bitsberger dec 0704
DESCRIPTION
Timothy Bitsberger Deputy Assistant Secretary October 2, 2003 Treasury Debt Management Perspective Where We are… • $462 billion in Treasuries are traded daily • $3.7 trillion raised in 176 auctions in 2002 • $171 billion paid in net interest in 2002 –represented 8.5% of Government expenditures –represents approximately a quarter of U.S. credit markets 25% 30% 40% 10% 15% 20% 35% 25% 30% 40% 0% 5% 0% 5% 1.0% 2.0% -2.0% -7.0% -6.0% -5.0% -4.0% -3.0% -1.0% -7.0% -6.0% -5.0% -4.0% -3.0% -2.0% -1.0%TRANSCRIPT
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