Treasury Debt Management

Timothy Bitsberger

Deputy Assistant Secretary

October 2, 2003

Perspective

Where We are…

Size of Operations Hard to Grasp

• $3.7 trillion raised in 176 auctions in 2002

• $171 billion paid in net interest in 2002– represented 8.5% of Government expenditures

• $462 billion in Treasuries are traded daily

• $3.4 trillion in marketable debt outstanding– represents approximately a quarter of U.S. credit markets

Percentage Breakdown of Nonfinancial Credit Market Debt

0%

5%

10%

15%

20%

25%

30%

35%

40%

1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 20020%

5%

10%

15%

20%

25%

30%

35%

40%

Treasuries Muni's Corporates Consumer Credit Other Home Mortgages

Surplus/Deficit as a Percentage of GDP

-7.0%

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%19

50

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

-7.0%

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

Debt Held by the Public as a Percentage of GDP

20%

30%

40%

50%

60%

70%

80%

90%

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Financing Projections

FINANCING RESIDUALS GIVEN CURRENT ISSUANCE

-300

-200

-100

0

100

200

300

400

500

600

700

2003 2004 2005 2006 2007 2008Fiscal Year

$ billions

-300

-200

-100

0

100

200

300

400

500

600

700$ billions

FY04 OMB MSR Deficit Forecast

Deficits plus Avg. Absolute Error

Deficits minus Avg. Absolute Error

Bars Indicate Additional Financing Required In Given Year For Different Deficit Outcomes

BILLS AS A PERCENTAGE OF TREASURY'S MARKETABLE DEBT 1

15%

20%

25%

30%

35%

40%

45%

1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 200715%

20%

25%

30%

35%

40%

45%

Assuming OMB '04 Budget MSR Deficit Forecasts Plus Avg. Absolute Error

Assuming OMB '04 MSRBaseline Deficit Forecasts

THE AVERAGE MATURITY OF TREASURY'S MARKETABLE DEBT AND ISSUANCE1

20

30

40

50

60

70

80

90

100

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

Months

20

30

40

50

60

70

80

90

100Months

'04 Budget Forecast/Quarterly 3s, 5s, and 10s

'04 Budget Forecast/Quarterly 3s, Monthly 5s, Reopen 10s

MSR Forecast/Quarterly 3s, Monthly 5s, Reopen 10s

1/ The average maturity of issuance is the average maturity eventually achieved if nominal issuance is held constant going forward.

AVERAGE MATURITY OF MARKETABLE DEBT

AVERAGE MATURITY OF ISSUANCE (4 quarter moving average)

Does Issuance Long-Term Securities Meet

the Goals of Treasury?

Treasury’s Debt Management

Low borrowing cost over timeRegular pattern of issuancePredictable issuance sizes

FlexibilityNeed ability to raise and pay-down cash

Strategy Not Affected By…

• Current interest rates

• Annual deficit

• Short-term fluctuations in demand

Implementation

• Auction dates known in advance Reduces investor uncertainty

• Changes in auction sizes are transparentAllows intermediaries to adjust to changes in supply.

• Auction sizes largeAssures investors of good liquidity

• Market consultationReduces investor uncertainty

Spread Between 10-Year Notes and 1-Year Bills Rolled Ten Times

-300

-200

-100

0

100

200

300

400

500

600

700

1954 1957 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002

basis points

-300

-200

-100

0

100

200

300

400

500

600

700basis points

Includes Forward Rates as of May 21, 2003

Low Cost Over Time: Longer Maturities More Expensive on Average

Low Cost Over Time: 10yr-30yr Spread Has Widen As Rates Have Fallen

Spread Between the 30-Year Bond and the 10-Year Note

-80

-60

-40

-20

0

20

40

60

80

100

1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001

bps

-80

-60

-40

-20

0

20

40

60

80

100bps

Low Cost Over Time: Requires a Diversified Debt Portfolio

Spread debt across maturities to…

Ensure regular and predictable issuance

Reduce event risk

Diversify investor base

Improve cash management

Reduce operational risk

Low Cost Over Time: Treasury Has a Diversified Debt Portfolio

Distribution of Debt 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

Projections 2003-2008

Annual Bond Issuance Nominal Amounts and as a Percentage of Annual Issuance

0%

1%

2%

3%

4%

5%

6%

7%

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

percent

0

5

10

15

20

25

30

35

40

45

50$ billions

Nominal Bond Issuance (RHS)

% of Annual Issuance (LHS)

Low Cost Over Time: Bond Issuance Low But Impact Grows Over Time...

