TBAC Discussion Charts Aug 2011

8/6/2019 TBAC Discussion Charts Aug 2011

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UNITED STATES DEPARTMENT OF THE TREASURY

Presentation to theTreasury Borrowing Advisory Committee

U.S. Department of Treasury

Office of Debt ManagementAugust 2, 2011


2/59


Agenda

Fiscal Developments Auction Demand & Market Trends

Portfolio Metrics

2


3/59


FISCAL DEVELOPMENTS

3


4/59


Individual Tax Receipts Slowed in Q3 FY 2011

4

-40%

-20%

0%

20%

40%

60%

-40%

-20%

0%

20%

40%

60%

Mar-00

Jun-00

Sep-00

Dec-00

Mar-01

Jun-01

Sep-01

Dec-01

Mar-02

Jun-02

Sep-02

Dec-02

Mar-03

Jun-03

Sep-03

Dec-03

Mar-04

Jun-04

Sep-04

Dec-04

Mar-05

Jun-05

Sep-05

Dec-05

Mar-06

Jun-06

Sep-06

Dec-06

Mar-07

Jun-07

Sep-07

Dec-07

Mar-08

Jun-08

Sep-08

Dec-08

Mar-09

Jun-09

Sep-09

Dec-09

Mar-10

Jun-10

Sep-10

Dec-10

Mar-11

Jun-11

W ithheld Taxes Nonwithheld Taxes Corporate Taxes

Quarterly Tax Receipts

Year-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


5/59


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

Saving s Bo nd Fo reig n Series SLGS

Net Non-marketable Issuance

In Billions $


6/59


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%


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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 1,249-1,592FY 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.


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AUCTION DEMAND & MARKET TRENDS

8


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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 Bonds

In Billions $, Coverage Ratio

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

Note: Through 6/30/2011


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Foreign Participation in Nominal Coupon Auctions Remains Steady

10

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

SOMA 9%

Depository

Institutions 1%

Individuals 1%

Primary Dealers

52%

Other Dealers &

Brokers 4%

Investment Funds

14%

Foreign &

International 19%

Five-Year Average of Investor Class Allotments*

SOMA 3%

Primary Dealers

47%

Other

Dealers &

Brokers

10%

Investment

Funds 17%

Foreign &

International

22%

FY2011 YTD: Average Investor Class Allotments


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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 Dealers

54%

Other Dealers &

Brokers 7%

Investment Funds

13%

Foreign &

International

10%

Other 1%

Five-Year Average of Investor Class Allotments*

SOMA 4% Individuals 2%

Primary Dealers

55%Other Dealers &

Brokers 11%

Investment Funds

14%

Foreign &

International

13%

FY2011 YTD: Average Investor Class Allotments


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PORTFOLIO METRICS

12


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Nominal Coupons and Bills as a Percentage of the Portfolio

