You are on page 1of 20

Treasury Debt Management

Timothy Bitsberger
Deputy Assistant Secretary U.S. Treasury Department

Summary
• Treasury is committed because TIPS reduce cost • Closest thing to a risk free asset for long-term investors. • Highest credit quality • Improve portfolio diversification • Better match to inflation than real estate, commodities, or other real assets • TIPS market is young but growing fast

TIPS Outstanding
180 $billions 160 140 120 100 80 60 40 20 0 1997
Source: US Treasury

1998

1999

2000

2001

2002

May 2003

10-year TIPS Issuance Represents More Than a Quarter of Treasury’s Total 10-year Note Issuance
$billions 70
60 50 40 30 20 10 0 1997 1998 1999
10-yr TIPS

2000

2001

2002

10-yr Nominal Issuance

TIPS Liquidity Increasing
3-Month Moving Average of Daily TIPS Transactions by Primary Dealers
4.0 $ billions 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Apr-98 4.0 $ billions 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Oct-98 Apr-99 Oct-99 Apr-00 Oct-00 Apr-01 Oct-01 Apr-02 Oct-02 Apr-03

Net Dealer Positions in Treasuries
6 TIPS ($ billions) TIPS 5 20 4 13-week MVA 0 3 40 Nominal Treasuries ($ billions)

2 13-week MVA 1 Nominal Treasuries 0

-20

-40

-60 -1 Dealers net short TIPS for the first time -80 Mar-01 May-01 Jul-01 Sep-01 Nov-01 Jan-02 Mar-02 May-02 Jul-02 Sep-02 Nov-02 Jan-03 Mar-03

-2 Jan-01

SIZE OF GLOBAL INFLATION-INDEXED BOND MARKET VS. OTHER ASSET CLASSES
500

400

300

€ Billions

200

100

0
Global Inflation Indexed Global High Yield Emerging M arket Bonds Emerging M arket Equities European Corporates

Asset Class

Source: Bridgewater Associates

Distribution of Competitive Auction Awards of 10-Year Treasury Notes
10-Year Inflation-Indexed Notes
July 2002, October 2002 & January 2003
Financial Insts., 1% Other, 4%

10-Year Fixed-Rate Notes
August 2002, November 2002 & February 2003
Financial Insts., 3% Other, 2%

Investment Funds, 25%

Investment Funds, 15%

Foreign & International, 12%
Foreign & International, 5% Primary Dealers, 66%

Primary Dealers, 67%

Distribution of Competitive Auction Awards of 10-Year Treasury Notes
July 2002 - February 2003
70% 70%

10-Year Fixed-Rate Notes
60%

10-Year Inflation-Indexed Notes

60%

50%

50%

40%

40%

30%

30%

20%

20%

10%

10%

0% Primary Dealers Investment Funds Foreign & International Financial Institutions Other

0%

Return Profiles
1997 - 2003
Lehman Index 2003 Returns
(Thru May 2003)

10-Year Treasury 5.8% 9.2% 2.0% 8.2%

10-Year TIPS 5.7% 7.9% 1.1% 6.2%

S&P 500 Index w/dividends 10.4% 4.7% 5.3% 22.0%

4.3% 8.4% 1.3% 5.7%

Annualized Return Monthly Volatility Annual Volatility

Source: Barclays Capital

STRATEGIC ROLE

I/I BOND CORRELATION TO OTHER ASSETS AND INFLATION

Correlation of TIPS (10 Yr Duration) to 1970 to Present CPI 1 Month 3 Month 1 Year 3 Year 5 Year 0.18 0.27 0.51 0.84 0.91 Equities S&P 500 0.11 0.02 -0.18 -0.47 -0.53 Nominal Bonds 10 Yr Duration 0.57 0.64 0.29 -0.33 -0.35

10-Year TIPS and Nominal Yields
7.5 Nominal Yield 7.0 6.5 4.0 6.0 On-The-Run 10-yr TIPS 5.5 5.0 4.5 10-yr Constant Maturity 4.0 2.0 3.5 3.0 2.5 Jan-97 Correlation Coefficent 1997-1999: -0.18 2000-present: 0.97 3.5 5.0 TIPS Yield 4.5

