Investment Funds

Foreign and International Other Auctions

Average 1% 2% 56% 1% 32% 8% 0% 455 0% 1% 62% 2% 26% 10% 0% 810 1% 2% 58% 1% 29% 8% 0% 2820 0% 1% 45% 1% 46% 6% 0% 9

Investor Class at Auction Breakdown by Security since 2001

Scenario Analysis of the Cost of the October Reopening of the 0.625% Apr 2013 5-Year TIPS

-200

0

200

400

600

800

1,000

1,200

-3.50% -2.50% -1.50% -0.50% 0.50% 1.50% 2.50% 3.50%

Hypothetical Inflation over Remaining Life of Security

Cos

t (+)

/ Sa

ving

(-) v

ersu

s Eq

uiva

lent

5-

Year

Nom

inal

($,m

m)

Breakeven Line

Current Estimate of Inflation from the Survey of Professional

Possible Outcomes Highly Biased to Cost due to Deflation Floor on the Principal of the Security

Study Cost Estimate (bn, $) Date of Estimate Study TypeSack/Elsasser 2.8 Through June 2003 Ex PostSack/Elsasser 12.3 Through June 2003 Ex Post + Extrapolation

Roush 5 - 8 Through February 2007 Ex PostRoush 8 - 17 Through February 2007 Ex Post + ExtrapolationTBAC 30 Through July 15, 2008 Ex Post

TIPS Program Cost Estimates


Adjusting the auction calendar should be considered to address borrowing needs while minimizing costs

Security Recent Size, $ Billions4-week, 13-week, and 26-week bills 34, 27, 2752-week bills 21 per month

2-year note 34 per month5-year note 24 per month10-year note 29 (17 initial + 12 reopening)

30-year bond 16 (10 initial + 6 reopening)

5-year TIPS 14 (8 initial + 6 reopening)10-year TIPS 14 (8 initial + 6 reopening) 20-year TIPS 14 (8 initial + 6 reopening)

Cash Management Bills 37 (average size in FY 2008 thru Nov. 5)(including SFP)


Coupons can be adjusted to raise additional cash

Coupons: Maturing and Net Cash Raised

-

100

200

300

400

500

600

700

800

900

2005 2006 2007 2008

FY

Am

ount

($, b

n)

Rollover Net cash

Amounts Rolled Over and Net Issue ($, bn)