13

69%

50%

55%

60%

65%

70%

75%

80%

Jan-00

Apr-00

Jul-00

Oct-00

Jan-01

Apr-01

Jul-01

Oct-01

Jan-02

Apr-02

Jul-02

Oct-02

Jan-03

Apr-03

Jul-03

Oct-03

Jan-04

Apr-04

Jul-04

Oct-04

Jan-05

Apr-05

Jul-05

Oct-05

Jan-06

Apr-06

Jul-06

Oct-06

Jan-07

Apr-07

Jul-07

Oct-07

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

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-00

Apr-00

Jul-00

Oct-00

Jan-01

Apr-01

Jul-01

Oct-01

Jan-02

Apr-02

Jul-02

Oct-02

Jan-03

Apr-03

Jul-03

Oct-03

Jan-04

Apr-04

Jul-04

Oct-04

Jan-05

Apr-05

Jul-05

Oct-05

Jan-06

Apr-06

Jul-06

Oct-06

Jan-07

Apr-07

Jul-07

Oct-07

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

Apr-11

Bills

Percentage of Total Portfolio

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

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


14/59


Treasury has Suspended the SFP Due to Debt Limit Negotiations

14

$0

$100

$200

$300

$400

$500

$600

Sep-08

Oct-08

Nov-08

Dec-08

Jan-09

Feb-09

Mar-09

Apr-09

May-09

Jun-09

Jul-09

Aug-09

Sep-09

Oct-09

Nov-09

Dec-09

Jan-10

Feb-10

Mar-10

Apr-10

May-10

Jun-10

Jul-10

Aug-10

Sep-10

Oct-10

Nov-10

Dec-10

Jan-11

Feb-11

Mar-11

Apr-11

May-11

Jun-11

Jul-11

Treasury Supplementary Financing Program Cash BalanceIn Billions $

Max: $560B10/10/2008

Min: $5B12/30/09

$200B $0B7/28/11


15/59


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)


16/59


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 Debt

In Months

Average Matu ri ty W itho ut SFP B ills A verage 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


17/59


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

17


20%

30%

40%

50%

60%

70%

Jan-90

Jul-90

Jan-91

Jul-91

Jan-92

Jul-92

Jan-93

Jul-93

Jan-94

Jul-94

Jan-95

Jul-95

Jan-96

Jul-96

Jan-97

Jul-97

Jan-98

Jul-98

Jan-99

Jul-99

Jan-00

Jul-00

Jan-01

Jul-01

Jan-02

Jul-02

Jan-03

Jul-03

Jan-04

Jul-04

Jan-05

Jul-05

Jan-06

Jul-06

Jan-07

Jul-07

Jan-08

Jul-08

Jan-09

Jul-09

Jan-10

Jul-10

Jan-11

Percentage of Debt Maturing in Next 12 to 36 Months

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


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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

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

2035

2036

2037

2038

2039

2040

2041

Maturity Profile of Outstanding DebtCalendar Year in Billions $



19/59


LONG-TERM CHALLENGES

19


20/59

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?


21/59

U.S.TreasuryBorrowingAdvisoryCommitteeAugust2,2011


22/59

,

Treasurytocontinuetolengthentheaveragematurityofdebt

outstanding.

Please

discuss

the

costs

and

benefits

of

extending

t eaveragematurityan ramewor s orquanti yingt ose

costsandbenefits.

2


23/59

Givenagoaloffundingthegovernmentas

Ma orConsiderationsare:

Volatilityofinterestexpensethroughtime

Rollover/LiquidityRisk

3


24/59

D t rvic i a F ncti n f Man Varia l

= *

Thisisafunctionofmanyvariables

Pastdebtissuance

Currentdebtissuancestrategy

Debtmanagementcommunicationpolicy

andmanyTreasurydoesnotcontrol: Outstandingstockofdebt

Interestrates

GDPgrowth

Inflation

4


25/59

ConsidertheFollowingRegression:

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

Fig.1 DefinitionandSummaryStatistics

Var a e De n t on Mean St Dev M n Max

DebtServ_GDP InterestpaymenttonominalGDPRatio(%) 3.8% 0.9% 1.7% 7.4%

GDP_YY RealGDPY/YGrowth(%) 2.7% 1.7% 4.1% 5.4%

FFR EffectiveFedFundsRate(%) 4.3% 2.5% 0.1% 9.7%

Fig.2 RegressionResults&Interpretation

vg_ a verage a ur y on s

Debt_GDP DebttonominalGDPRatio(%) 42.2% 7.1% 31.9% 63.8%

Variable Beta p-Value Interpretation

Intercept 2.18


26/59

7.0

8.0

RegressionFit

3.0

4.0

5.0

6.0

0.0

1.0

.

Dec86 Dec90 Dec94 Dec98 Dec02 Dec06 Dec10

Actuals(%) Fitted(%)

3.0

4.0

Residuals(%)

0.0

1.0

2.0

3.0

2.0

1.0

Dec86 Dec90 Dec94 Dec98 Dec02 Dec06 Dec10

Spikeiscausedbycalendareffectsfromyearendfallingonaweekendwhich

forcedinterestpaymentsonnonmarketabledebttobepushedintoJanuary. 6


27/59

DataSeries:

7


28/59

AverageMatur ty son yoneo manyvar a est at mpacts e t

service

to

GDP

IncreasingAverageMaturitycanhaveapotentialfeedbackeffect

.

explorethemagnitudeofthiseffectduringQE2andunderamaturity

extensionstrategy.

