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
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UNITED STATES DEPARTMENT OF THE TREASURY
Agenda
Fiscal Developments Auction Demand & Market Trends
Portfolio Metrics
2
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UNITED STATES DEPARTMENT OF THE TREASURY
FISCAL DEVELOPMENTS
3
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UNITED STATES DEPARTMENT OF THE TREASURY
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
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UNITED STATES DEPARTMENT OF THE TREASURY
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 $
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UNITED STATES DEPARTMENT OF THE TREASURY
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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UNITED STATES DEPARTMENT OF THE TREASURY
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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UNITED STATES DEPARTMENT OF THE TREASURY
AUCTION DEMAND & MARKET TRENDS
8
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UNITED STATES DEPARTMENT OF THE TREASURY
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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UNITED STATES DEPARTMENT OF THE TREASURY
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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UNITED STATES DEPARTMENT OF THE TREASURY
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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UNITED STATES DEPARTMENT OF THE TREASURY
PORTFOLIO METRICS
12
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UNITED STATES DEPARTMENT OF THE TREASURY
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
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UNITED STATES DEPARTMENT OF THE TREASURY
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
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UNITED STATES DEPARTMENT OF THE TREASURY
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)
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UNITED STATES DEPARTMENT OF THE TREASURY
Average Maturity of the Debt Continues to Lengthen
16
Note: Data through 7/31/2011
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
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UNITED STATES DEPARTMENT OF THE TREASURY
Percentage of Debt Maturing in the Near-Term Remains at Historic Lows
17
Note: Data through 6/30/2011
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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UNITED STATES DEPARTMENT OF THE TREASURY
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 $
Note: Data through 6/30/2011
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UNITED STATES DEPARTMENT OF THE TREASURY
LONG-TERM CHALLENGES
19
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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?
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U.S.TreasuryBorrowingAdvisoryCommitteeAugust2,2011
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,
Treasurytocontinuetolengthentheaveragematurityofdebt
outstanding.
Please
discuss
the
costs
and
benefits
of
extending
t eaveragematurityan ramewor s orquanti yingt ose
costsandbenefits.
2
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Givenagoaloffundingthegovernmentas
Ma orConsiderationsare:
Volatilityofinterestexpensethroughtime
Rollover/LiquidityRisk
3
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D t rvic i a F ncti n f Man Varia l
= *
Thisisafunctionofmanyvariables
Pastdebtissuance
Currentdebtissuancestrategy
Debtmanagementcommunicationpolicy
andmanyTreasurydoesnotcontrol: Outstandingstockofdebt
Interestrates
GDPgrowth
Inflation
4
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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
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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
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DataSeries:
7
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AverageMatur ty son yoneo manyvar a est at mpacts e t
service
to
GDP
IncreasingAverageMaturitycanhaveapotentialfeedbackeffect
.
explorethemagnitudeofthiseffectduringQE2andunderamaturity
extensionstrategy.
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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
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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
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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
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InterestExpenseOverTime
Historicalbacktest oflon vs.shortmaturit
strategieso PointinTimedecisiontoissueanew5Ybondorrolling3MTbills for5
years synt et c oater
o Quarterlyinterestexpenseforafixedsizeportfolioallinasingle
maturity
OmitsthereverseLSAPfeedbackonGDPand
rates
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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
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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
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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
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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
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Since62 issuin as ntheticfloaterbeatsissuin a5Y72%of
thetimeanda10Y60%
Lockinginlongratesonlyreducescostwhenratesriseby
morethanthetermpremium
Wecantanticipateratechangesbutwecanmeasurethe
termpremiumnowtodecidewhichproductismorefavorable
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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.
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Thiscalculationshouldrepresentalowerboundonthetermpremium
becauseTbill ieldsaret icall belowcom arableFFOISrates
19
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Estimates oftheTermPremiumUsingaVariationof
Note:Resultsareheavilydependentonmodelstructureandparametervalues
20
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MatchedMaturityAssetSwapSpreadstoFFOISCurve
21
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TotalTermPremium
(FFOIStermpremium+FFOISassetswapspread)
22
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LongerDatedTermPremiumsAppearElevated
Assetswapsconfirmpremiumsarehigh.Arehighpremiums
Thefollowingchartsconsiderpotentialdriverssuchas
RiskAppetite
Risk Ex ectation
InflationExpectation
u c e
IssuanceDV01
23
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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
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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
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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
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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$/bp)
10Y Fed Funds Term Premium vs Issuance DV01
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120
10YFedFundsTermPremium vs.IssuanceDV01
60
80
100
Y
FF
TP
9602
0
20
40
0 20 40 60 80 100 120
T10
Oct08Jun11
20MonthlyIssuanceDV01(6mAvg,mm$/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
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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
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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
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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
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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
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LikelyLinkedtoReserveCurrencyStatus
34
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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
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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
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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
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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
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Conclusion
Thebenefitsofextensiondonotcomeforfree. Historicalanalysissuggests
thatshortertermfundinghasatmanytimesbeenbothcheaperandthe
Recentcyclesofrisingrateshavenotlastedlongenoughformaturity
extensionto a off
Itispossible,however,thatthistimeisdifferentbecauseo Nominalratesaremuchclosertothezeroboundthanpreviousperiods
o Concentratedforeignownershipcreateslessreliabledemand
o Thebenefitsoffundingattributabletobeingthereservecurrencymaybefading
,
forfuturestudyistheimpactofthedistributionofmaturitiesontotalinterestexpense
39
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