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

07 Bills 07 NomCpns 07 TIPs 08 Bills 08 NomCpns 08 TIPs

Securities and Year

Maturing Net Cash


In FY 2009, maturing securities add to financing needs

Coupons Maturing*November 15, 2008-May 15, 2038

0

10

20

30

40

50

60

70

80

15-N

OV

-200

830

-NO

V-2

008

15-D

EC

-200

831

-DE

C-2

008

15-J

AN

-200

931

-JA

N-2

009

15-F

EB

-200

928

-FE

B-2

009

15-M

AR

-200

931

-MA

R-2

009

15-A

PR

-200

930

-AP

R-2

009

15-M

AY

-200

931

-MA

Y-2

009

15-J

UN

-200

930

-JU

N-2

009

15-J

UL-

2009

31-J

UL-

2009

15-A

UG

-200

931

-AU

G-2

009

15-S

EP

-200

930

-SE

P-2

009

15-O

CT-

2009

31-O

CT-

2009

15-N

OV

-200

930

-NO

V-2

009

15-D

EC

-200

931

-DE

C-2

009

15-J

AN

-201

031

-JA

N-2

010

15-F

EB

-201

028

-FE

B-2

010

15-M

AR

-201

031

-MA

R-2

010

15-A

PR

-201

030

-AP

R-2

010

15-M

AY

-201

031

-MA

Y-2

010

15-J

UN

-201

030

-JU

N-2

010

15-J

UL-

2010

31-J

UL-

2010

15-A

UG

-201

031

-AU

G-2

010

15-S

EP

-201

030

-SE

P-2

010

15-O

CT-

2010

15-N

OV

-201

015

-DE

C-2

010

15-J

AN

-201

115

-FE

B-2

011

28-F

EB

-201

131

-MA

R-2

011

15-A

PR

-201

130

-AP

R-2

011

31-M

AY

-201

130

-JU

N-2

011

31-J

UL-

2011

15-A

UG

-201

131

-AU

G-2

011

30-S

EP

-201

131

-OC

T-20

1130

-NO

V-2

011

31-D

EC

-201

115

-JA

N-2

012

31-J

AN

-201

215

-FE

B-2

012

29-F

EB

-201

231

-MA

R-2

012

15-A

PR

-201

230

-AP

R-2

012

31-M

AY

-201

230

-JU

N-2

012

15-J

UL-

2012

31-J

UL-

2012

15-A

UG

-201

231

-AU

G-2

012

30-S

EP

-201

231

-OC

T-20

1215

-NO

V-2

012

30-N

OV

-201

231

-DE

C-2

012

31-J

AN

-201

315

-FE

B-2

013

28-F

EB

-201

331

-MA

R-2

013

15-A

PR

-201

330

-AP

R-2

013

15-M

AY

-201

331

-MA

Y-2

013

30-J

UN

-201

315

-JU

L-20

1331

-JU

L-20

1315

-AU

G-2

013

31-A

UG

-201

330

-SE

P-2

013

15-N

OV

-201

315

-JA

N-2

014

15-F

EB

-201

415

-MA

Y-2

014

15-J

UL-

2014

15-A

UG

-201

415

-NO

V-2

014

15-J

AN

-201

515

-FE

B-2

015

15-M

AY

-201

515

-JU

L-20

1515

-AU

G-2

015

15-N

OV

-201

515

-JA

N-2

016

15-F

EB

-201

615

-MA

Y-2

016

15-J

UL-

2016

15-A

UG

-201

615

-NO

V-2

016

15-J

AN

-201

715

-FE

B-2

017

15-M

AY

-201

715

-JU

L-20

1715

-AU

G-2

017

15-N

OV

-201

715

-JA

N-2

018

15-F

EB

-201

815

-MA

Y-2

018

15-J

UL-

2018

15-A

UG

-201

815

-NO

V-2

018

15-F

EB

-201

915

-AU

G-2

019

15-F

EB

-202

015

-MA

Y-2

020

15-A

UG

-202

015

-FE

B-2

021

15-M

AY

-202

115

-AU

G-2

021

15-N

OV

-202

115

-AU

G-2

022

15-N

OV

-202

215

-FE

B-2

023

15-A

UG

-202

315

-NO

V-2

024

15-J

AN

-202

515

-FE

B-2

025

15-A

UG

-202

515

-JA

N-2

026

15-F

EB

-202

615

-AU

G-2

026

15-N

OV

-202

615

-JA

N-2

027

15-F

EB

-202

715

-AU

G-2

027

15-N

OV

-202

715

-JA

N-2

028

15-A

PR

-202

815

-AU

G-2

028

15-N

OV

-202

815

-FE

B-2

029

15-A

PR

-202

915

-AU

G-2

029

15-M

AY

-203

015

-FE

B-2

031

15-A

PR

-203

215

-FE

B-2

036

15-F

EB

-203

715

-MA

Y-2

037

15-F

EB

-203

815

-MA

Y-2

038

$ Billions

10 YR IIS NOTE 10 YR NOTE 2 YR NOTE

20 YR IIS BOND 3 YR NOTE 30 YR BOND

30 YR IIS BOND 5 YR IIS NOTE 5 YR NOTE

*Based on coupon securities outstanding as of October 15, 2008.


Given Treasury’s financing needs in the coming years as well as current and medium-term trends in the fiscal and economic outlooks, what are the Committee’s thoughts on Treasury’s debt issuance?

What changes to the auction calendar do you recommend Treasury make at this time?