8


29/59

ActivityDuringQE2Period

Fed'sSOMAPortfolio StockofTreasuryDebt TreasuryStock SOMA

11/12/10to6/30/2011

Change11/12/10to6/30/2011 Change11/12/10to6/30/2011 Change11/12/10to6/30/2011

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 156,08240,646,000

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

5Y 184,36983,701,000

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

Faceamountmeasuredinmillions,DV01measuredin$/bp atcurrentyieldlevels

9


30/59

MaturityextensionduringLSAP2added75115millionoflongerdurationDV01s

BasedontheOLSa roachinGa non,J.,M.Raskin,J.Remache andB.Sack(2010),thisis

equivalenttoachangeinthetermpremiumfrom4.0to6.1bp

Thecalculationmethodisdescribedwithaconcretenumericalexampleonpage25of

Gagnon,J.,M.Raskin,J.Remache andB.Sack(2010)

theFederalReservewillhavepurchasedatotalofapproximately$850billionin10yearequivalents.Thisisroughly6percentof2009Q4nominalGDP,whichimpliesthatassetpurchases

reducedthetermpremiumby38basispoints.

LSAP2 LowerBound UpperBound

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

01s/1millionNotional10yNote 850 850

Notional10yNoteEquivalents 850,000,000,000 88,250,000,000 135,300,000,000

NominalGDP(Q42009) 14,277,000,000,000 14,277,000,000,000 14,277,000,000,000

. . .

OLSRegression Coefficient(From Table2,

p.34Gagnonetal. 0.064 0.064 0.064

ChangeinTermPremium 38.1bp 4.0bp 6.1bp

NotethatChung,Laforte,Reifschneider andWilliams(2011)estimatethatthereis aroughly4

to1ratiobetweenchangesinthetermpremiumandchangesinthefederalfundsrate. Thornton

(2011)hasquestionedthestabilityofthisestimate.10


31/59

ExtendingtheAverageMaturityto70monthswouldadd375millionto475

millionadditionaldurationtothemarket

Adding thismuchdurationtotheprivatesectorwouldincreasetermpremiums

19 to 24b

LowerBound UpperBound

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

01s/1millionNotional10yNote 850 850

Notional10yNoteEquivalents 441,200,000,000 558,800,000,000

NominalGDP(Q12011) 15,018,000,000,000 15,018,000,000,000

10yNotesasPercentofGDP 2.94% 3.72%

OLSRegressionCoefficient 0.064 0.064

ChangeinTermPremium 18.8bp 23.8bp

11


32/59

InterestExpenseOverTime

Historicalbacktest oflon vs.shortmaturit

strategieso PointinTimedecisiontoissueanew5Ybondorrolling3MTbills for5

years synt et c oater

o Quarterlyinterestexpenseforafixedsizeportfolioallinasingle

maturity

OmitsthereverseLSAPfeedbackonGDPand

rates

12


33/59

Lifetime

cost

of

a

new

5Y

loan Assumeaonetimefundingincreasewitha5Yhorizon

Computeaverageratesoverthenext5Yofa5Ybondvsrolling3MTbills

16

18

10

12

14

dR

ate%

6

8

CMT05Y

syntheticCMT05Y

CMT05Y Synthetic5

Mean 6.86 5.70

Annua

liz

0

2

4ev . .

