UNCTAD’s Seventh Debt Management Conference
9-11 November 2009
Treasury Debt Issuance and Recent Financial Events
by
Mr. Stephen M. Vajs
Office of Debt Management
United States Department of the Treasury
The views expressed are those of the author and do not necessarily reflect the views of UNCTAD
Treasury Debt Issuance and Recent Financial Events
Presentation to the Seventh Debt Management Conference
Geneva, Switzerland
Stephen M. Vajs
Office of Debt Management
November 9, 2009
Contents
•
Overview of Treasury Debt Management
•
Composition of U.S. Portfolio
•
Determinants of U.S. Borrowing Needs and Policy Tools
•
Response to the Crisis and Fiscal Environment
Office of Debt Management
3
Treasury Issuance Objectives and Constraints
Our Objectives
• Long-term: Lowest cost of financing over time
• Short-term: Adequate cash balances to cover expenses
Constraints
• Uncertainty: Forecast errors, legislation, etc. all create uncertainty in deficit
forecasts, debt limit problems
• Size: Treasury is too large to behave opportunistically
• Fluctuations in non-marketable debt (Savings Bonds, State and Local
Government Securities (SLGS))
Policy Outcomes
• We are regular market participants, not market timers -- “Regular and
Predictable”
• We don’t react to interest rate levels
• We need flexibility
• We strive for transparency
Office of Debt Management
4
Composition of Portfolio (as of September 30, 2009)
Marketable Debt
• $7.0 trillion outstanding, can be traded in the secondary market
• Sold at auction, rates set via competitive bidding
Non-Marketable Debt
• $4.9 trillion outstanding
• Can only be sold to Treasury
• Sold by subscription, rates set administratively
Government Account Series
• Approximately $4.5 trillion (mostly special non-marketables) in 135 funds
Federal Old Age Survivors Fund
$2,296 billion
Civil Service Retirement Fund
$742 billion
Hospital Insurance Trust Fund
$310 billion
Office of Debt Management
5
Composition of Marketable Debt as of September 30, 2009
$7 Trillion Marketable Outstanding
TIPS; $552 ; 8%
Bonds; $680 ; 10%
Bills; $1'993 ; 28%
Notes; $3'774 ; 54%
Office of Debt Management
6
Debt Management Policy Tools
Treasury’s policy tools include the following, always used in a regular and
predictable manner:
• Auction Sizes
• Auction Frequency
• Security Offering Menu
What does regular and predictable debt issuance mean?
U.S. Treasury...
– Is a regular market participant, but not a market timer,
– Does not react to interest rate levels,
– Strives for transparency in decision making,
– Provides certainty of supply to the market place,
– Engages in “regular and predictable” auctions, of a set of straight
forward securities, on a set issuance schedule.
Office of Debt Management
7
Lowest Cost over Time Implies a Diversified Debt Portfolio
Treasury spreads debt across maturities to…
•
•
•
•
Reduce risk
Diversify the investor base
Improve cash management
Facilitate regular and predictable issuance
Office of Debt Management
8
Regular and predictable debt issuance with a set auction calendar
US Treasury issuance schedule – Pattern of financing
Nominal Securities
•
•
•
•
•
•
•
•
•
•
4-week bills (52x)
13-week bills (52x)
26-week bills (52x)
52-week bills (13x)
2-year notes (12x)
3-year notes (12x)
5-year notes (12x)
7-year notes (12x)
10-year notes (12x)
30-year bonds (12x)
Frequency
Latest Offering
Weekly
Weekly
Weekly
Every 4 weeks
Monthly
Monthly
Monthly
Monthly
Quarterly, with 2 re-openings