Low Cost Over Time: Bonds Currently 17% of Treasury’s Marketable Debt

Distribution of Treasury's Marketable Debt Outstanding By SecurityAs of June 30, 2003

0%

5%

10%

15%

20%

25%

30%

Bills 2-year 3-year 5-year 10-year 10-year IIS 20-year 30-year 30-year IIS0%

5%

10%

15%

20%

25%

30%

Low Cost Over Time:Issuing Bonds Regularly Has Been Expensive

Bonds as a Percentage of Marketable Debt and Interest Expenses

5%

10%

15%

20%

25%

30%

35%

1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 20035%

10%

15%

20%

25%

30%

35%

Interest on Bonds as a Percentage of Interest Expenses on Marketable Debt

Nominal Bonds as a Percentage of Marketable Debt

Low Cost Over Time: Maturing Debt and Issuance Stable without Bond

Annual Issuance as a Percentage of GDP and Percentage of Debt Maturing in 12 Months

8%

10%

12%

14%

16%

18%

20%

Dec-80 Dec-82 Dec-84 Dec-86 Dec-88 Dec-90 Dec-92 Dec-94 Dec-96 Dec-98 Dec-00 Dec-02 Dec-04 Dec-06

Issuance/GDP

30%

35%

40%

45%

50%

55%Debt Maturing/ Total Debt

Issuance as a % of GDP (LHS)

% of Debt Maturing in 12 Months (RHS)

Projections 2003-2008

Weekly Receipts Minus Expenditures

-50

-40

-30

-20

-10

10

20

30

40

50

Oct-01 Nov-01 Dec-01 Jan-02 Feb-02 Mar-02 Apr-02 May-02 Jun-02 Jul-02 Aug-02 Sep-02

$ Billions

-50

-40

-30

-20

-10

10

20

30

40

50$ Billions

FY2002

FY2003

*Expenditures exclude debt redemptions and unclassified withdrawals.

Flexibility: Fiscal Needs Volatile

Average Absolute Federal Budget Forecast Errors 1997 - 2002

0

20

40

60

80

100

120

140

160

180

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

$ billions

0

20

40

60

80

100

120

140

160

180$ billions

CBO

OMB

Primary Dealers

Flexibility: Future Financing Requirements Uncertain

Year Over Year Change in Total Annual Issuance

-100

-50

0

50

100

150

200

250

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

$ billions

-100

-50

0

50

100

150

200

250$ billions

Bills

2-Year

5-year

10-year

30-year

* Nominal securities only. No inflation-indexed securities included.

Flexibility: Frequent Auctions of Shorter Maturities

Flexibility: Longer Maturities Unsustainable During Surpluses

Estimated Average Auction Size in 5 Years1

Based On Budget Forecast At The TIme

0

5

10

15

20

25

30

35

1998/2003 1999/2004 2000/2005 2001/2006 2002/2007 2003/2008Year of Forecast/Projected Year

$ billions

0

5

10

15

20

25

30

35$ billions

Bills 2YR 3YR 5YR 10YR 30YR

1/ Issuance is based on securities being issued at time of forecast and includes SOMA.

Flexibility: Weight Issuance Towards Shorter Maturities

• Financing needs volatile and uncertain

• Investor base for long-term debt ill-suited for high frequency auctions

• Long-term debt hampers regular and predictable issuance in improving fiscal environments

Conclusions• Achieving the lowest cost over time requires the

regular and predictable issuance of a diversified, flexible portfolio of debt

• Weight issuance towards shorter maturities– Less costly– More flexible (i.e., frequent issue/maturity dates)

• Bonds do not meet our criteria– Expensive

• Risk premium• Commitment to regular issuance in all rate environments has

a large effect on Treasury’s portfolio of outstanding debt– Inflexible

• Infrequent auctions• Restricts other issuance in an improving fiscal environment

– Risks manageable without bonds