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


34/59

Lifetimecostofanew10Y

18

Sameexperimentusing10Ybondandusingaverageratesoverthe10Ylifeofthebond

14

16

8

10

CMT10Ynua

lize

dRate%

2

4

6 syntheticCMT10Y

CMT10

Y 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


35/59

QuarterlyCostofLongTermDebt Quarterlyinterestexpenseforaconstantsizedebtfundedwithasinglematurity Tbills,5Ywith5%auctionedeachquarter,or10Ywith2.5%auctionedeachquarter

PayNoworPayLater thelate70sspikeaffectsTbillsfirst,butitaffects5sand

14

16

8

10

12

Rate%

4

6

regularauctionCMT10Y

CMT03M

regularauctionCMT05YAnnua

lize

Since ' 72 CMT03M Auction5 Auction10

Mean 5.53 7.05 7.38StdDev 3.25 2.47 2.04

0

2

961

967

972

978

983

988

994

999

005

010

15

8/7

/

1/28

/

7/20

/

1/10

/

7/3

/

12

/23

/

6/15

/

12

/6

/

5/28

/2

11

/18

/2


36/59

HistoricalRatesSince '62 CMT03M CMT05Y CMT10Y

Mean 5.33 6.47 6.75

StdDev 2.99 2.84 2.65

Tenorextensionhassmalleffectonspotratevol

Theadvantageoflongertenorsisinstaggering

maturitiestoaverageouttheimpactofeachauction

14

16

18

10

12

Rate%

4

6

8 CMT10Y

CMT03M

CMT05YAnnua

lize

0

2

/1961

/1967

/1972

/1978

/1983

/1988

/1994

/1999

/2005

/2010

8/7

1/28

7/20

1/10

7/3

12

/23

6/15

12

/6

5/28

11

/18

16


37/59

Since62 issuin as ntheticfloaterbeatsissuin a5Y72%of

thetimeanda10Y60%

Lockinginlongratesonlyreducescostwhenratesriseby

morethanthetermpremium

Wecantanticipateratechangesbutwecanmeasurethe

termpremiumnowtodecidewhichproductismorefavorable

17


38/59

EstimatingtheTermPremium

From Gagnonetal.

ForTreasurysecurities,themostimportantcomponentoftheriskpremiumisreferredtoasthetermpremium,andit

reflectsthereluctanceofinvestorstobeartheinterestrateriskassociatedwithholdinganassetthathasalongduration.The

termpremiumistheadditionalreturninvestorsrequire,overandabovetheaverageofexpectedfutureshortterminterest

rates,foracceptingafixedlongtermyield.

TbillsrepresentTreasurysshorttermborrowingratesbuttheirfutureexpectedvaluesare

unobservablequantities.

ForwardFedfundsOIS(FFOIS)swapratesarethebestproxy.

FFOIStermpremiumcanthenbecalculatedasthedifferencebetweenquotedlongtermFFOISswap

ratesandtheirequivalentcalculatedwithestimatedfutureexpectedFFOISrates.

FixedlongtermUSTissuancerequiresanadditionaltermpremiumoverandabovewhatispresentin

t e ongtermFe un sOISswaps.

Foranyparticularbond,wedefinethetotaltermpremiumtobethesumoftheFFOIStermpremium

andthebondsFFOISassetswapspread.

18


39/59

Thiscalculationshouldrepresentalowerboundonthetermpremium

becauseTbill ieldsaret icall belowcom arableFFOISrates

19


40/59

Estimates oftheTermPremiumUsingaVariationof

Note:Resultsareheavilydependentonmodelstructureandparametervalues

20


41/59

MatchedMaturityAssetSwapSpreadstoFFOISCurve

21


42/59

TotalTermPremium

(FFOIStermpremium+FFOISassetswapspread)

22


43/59

LongerDatedTermPremiumsAppearElevated

Assetswapsconfirmpremiumsarehigh.Arehighpremiums

Thefollowingchartsconsiderpotentialdriverssuchas

RiskAppetite

Risk Ex ectation

InflationExpectation

u c e

IssuanceDV01

23


44/59

10YTotalTermPremiumvs.RiskAppetite

80

100

20

40

20

010Y

TT

9602

2003Sep08

Oct08

Jun11

60

40

80

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

RiskAppetite

BBBAAAspreadsasapercentageofhistoricmaxmin(1996present)