Quarterly, with 2 re-openings
$30 billion
$30 billion
$29 billion
$27 billion
$44 billion
$39 billion
$41 billion
$31 billion
$23/20 billion
$15/12 billion
Treasury Inflation Protected Securities (TIPS, our inflation linked product)
•
•
•
5-year TIP (2x)
10-year TIP (4x)
20-year TIP (2x)
Semi-annual
Quarterly
Semi-annual
$8/7 billion
$8/7 billion
$8/6 billion
Office of Debt Management
9
Determinants of U.S. Treasury Borrowing Needs
Changes in Cash Balance
Budget Deficit/Surplus
Economic Outlook
Volume of Maturing Issues (Rollover)
Office of Debt Management
10
Balances are cyclically predictable, but magnitude hard to guess—
necessitating bill financing
Treasury Daily Operating Balance
1992-2009
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
Year
2002
2003
2004
2005
2006
2007
Thousands
2008
2009
1
2
4
5
6
7
8
10
11
12
13
14
16
17
18
19
20
22
23
24
25
26
28
29
30
31
32
34
35
36
37
38
40
41
42
43
44
46
47
48
49
50
52
53
70.00
63.00
56.00
49.00
42.00
35.00
28.00
21.00
14.00
0.00
7.00
119.00
161.00
154.00
147.00
140.00
133.00
126.00
112.00
105.00
98.00
91.00
84.00
77.00
Week of Yr
Office of Debt Management
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Uncertainty About Future Budget Situation
Office of Debt Management
12
Uncertainty and Sharp Deficit Swings Imply a Need for Flexibility
OMB 8/09 Budget
Estimates
Annual Deficits
4
400
200
Surplus/Deficits
$ millions (LHS)
2
0
0
-200
-400
-4
Surplus/Deficits as a Percentage of GDP
-800
-6
-1'000
-1'200
-8
-1'400
-10
-1'600
2019
2016
2013
2010
2007
2004
2001
1998
1995
1992
1989
1986
1983
1980
1977
1974
1971
1968
1965
1962
1959
1956
-12
1953
-1'800
1950
$ Billions
-600
Percent of GDP
-2
Years
Office of Debt Management
13
Structural Deficit Changes are connected to coupon issuance
Data for the past 50 years
show a strong, consistent
relationship between the
budget deficit throughout
the fiscal year and the net
annual issuance of notes and
bonds.
Fiscal Year to-Date Deficit and Net Coupon Issuance
FY1954 to FY2007
$500
$400
$300
This relationship can be
used to project changes in
net financing needs as
budget projections change.
y = 0.72x - 10519
2
R = 0.89
$200
Coupons Issued
A $10 billion change in the
deficit will generate a $7
billion change in net
issuance.
$100
$0
-$300
-$200
-$100
$0
$100
$200
$300
$400
$500
-$100
-$200
-$300
Fiscal Deficit
Office of Debt Management
14
Declines in corporate tax receipts have generally preceded lower growth in
individual withheld and non-withheld receipts.
Rolling 12-Month Growth Rates
40%
Corp Taxes
WH Taxes
nWH Taxes
30%
20%
10%
0%
-10%
-20%
-30%
-40%
Mar-09
Mar-08
Mar-07
Mar-06
Mar-05
Mar-04
Mar-03
Mar-02
Mar-01
Mar-00
Mar-99
Mar-98
Mar-97
Mar-96
Mar-95
Mar-94
Mar-93
Mar-92
Mar-91
Mar-90
Mar-89
Mar-88
Mar-87
Mar-86
Mar-85
Mar-84
Mar-83
Mar-82
-50%
Office of Debt Management
15
Receipts for FY 2009 are lower
Corporate Income Tax
Withheld Individual Tax
FY07
FY08
FY09
FY06
400
FY07
1750
350
1500
300
1250
250
$ Bill
$ Bill
1000
200
150
750
500
100
250
50
0
1-Oct 15-Nov31-Dec15-Feb 1-Apr17-May 2-Jul 16-Aug
0
1-Oct15-Nov31-Dec15-Feb1-Apr17-May 2-Jul 16-Aug
Tax Refunds
Non-Withheld Individual Tax
FY06
FY07
FY08
FY06
FY09
FY07
FY08
FY09
0
1-Oct 15-Nov 31-Dec 15-Feb 1-Apr 17-May 2-Jul 16-Aug
-100
600
500
300
200
100
0
1-Oct15-Nov31-Dec15-Feb1-Apr17-May2-Jul16-Aug
-200
$ Bill
$ Bill
400
-300
-400
-500
Office of Debt Management
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And outlays have increased in 2009.