Treasury Cash and Debt Management Tools


Existing Cash and Debt Management Tools

Cash Management Tools• Treasury Tax and Loan (TT&L)• Treasury’s Term Investment Option (TIO)• Repurchase Agreement Program

Debt Management Tools• Auction schedule

• Amount• Frequency• Adding/Discontinuing Securities

• Treasury Debt Repurchases


Private sector solutions need to be implemented to prevent a reoccurrence

The private sector has repeatedly stated that they would implement their own solutions rather than involving governmental intervention.Recommendations:•Amend master repo agreements•Establish a standard cash trading agreement•Margining of aged settlement fails•Negative rate trading•Bilateral cash settlement of aged fails•Multi-lateral netting facility

Treasury has repeatedly requested as part of its quarterly refundings that the private sector address the fails-to-deliver :•Feb 2008•May 2008•Aug 2008•Nov 2006•Aug 2006

•May 2006•Feb 2006•Nov 2005•Aug 2005•Nov 2003

P r i m a r y D e a l e r T r e a s u r y S e c u r i t y S e t t l e m e n t F a i l sI n t e r e s t R a t e E n v i r o n m e n t

0

5 0

1 0 0

1 5 0

2 0 0

2 5 0

3 0 0

3 5 0

4 0 0

4 5 0

1/4/

1995

6/4/

1995

11/4

/199

5

4/4/

1996

9/4/

1996

2/4/

1997

7/4/

1997

12/4

/199

7

5/4/

1998

10/4

/199

8

3/4/

1999

8/4/

1999

1/4/

2000

6/4/

2000

11/4

/200

0

4/4/

2001

9/4/

2001

2/4/

2002

7/4/

2002

12/4

/200

2

5/4/

2003

10/4

/200

3

3/4/

2004

8/4/

2004

1/4/

2005

6/4/

2005

11/4

/200

5

4/4/

2006

9/4/

2006

2/4/

2007

7/4/

2007

12/4

/200

7

5/4/

2008

10/4

/200

8

$ B i l l i o n s

0 . 0 0

1 . 0 0

2 . 0 0

3 . 0 0

4 . 0 0

5 . 0 0

6 . 0 0

7 . 0 0

8 . 0 0

P e r c e n t

W e e k l y E f f e c t i v e F e d F u n d s R a t e

A v e r a g e D a i l y F a i l s to R e c e i v e

S o u r c e : F R B N Y F R 2 0 0 4 S e t t l e m e n t F a i l s D a ta & F R B H . 1 5


Unscheduled Reopenings

On October 8, Treasury announced that it was reopening $10 billion in each of the following original issue 10-year note securities:

• 3.5% of February 15, 2018 • 4.25% of August 15, 2015• 4.125% of May 15 2015 • 4.0% of February 15, 2015

The actions were undertaken to:• Address upcoming borrowing needs• Provide additional liquidity given the extraordinary dislocations in the Treasury market

Since then:• Fails have declined by more than half of their mid-October peak• Treasury 2-year and 5-year auctions performed well

Market participants should not anticipate regular unscheduled reopenings because they:• Are contrary to Treasury’s policy of transparency, regularity, and predictability• Permanently increase outstanding supply for what may be a temporary shortage• Increase supply uncertainty and raise borrowing costs • Act as a disincentive to private sector solutions


Given the benefits of a liquid Treasury market and broad investor participation, what steps should be pursued to ensure continued efficient market functioning?

Are there any other approaches to auctions, cash and debt management tools, and/or instruments that Treasury should consider?

Credit Market Conditions

Treasury Borrowing Advisory CommitteePresentation to the U.S. Treasury

November 4, 2008

Treasury Borrowing Advisory Committee

Credit Market Conditions

November 4, 2008

Executive Summary

•Healing phase started globallySwap spreadsCP tenureMonetary base

•Risk adversion in all marketsCredit spreadsDefaultsVIX

•HeadwindsTreasury failsCredit deterioration in consumerLending attitudesInvestors asset allocations

1

Credit Trends

Commercial Paper Outstanding

0.00

200.00

400.00

600.00

800.00

1000.00

1200.00

1400.00

Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08

Am

ou

nt

($m

illi

on

s)

Financial CP Non-Finl CP A BCP

3-month LIB/OIS

0

50

100

150

200

250

300

350

400


bp

s

3-mo Agency Discount Note/UST Bill Spread

0

50

100

150

200

250


Sp

read

(bp

s)