24

100%equalsmaximumappetite


45/59

100

10YTotalTermPremium vs.RiskExpectation

60

80

40

0

20

10Y

TTP

9602

2003Sep08

Oct08

Jun11

40

20

80

60

0 10 20 30 40 50 60 70

25

RiskExpectation(MonthlyAverageofVIXIndex)

l i fl i i


46/59

100

10YTotalTermPremium vs.InflationExpectations

60

80

20

40

010Y

TTP

9602

2003Sep08

Oct08

Jun11

40

80

60

0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50

26

InflationExpectations

5y5yTipsBreakevens(%)

10YFedFundsTermPremium vs.PublicDebtDV01


47/59

120

60

80

0Y

FF

TP

9602

2003Sep08

0

20

0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00

T1

Oct08Jun11

20PrivatelyHeldPublicDebtDV01(bln$/bp)

40

10YExcessTermPremium vs.PublicDebtDV01

40

20

0

20

essTP

120

100

80

60

10Y

Exc

9602

2003Sep08

Oct08Jun11

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)

10Y Fed Funds Term Premium vs Issuance DV01


48/59

120

10YFedFundsTermPremium vs.IssuanceDV01

60

80

100

Y

FF

TP

9602

0

20

40

0 20 40 60 80 100 120

T10

Oct08Jun11

20MonthlyIssuanceDV01(6mAvg,mm$/bp)

40

10YExcessTermPremium vs.IssuanceDV01

40

20

0

20

TP

100

80

6010Y

X 9602

2003Sep08

Oct08Jun11

28

140

120

0 20 40 60 80 100 120

MonthlyIssuanceDV01(6mAvg,mm$/bp)

Preceding Analysis Illustrates Costs of Extension,


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PrecedingAnalysisIllustratesCostsofExtension,

WhataretheBenefits?

Macro

Nominalratesarelow(eveniftermpremiumishigh)

Higherdebtlevelsimply greaterexposuretorisinginterestrates

Riskofarisingnominalrate/lowgrowthenvironment Willreservecurrencystatuscontinue?

Large,Concentrate ForeignOwners ipo De t

o Foreignholderswouldliketodiversify

o Mayviewshorttermfundingaslessstable

Othersovereignshavelongeraveragematurities

Rolloverrisk

Traditionalrolloverriskislikelylowsincedebtisdenominatedindollars

Combination

of

high

debt

service

and

increasing

rollover

needs

could

trigger

a

fundingcrisisfollowedbyadeclineincurrency

Floatingratenotescouldreducerolloverriskbydecouplingthematurityand

29

LowInterestRatesOfferAttractiveLongerTerm


50/59

FundingonanAbsoluteBasis

16.0016.00

Yield (%)Yield (%) A History of Long-Term U.S. Interest Rates: 1913 - July 29, 2011 (monthly)Theimagecannotbedisplayed.Your computer may nothaveenough memory to open theimage,or theimagemay havebeen corrupted.Restartyour computer,and then open thefileagain.Ifthered x stillappears,you may haveto deletetheimageand then insertitagain.

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

6.006.00

Mean = 5.50%July 29, 2011

4.18%

2.00

4.00

2.00

4.00

Min 2.45%Feb. 1947

30

0.000.00

1913 1920 1927 1934 1941 1948 1955 1962 1969 1976 1983 1990 1997 2004 2011

Shadedareas:U.S.Recessions

Source:BNYMellon;Bloomberg;GlobalFinancialData;NBER 30


51/59

Treasury5yr5yrvs.Spot5yr&10yr

7

8

5

6

3

4

2

0

1

Oct96 Oct97 Oct98 Oct99 Oct00 Oct01 Oct02 Oct03 Oct04 Oct05 Oct06 Oct07 Oct08 Oct09 Oct10

T5y5y 5Y 10Y

31


52/59

Treasury10yr10yrvs.Spot10yr

8

9

6

7

4

5

2

3

0

1

Oct96 Oct97 Oct98 Oct99 Oct00 Oct01 Oct02 Oct03 Oct04 Oct05 Oct06 Oct07 Oct08 Oct09 Oct10