Education
Defense Vendors
FY07
FY07
FY08
FY08
FY09
0
1-Oct 15-Nov31-Dec15-Feb 1-Apr 17-May 2-Jul 16-Aug
-25
0
-501-Oct15-Nov31-Dec15-Feb 1-Apr17-May 2-Jul 16-Aug
-100
-50
-150
$ Bill
$ Bill
-200
-250
-75
-100
-300
-125
-350
-150
-400
-175
-450
Medicare
FY07
Medicaid
FY07
FY08
0
1-Oct15-Nov31-Dec15-Feb1-Apr17-May 2-Jul 16-Aug
-100
$ Bill
$ Bill
FY09
-100
-200
-300
FY08
0
1-Oct 15-Nov 31-Dec 15-Feb 1-Apr 17-May 2-Jul 16-Aug
-50
-150
-400
-200
-500
-250
-600
Office of Debt Management
-300
17
Rollover of maturing debt is another important consideration
Outstanding Marketable Debt: Median and Mean Rollover Period
Mean
Median
7
6
Years to Rollover
5
4
3
2
1
0
12/31/1998
5/14/2000
9/26/2001
2/8/2003
6/22/2004
11/4/2005
3/19/2007
7/31/2008
Office of Debt Management
18
How Debt Managers Responded to Fiscal Uncertainty
in 2007 & 2008
Background: 2007, Provided Headroom
Full Crisis: 2008, Strategic Addition of Issuance Tools
Office of Debt Management
19
In 2007 Treasury Had Excess Capacity
Treasury cut bill issuance and coupon issuance because cash balances
were healthy.
• Suspended issuance of 3-year note in May 2007
• Reduced bill issuance to minimal levels consistent with market liquidity
This proved to be a fortunate move when we came under subsequent
pressure and had to increase amounts. This gave debt managers headroom
before crisis.
Office of Debt Management
20
August 2007 –SOMA Reductions Begin
Federal Reserve began to reduce its holdings of Treasury bills
• System Open Market Account is the portfolio of Treasury and agency
securities that the Federal Reserve owns and uses to maintain interest rates
and markets through repo activities.
• The Federal Reserve cannot augment its portfolio by direct purchases from
the Treasury. It may only rollover maturing securities in new auctions
from the Treasury, although it can let its holdings mature without
replacement. All other securities are bought or sold in the secondary
market.
• In the summer of 2007, the Federal Reserve held about $200 billion of its
SOMA in Treasury bills.
• As bills held in SOMA matured, these were allowed to roll off.
Office of Debt Management
21
February 2008 -- The first financial stimulus
In February 2008, talk began to focus on a proposed fiscal stimulus in the
form of a rebate in advance on 2008 taxes.
• The rebate was to be paid in 2008 based on 2007 tax filings.
• These rebates would total $100 billion and were to be paid out rapidly
starting in May 2008.
The challenge lay in raising sufficient money in a few weeks to cover the
checks when they were cashed.
• Began with cash management bills long-dated
• This was a change from standing policy of keeping CMBs at no more than
21 days long. They were meant to absorb shocks.
• Aim was to carry financing until increases in coupons could catch up
Office of Debt Management
22
Summer 2008 – Present: Dealing with the crisis.
Assisting the Federal Reserve
• By summer 2008, the Fed had sold or redeemed 90% of its holdings of
Treasury bills.
• It now holds about $18 billion.
• As these bills held in SOMA were allowed to mature, they had to be
replaced by offerings to the public
Additionally, the suspension of the 3-year was beginning strain issuance
profile.
• Maturing notes had to be financed. This led to regular CMB issuance over
quarterly refunding
Response:
Brought the 1-year bill back after a 7 year absence on a revolving 4-week
cycle
Office of Debt Management
23
Bill Financing in Response
Allocation of Debt for Bill Financing
1. Fed redemption and sale of SOMA w ere matched by additional issuance to private holders.
2. Additional deficit has required further bill financing above level at start of period.
3. CMBs have been needed for additional financing.
4. SFP program initiated on Sept 17.
$2,500
SFP
$ billions
$2,000
$1,500
CMBs
Bills Issued for cash
needs & op'ns
$1,000
Bills issued absent
add'l funding needs
$500
SOMA
SOMA Sales
$0
6/ 28/ 2007
9/ 27/ 2007
12/ 27/ 200
3/ 27/ 2008
6/ 26/ 2008
9/ 25/ 2008
12/ 25/ 200
3/ 26/ 2009
Date
SOMA
SOMA sales
Bills for Opns
CMBs
SFP
Start of Per.