3.0

2.5

1.5

Jul-97

Jan-98

Jul-98

Jan-99

Jul-99

Jan-00

Jul-00

Jan-01

Jul-01

Jan-02

Jul-02

Jan-03

1.0 Jul-03

TIPS Characteristics
• Fixed real coupon, paid semi-annually on inflation adjusted principal • Deflation-protected principal at maturity • Principal adjusted for inflation daily, but paid at maturity • Inflation accretion is referenced to the CPI-U NSA, set with a 3-month lag • First issue January 1997; 10 issues ranging from 2007 to 2032 • $155 billion market capitalization; total Treasury market capitalization $3.3 trillion • Four 10-year TIPS auctions per year, increased issuance • Average daily trading volume over $3.5 billion

Structure
• Principal value is adjusted for inflation by multiplying the value at issuance by an index ratio which changes daily. Inflation adjustment is paid at maturity. • Coupon payments are a fixed percentage, determined at auction, of the inflation-adjusted value of the principal. • The index ratio for a particular valuation date is the index number for that date divided by the index number for the issue date. • Index Ratio Date = Index number for value date Index number for dated date

Average Absolute Federal Budget Forecast Errors
$ billions 180 160 140 120 100 80 60 40 20 0 14 months
Office of Market Finance Department of the Treasury

1997 - 2002
$ billions 180 160 140 120 100 80 60 CBO OMB Primary Dealers 20 0 11 months 8 months 5 months months until end of fiscal year 2 months 40

Source: Primary Dealer forecasts provided to Treasury at quarterly dealer interviews OMB – U.S. Budget and Mid-Session Review CBO – Budget Outlook and Update

$ billions 600 500 400

FINANCING RESIDUALS GIVEN CURRENT ISSUANCE

$ billions 600

Deficits plus 1 St. Dev.

500 400

Deficit Forecasts (FY04 Budget) 300 200 100 0 -100 -200 -300 -400 2003 2004 2005 Fiscal Year 2006 2007 2008 300 200 100 0 -100 -200 -300 -400

Deficits minus 1 St. Dev.

Refinancing dominates new financing
$Bil. 1,000 Maturing Debt Maturing Debt Without 4-week Bills Fiscal Balance
(Deficit/Surplus)

$Bil. 1,000

800

800

600

600

400

400

200

200

0

0

-200

-200

Department of the Treasury Office of Market Finance

Dec-61 Dec-62 Dec-63 Dec-64 Dec-65 Dec-66 Dec-67 Dec-68 Dec-69 Dec-70 Dec-71 Dec-72 Dec-73 Dec-74 Dec-75 Dec-76 Dec-77 Dec-78 Dec-79 Dec-80 Dec-81 Dec-82 Dec-83 Dec-84 Dec-85 Dec-86 Dec-87 Dec-88 Dec-89 Dec-90 Dec-91 Dec-92 Dec-93 Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-99 Dec-00

-400 1961

'64

'67

'70

'73

'76

'79

'82

'85

'88

'91

'94

'97

'00

-400 '03

Quarterly Financial Obligations

February 3, 2003-9

BILLS AS A PERCENTAGE OF TREASURY'S MARKETABLE DEBT 1
45% 45%

40%
Assuming OMB '04 Budget Deficit Forecasts Plus 1 St. Dev.

40%

35%

35%

30%

30%

25%

25%

20%
Assuming OMB '04 Budget Baseline Deficit Forecasts

20%

15% 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

15%

Distribution of Treasury's Marketable Debt Outstanding By Security
As of April 30, 2003
30% 30%

25%

25%

20%

20%

15%

15%

10%

10%

5%

5%

0% Bills 2-year 5-year 10-year 10-year IIS 20-year 30-year 30-year IIS

0%

Realized 10-Year Borrowing Cost for Treasury Securities
16 yield 16 yield

14

14

12

12

10

10

8

8

6

6

4
1-year 2-year 5-year 10-year

4

2 1953

2 1957 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001
Includes Forward Rates as of May 21, 2003

1/ The interest cost for borrowing a fixed amount with a given security over a 10-year period was calculated using Treasury constant maturity yields.