32

T10y10y 10Y

D bt d D fi it L l


53/59

DebtandDeficitLevels

5%

10% 0%

20%

5%

0%1930

1940

1950

1960

1970

1980

1990

2000

2010

40%

10%80%

20%

100%

120%

30%

25%

140%FiscalBalance/GDP right

TotalDebt/GDP left(reverseorder)

33

Source: OMB, Center for Financial Stability

ForeignOwnershipHasRisen,IsConcentrated,andIs


54/59

LikelyLinkedtoReserveCurrencyStatus

34


55/59

WhatisOutlookforReserveCurrenc Status

3.5

4

SwissFranc/USD:January1973toJuly2011U.S.DollarLosingGroundasaSafeHavenCurrency

3.5000

4.0000

U.S.Dollar/BrazilianReal:June1994toJuly2011RiseofMajorEMCurrencies toU.S.Dollar

2

2.5

3

1.

2.0000

2.5000

3.0000

0

0.5

1

.

n-7

3

n-7

5

n-7

7

n-7

9

n-8

1

n-8

3

n-8

5

n-8

7

n-8

9

n-9

1

n-9

3

n-9

5

n-9

7

n-9

9

n-0

1

n-0

3

n-0

5

n-0

7

n-0

9

an-

11

0.0000

0.5000

1.0000

.

n-9

4

n-

95

n-9

6

n-

97

n-9

8

n-9

9

n-0

0

n-

01

n-0

2

n-0

3

n-0

4

n-0

5

n-0

6

n-0

7

n-0

8

n-0

9

n-

10

un-

11

Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja J

Source: BNY Mellon Global Marke ts

J J J J J J Ju

J J J J J J J J J JJ

Source: BNY Mellon Globa l Markets

,

appearstobeslipping

Theideaofareservecurrencyisthatitisbuiltonstrength,nottypicallythatitisbestamongpoor

choices. ThefactthattherearenotcurrentlyviablealternativestotheUSdollarisahollowvictoryand

perhapsportendsadeterioratingfate

3535

US Debt Mix is Most Short Term Funded Among OECD Nations


56/59

USDebtMixisMostShortTermFundedAmongOECDNations

10yrs

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

Spain 66% 3% 31%

ermany

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%

Manycitemid1940shighdebtlevelsasproofthatU.S.canwithstand

Sources:

U.S.

Treasury,

Bloomberg,

Center

for

Financial

Stability

Inc.

arge un ngnee s, owever ema ur ym xwasmar e y eren

thantoday.

3636

While PERCENTAGE of total debt maturing is shrinking the SIZE


57/59

WhilePERCENTAGEoftotaldebtmaturingisshrinking,theSIZE

o o a e ma ur ng sr s ngrap y

35%70%

MarketableDebtMaturinginNext36Months

30%65%

As % of outstanding debt (LHS)

25%60%

20%55%

As % o f GDP (RHS)

15%50%

Dec-99

Dec-00

Dec-01

Dec-02

Dec-03

Dec-04

Dec-05

Dec-06

Dec-07

Dec-08

Dec-09

Dec-10

37

'as % of outstanding debt' as % of GDP

Projected Interest Expense Differentials


58/59

ProjectedInterestExpenseDifferentials

Currentbill/couponmixvs.movingto50/50mixover2years

250

billions

150

200

Following theforward curve

300bp shock at 5years

500bp shock at 5

en

se

differentia

lin

50

100Constant spot rates

Interestexp

50

0

150

100

38

2010

2012

2013

2014

2016

2017

2019

2020

2021

2023

Conclusion


59/59

Conclusion

Thebenefitsofextensiondonotcomeforfree. Historicalanalysissuggests

thatshortertermfundinghasatmanytimesbeenbothcheaperandthe

Recentcyclesofrisingrateshavenotlastedlongenoughformaturity

extensionto a off

Itispossible,however,thatthistimeisdifferentbecauseo Nominalratesaremuchclosertothezeroboundthanpreviousperiods

o Concentratedforeignownershipcreateslessreliabledemand

o Thebenefitsoffundingattributabletobeingthereservecurrencymaybefading

,

forfuturestudyistheimpactofthedistributionofmaturitiesontotalinterestexpense

39

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