Office of Debt Management
24
Bringing in the 52-week bill increased bill maturity
Average Maturity - Weekly Bills
103
98
Days
93
88
83
78
73
68
oct.-07
mars-08
sept.-08
mars-09
sept.-09
Office of Debt Management
25
Bill Share of Portfolio Temporarily Raised
Bills as a Share of Total Portfolio
All Bills
Regular Bills
37%
35%
33%
31%
29%
27%
25%
23%
21%
19%
Oct-04
Apr-05
Oct-05
Apr-06
Oct-06
Apr-07
Oct-07
Apr-08
Oct-08
Apr-09
17%
Oct-09
Apr-10
Office of Debt Management
26
Taking Both Nominal Coupons …
Nominal Coupons as a Share of Total Portfolio
71%
69%
67%
65%
63%
61%
59%
57%
Oct-04
Apr-05
Oct-05
Apr-06
Oct-06
Apr-07
Oct-07
Apr-08
Oct-08
Apr-09
55%
Oct-09
Apr-10
Office of Debt Management
27
And TIPS Lower.
TIPS as a Share of Total Portfolio
13%
12%
11%
10%
9%
8%
7%
6%
Oct-04
Apr-05
Oct-05
Apr-06
Oct-06
Apr-07
Oct-07
Apr-08
Oct-08
Apr-09
5%
Oct-09
Apr-10
Office of Debt Management
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A Temporary Rise in Bills.
Shares of Total Debt Outstanding
TIPS
Nominal Cpns
CMBs
Regular Bills
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Office of Debt Management
29
We now must work out of a rollover challenge
Outstanding Marketable Debt: Median and Mean Rollover Period
Mean
Median
7
6
Years to Rollover
5
4
3
2
1
0
12/31/1998
5/14/2000
9/26/2001
2/8/2003
6/22/2004
11/4/2005
3/19/2007
7/31/2008
Office of Debt Management
30
Reinstating the 3-Year Note
After consultation with the market the 3-year note was issued again starting
in November 2008.
It was now issued on a monthly schedule. Prior to suspension, the issuance
had been quarterly.
Office of Debt Management
31
Return of the 7-Year Note
As expenditures for TARP and other actions increased, it was determined
that another coupon issue was needed.
In February 2009, issuance began again for the first time since 1993.
The 7-year note is issued monthly.
It has the attraction that its duration approximates that of most mortgage
securities in the market.
Office of Debt Management
32
Maturity Profile Changes -- Coupon Replacing Bills with Time
Cumulative Financing Net Flows since FY 2007
SFP Amounts
CMBs
RegBills
TIPS
Notes
Bonds
Net Mktable Borrowing
$3'000
FY 2009 Deficit =
$1,417b
$2'500
$2'000
$1'500
FY 2008 Deficit =
$455b
FY 2007 Deficit =
$162b
$1'000
$500
Oct-06
Jan-07
Apr-07
Jul-07
FY 2007
Oct-07
Jan-08
Apr-08
Jul-08
FY 2008
Oct-08
Jan-09
Apr-09
Jul-09
$0
Oct-09
FY 2009
-$500
Date
Office of Debt Management
33
Summary Treasury Debt Management
Economic and financial market volatility has an impact on the fiscal outlook
Treasury constantly revisits its assumptions and forecasts when making debt issuance
decisions, but overall strategy remains consistent
Treasury issues over $7 trillion per year in over 250 auctions – nearly one every
business day – making us unable to move opportunistically and changes in the
outstanding portfolio take time.
Plans for debt issuance changes are transmitted to the market as transparently as
possible.
During rapid changes to the economy, such changes may become more pronounced.
Office of Debt Management
34
Additional Information
Office of Debt Management
• http://www.treas.gov/offices/domestic-finance/debt-management/
Bureau of Public Debt
• http://www.treasurydirect.gov
Federal Reserve Information
• http://www.newyorkfed.org/
• http://www.federalreserve.gov/
Office of Debt Management
35