% Commercial Paper Maturing In <4 Days(5-day Moving Avg)

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

100.00%

Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08

Finl (10/28/08 = 46%)

Non-Finl (10/28/08 = 41%)

Source: BloombergSource: Bloomberg

Source: Bloomberg Source: Federal Reserve Bank

2

Swap Spreads

Source Bloomberg

U.S. 2 yr Euro 2 yr

Sterling 2 yr Yen 2 yr

Swap Spreads Narrowing In US And Europe. 3

The Monetary Base

Source: Bloomberg

The Fed Has Expanded The Monetary Base By Nearly 39%.4

U.S. Spreads

Agencies Corporates

High YieldLoans

Selected Large Institutional Flow Loans

L+100

L+200

L+300

L+400

L+500

L+600

L+700

L+800

L+900

L+1000

Pre-9

/11

12/6

/200

1

3/5/

2002

5/21

/200

2

8/13

/200

2

10/2

9/20

02

1/21

/200

3

4/8/

2003

6/24

/200

3

9/11

/200

3

12/2

/200

3

2/24

/200

4

5/11

/200

4

7/27

/200

4

10/1

4/20

04

1/11

/200

5

3/29

/200

5

6/14

/200

5

8/30

/200

5

11/1

5/20

05

2/7/

2006

4/25

/200

6

7/13

/200

6

9/28

/200

6

12/1

9/20

06

3/8/

2007

5/24

/200

7

8/9/

2007

10/3

0/20

07

1/29

/200

8

4/15

/200

8

7/1/

2008

9/16

/200

8

Source: Standard and Poor’s

U.S. Corporate Investment Grade - OAS

NUGGETTAG:userName=null &plotName=null

100

200

300

400

500

2000 2002 2004 2006 2008

Source: LehmanLive.com

Key Axis Name Last Minimum Maximum Mean SD SD Change

Left U.S. Corporate Investment Grade - OAS568.552 75.757 03/11/2005 570.728 10/27/2008 146.32270.601 2.880

U.S. Agency - OAS

NUGGETTAG:userName=null &plotName=null

20

40

60

80

100

120

140

160

2000 2002 2004 2006 2008



Left U.S. Agency - OAS 157.914 18.095 01/03/2007 163.962 10/28/2008 40.106 17.288 2.015

U.S. Corporate High Yield - OAS

NUGGETTAG:userName=null &plotName=null200

400

600

800

1,000

1,200

1,400

2000 2002 2004 2006 2008



Left U.S. Corporate High Yield - OAS1479.068 232.645 05/23/2007 1516.719 10/27/2008538.910225.145 10.813

Credit Spreads Generally Wider

Average Secondary Spread to Maturity

5

The VIX

Source: Bloomberg

Stock Market Volatility Hitting Thirteen Year Highs

6

Bloom berg Financia l Conditions Index

-12.000

-10.000

-8.000

-6.000

-4.000

-2.000

0.000

2.000

4.000

92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

Sta

nd

ard

De

vfr

om

Ja

n1

99

2-J

un

20

08

Av

g

Money Market Index Weight Bond Market Index Weight Equity Market Index Weight

TED Spread 11.1% Investment-Grade Corp/Tsy Spread 6.7% S&P 500 Share Prices 16.7%

Commercial Paper/T-Bill Spread 11.1% Muni/Treasury Spread 6.7% VIX Index 16.7%

LIBOR-OIS Spread 11.1% Swaps/Treasury Spread 6.7% 33.3%

33.3% High Yield/Treasury Spread 6.7%

Agency/Treasury Spread 6.7%

33.3%

Total 100.0%

Bloomberg's U.S. Financial Conditions Index

Components and Weights

Source Bloomberg 7

Treasury System Fails

Source: Bianco Research, L.L.C

8

But Banks are Hoarding Cash

Sources: The Federal Reserve Board , The Bloomberg, and Merrill Lynch

Bank Cash Holdings at are above the levels of Sept 2001

9

Documents

Presentation to the Treasury Borrowing Advisory Committee · Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 $ billions Data through