Timothy Bitsberger Deputy Assistant Secretary U.S. Treasury Department Treasury Debt Management.
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Transcript of Timothy Bitsberger Deputy Assistant Secretary U.S. Treasury Department Treasury Debt Management.
Timothy Bitsberger Deputy Assistant Secretary U.S. Treasury Department
Treasury Debt Management
Treasury Inflation-Protection Securities
Treasury’s Perspective
• Widen investor base
• Reduce/eliminate term premium
Investor’s Perspective
• Improve portfolio diversification
• Protect against inflation better than real estate, commodities, or other real assets
TIPS Structure
• The principal value is adjusted for inflation by multiplying the value at issuance by an index ratio that changes daily. The inflation accrual on principal is paid at maturity.
• The coupon payments are a fixed percentage, determined at auction, of the inflation-adjusted value of the principal.
• The principal repayment at maturity is protected against deflation, but the semi-annual coupon payments are not protected against deflation.
• The inflation accrual is based on the CPI-U NSA with a 3-month lag (e.g., index number for July 1st is based on the April CPI report which was released in mid-May).
• Daily indexed numbers are calculated using straight-line interpolation between first-of-month numbers.
• The index ratio for a particular valuation date is the index number for that date divided by the index number for the dated date.
• Index Ratio Value Date = Index number for value date Index number for dated date
TIPS Auction Schedule
July 2004- 10-yr TIPS, auction 7/8/04, settle 7/15/04, mature 7/15/14- 20½-yr TIPS, auction 7/27/04, settle 7/30/04, mature 1/15/25
October 2004- 9¾-yr TIPS, auction 10/7/04, settle 10/15/04, mature 7/15/14- 5½-yr TIPS, auction 10/26/04, settle 10/29/04, mature 4/15/10
January 2005 - 10-yr TIPS, auction 1st half of month, settle on 15th, mature 1/15/15- 20-yr TIPS, auction 2nd half of month, settle last business day of month, mature 1/15/25
April 2005- 9¾-yr TIPS, auction 1st half of month, settle on 15th, mature 1/15/15- 5-yr TIPS, auction 2nd half of month, settle last business day of month, mature 4/15/10
* Tentative Schedule
TIPS SupplyInflation-Adjusted Par Amount Outstanding
0
20
40
60
80
100
120
140
160
180
200
220
1997 1998 1999 2000 2001 2002 2003 June '04
calendar year
$billions
Source: US Treasury
TIPS Annual Issuance
0
10
20
30
40
50
60
70
1997 1998 1999 2000 2001 2002 2003 2004 est
calendar year
$ billions
5-yr TIPS10-yr TIPS20-yr TIPS30-yr TIPS
* 2004 issuance amounts are tentative and not necessarily indicative of future auction sizes.
TIPS Trading Volume IncreasingAverage Daily TIPS Transactions by Primary Dealers
0
2
4
6
8
10
12
14
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
$ billions
0
2
4
6
8
10
12
14$ billions
Weeks with a TIPS Auction
Non-Auction Weeks
3-month MA of Nonauction Weeks
* Source: New York Fed
Net Dealer Positions in Treasuries
-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
TIPS ($ billions)
-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: New York Fed
SIZE OF GLOBAL INFLATION-INDEXED BOND MARKET VS. OTHER ASSET CLASSES
0
100
200
300
400
500
600
700
800
900
1,000
Global Inflation Indexed Global High Yield Emerging Market Debt Emerging MarketEquities
European Corporates
Asset Class
US
$ B
illio
ns
Source: Bridgewater Associates
Distribution of Competitive Auction Awards of 10-Year Treasury Notes
10-Year TIPS July '03, Oct '03, Jan '04, & Apr '04
Investment Funds, 31%
Primary Dealers, 54%
Foreign & International,
7%
Financial Insts., 1%
Other, 8%
10-Year Nominal Notes Nov '03, Dec '03, Feb '04, & Mar '04
Other, 3%Financial Insts., 1%
Foreign & International,
22%
Primary Dealers, 64%
Investment Funds, 10%
I/I BOND CORRELATION TO OTHER ASSETS AND INFLATION
US Equities US Nominal BondsJan. 1970 - Feb. 2004 US CPI S&P 500 10-Year Duration1 Month 0.18 0.09 0.603 Month 0.28 0.02 0.671 Year 0.49 -0.21 0.303 Year 0.65 -0.54 -0.275 Year 0.75 -0.56 -0.28
Correlation of TIPS (10-Year Duration) to…
Source: Bridgewater Associates
10-Year TIPS and Nominal Yields
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
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
Nominal Yield
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0TIPS Yield
TIPS 10yr(RHS)
Nominal 10yr(LHS)
10-Year TIPS Breakeven Rates
0.0
0.5
1.0
1.5
2.0
2.5
3.0
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
Percent
0.0
0.5
1.0
1.5
2.0
2.5
3.0Percent
auction dates
5yr - 10yr Yield Spread
-50
-30
-10
10
30
50
70
90
110
130
Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04
basis points
-50
-30
-10
10
30
50
70
90
110
130basis points
Nominal Treasuries
TIPS
Monthly Inflation Accrual on TIPS
-0.6%
-0.4%
-0.2%
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
-0.6%
-0.4%
-0.2%
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1997 1998 1999 2000 2001 2002 2003 2004
Average Monthly Inflation Accrual