Treasury Borrowing Advisory Committee

Quarterly Refunding

November 2, 2004

2

Committee Charge Question 1

Quarterly Refunding Chart Package

We will show you a revised version of the chart package we released on Monday of the week of the refunding. We would like the Committee’s view on the proposed changes and suggestions for further improvements.

3

Current FinancingShort-term and medium-term borrowing requirements, cash

balance estimates, and issuance schedule

• FY 2005 Q1 and FY 2005 Q2 Outlook– We expect net marketable borrowing of $100B this quarter

and $147B next quarter

• FY 2005 to FY 2009 OMB Outlook– Current coupons meet expected borrowing assuming:

• 5% projected GDP growth rate• Revenues rise to historical average• Expenditures fall below historical average

– Net interest is below 2.5% of GDP

4

5

6

7

8

Drivers of Financing Needs

-5

0

5

10

15

20

25

30

1960 1965 1970 1975 1979 1984 1989 1994 1999 2004 2009

Percentage of GDP

-5

0

5

10

15

20

25

30Percentage of GDP

Outlays

Revenue

GDP Growth

Net Interest

SOURCE: OMB

Estimated

Average Historical Difference: 2%

9

Projected Net Marketable Borrowing and Hypothetical Bill Auction SizesIf Coupon Auction Sizes Held Constant

0

5

10

15

20

25

30

35

40

2005 2006 2007 2008 2009

Average Announced Auction Size $ Billions

0

50

100

150

200

250

300

350

400Net Borrowing

$ Billions

4-week

13-week

26-week

Assumes OMB's FY 2005 MSR deficit projections and coupon auction sizes remain at most recently announced amounts. Bill issuance sizes are shown in fixed shares to meet residual financing needs.

Net Marketable Borrowing (RHS)

10

Projected Net Marketable Borrowing and Hypothetical Auction Sizes If Bill Issuance held Constant as a percent of Portfolio

0

5

10

15

20

25

30

35

40

45

2005 2006 2007 2008 2009

Announced auction sizes

$ billions

0

50

100

150

200

250

300

350

400

450net borrowing $ billions

BILLS 2-YEAR 3-YEAR 5-YEAR 10-YEAR 5-YEAR TIPS 10-YEAR TIPS 20-YEAR TIPS

Net Marketable Borrowing (RHS)

* *For bills, the average auction size equals the amount outstanding at the end of the fiscal year divided by 43 (i.e., 4 1-month auctions, 13 3-month auctions, plus 26 6-month auctions).

11

Debt PortfolioMaturity, issuance and outstanding profile

• Average maturity of issuance stabilizes, averaging 2.8 years

• Maturity of outstanding drops from 4.6 years to 4 years over thenext 5 years

• Composition of nominal issuance is within historical ranges

• Current issuance patterns would lead to a growing proportion of 5-year notes and TIPS in the portfolio

• The percent of debt maturing over the next 3 years is projected to remain stable over the next 4 years, at roughly 60%

12

13

Percentage Breakdown of Annual Issuance

0%

10%

20%

30%

40%

50%

60%

70%

80%

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 20080%

10%

20%

30%

40%

50%

60%

70%

80%

Bills 2-3 yrs 4-7 yrs 10-yrs Bonds TIPS

Projected

Projections based on OMB's FY 2005 MSR and assume coupon auction sizes remain at most recently announced amounts. Residual amounts financed with bills.

Source: Treasury

14

Distribution of Marketable Debt Outstanding by Security

0%

5%

10%

15%

20%

25%

30%

35%

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 20080%

5%

10%

15%

20%

25%

30%

35%

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

Projected

Projections based on OMB's FY 2005 MSR and assume coupon auction sizes remain at most recently announced amounts. Residual amounts financed with bills.

Source: Treasury

15

Percentage of Debt Maturing in Next 12 to 36 Months

25%

30%

35%

40%

45%

50%

55%

60%

65%

70%

75%

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 200825%

30%

35%

40%

45%

50%

55%

60%

65%

70%

75%

Maturing in 12 Months

Maturing in 24 Months

Maturing in 36 Months

Projected

Projections based on OMB's FY 2005 MSR and assume coupon auction sizes remain at most recently announced amounts. Residual amounts financed with bills.

16

Treasury Annual Net Market Borrowing

-300

-200

-100

0

100

200

300

400

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

$ Billions

-300

-200

-100

0

100

200

300

400

Buybacks

over 10 years

5-10 years

2-under 5 years

Bills

Projections are based on FY 2005 OMB's MSR and assume coupon auction sizes remain at most recently announced amounts. Residual amounts amounts financed with bills.

Projected

17

Distribution of Marketable Debt Outstanding by Maturity

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2006 2007 2008 2009

Percentage of Portfolio

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Percentage ofPortfolio

Bills 1 year & under 1-2 years 2-10 years over 10 years

Projections based on OMB's FY 2005 MSR and assume coupon auction sizes remain at most recently announced amounts. Residual amounts financed with bills.

Source: Treasury

18

UncertaintyStress to issuance and borrowing costs

• Deficit forecast errors for FY 2004 were comparable to previous forecast errors

• Current issuance pattern equally well positioned for higher or lower deficits

19

Average Absolute Federal Budget Forecast Errors 1997 - 2004

0

50

100

150

200

250

14 months 11 months 8 months 5 months 2 monthsmonths until end of fiscal year

$ billions

0

50

100

150

200

250$ billions

CBO

OMB

Primary Dealers

Average Error for FY 2004

20

21

Capital MarketsTreasury’s share of global and domestic markets and Treasury’s liquidity

• Foreign holdings of Treasury debt are at historical highs

• Treasuries represent a small proportion of the domestic debt stock

• Debt outstanding as a percent of GDP compares favorably to that of many other large economies

22

23

U.S. Debt Compared to the G7

30

35

40

45

50

55

60

65

70

75

80

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

Percentage of GDP

30

35

40

45

50

55

60

65

70

75

80Percentage of GDP

U.S. Net General Government Debt

G7 less US Median Net GeneralGovernment DebtG7 less US Average Net GeneralGovernment Debt

SOURCE: IMF, WEO September 2004

Net debt is federal, state and municipal government debt held by the public. (That is, it is net of claims of government entities on each other).Debt data are not always comparable across countries.

Estimated

24

25

26

Net Dealer Positions in Treasuries

-3

-2

-1

0

1

2

3

4

5

6

Feb-01 Jun-01 Oct-01 Feb-02 Jun-02 Oct-02 Feb-03 Jun-03 Oct-03 Feb-04 Jun-04 Oct-04

TIPS ($ billions)

-160

-140

-120

-100

-80

-60

-40

-20

0

20

40Nominal Treasuries ($ billions)

TIPS (LHS)

Nominal Treasuries (RHS)

Dealers net short TIPS for the first time

(5/14/03)

nominal zero line

TIPS zero line

Source: NY Fed

27

Committee Charge Question 2

Financing this Quarter

We would like the Committee’s advice on the following:

• The composition of Treasury notes to refund approximately $48 billion of privately held notes and bonds maturing on November 15 (this includes $3.1 billion of the 10 3/8% 11/15/04-09 that was called on 7/15/04).

• The composition of Treasury marketable financing for the remainder of the October-December quarter, including cash management bills if necessary.

• The composition of Treasury marketable financing for the January-March quarter.