Treasury Borrowing Advisory Committee

Quarterly Refunding November 4, 2003

TBAC Quarterly Meeting November 2003
I. Long-Term Financing II. TIPS III. Market Conditions IV. Financing This Quarter

Long-Term Financing
We will show you a few charts that describe projections of our future financing needs given our current issuance calendar. We would like the Committee’s advice on whether Treasury’s financing calendar provides sufficient flexibility given the current fiscal outlook. If the Committee views the current calendar as insufficiently flexible to meet the range of projections shown, what recommendations does the Committee have for changing the calendar and when should these recommendations be implemented?

Treasury Financing Requirements
($ Billions) July - September 2003
(Projected) (Actuals)

October - December 2003
(Projected)

Deficit Funding (Def + / Surplus -) * Means of Financing Change in Cash Balance Compensating Balances Net Non-Marketable Financing Net Marketable Financing Other Net Marketable Financing Bills Nominal Notes IIS Bonds
Notes: Starting Cash Balance Ending Cash Balance

138

103

140

-15 28 16 104 5 104

-5 28 8 82 -10 82 -10 86 11 -6

0 7 5 117 10 117

30 45

30 35

35 35

* Includes budget results, direct loan activity, changes in accrued interest and checks outstanding and minor miscellaneous transactions. Note: Totals may not add due to rounding

Financing Residuals Given Current Issuance Calendar
700 $ billions 600 500 400
Deficits minus Avg. Absolute Error

700 $ billions
Deficits plus Avg. Absolute Error

600 500 400

300 200 100 0 -100 -200 -300

FY04 OMB MSR Deficit Forecast

300 200 100 0 -100 -200 -300

Bars Indicate Additional Financing Required In Given Year For Different Deficit Outcomes

2004

2005

2006 Fiscal Year

2007

2008

2009

CBO Baseline Budget Projections With Policy Alternatives
300 $ billions 200 100 0 -100 -200 -300 -400 -500 -600 -700 -800 2004 2005 2006 2007 2008 2009 2010 2011 2012 Fiscal Year
CBO August Baseline Reform Alternative Minimum Tax Increase Discretionary Appropriations by Growth Rate of Nominal GDP Extend Expiring Tax Provisions Reform Medicare/Prescription Benefit Afghan. & Iraq Supplemental Request
-583 -453 -457 -482 -516 -537

$ billions 300 200 100 0 -100 -200 -300 -400 -500
-559 -581

-600
-529 -542

Net Deficit Projection

-700 -800 2013

Source: CBO, The Budget and Economic Outlook, August 2003

Outlays and Receipts as a Percentage of GDP
25% 24%
Projections '04 - '08

25% 24% 23% 22% 21% 20%
Average Historical Difference: 2%

23% 22% 21% 20% 19% 18% 17% 16% 15% 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
OMB's MSR Outlays OMB's MSR Receipts CBO Baseline Outlays CBO Baseline Receipts CBO Policy Outlays CBO Policy Receipts

19% 18% 17% 16% 15%

Sources: OMB, FY ’04 Budget Historical Tables; OMB, MSR, July ‘03; CBO, The Budget and Economic Outlook, August ‘03

Projected Average Announced Auction Sizes (CBO Policy plus Afghan & Iraq Supplemental)
Note: Projected auction sizes are hypothetical. Assumes no changes in auction calendar.
$40 billions

40 $ billions 2004 2005 35 30 25 20 15 10 5 0 Bills 2-year 3-year 5-year 10-year 10-yr TIPS

35 30 25 20 15 10 5 0

2006 2007 2008

Annual Issuance as a Percentage of GDP and Percentage of Debt Maturing in 12 Months
Issuance/ 24% GDP 22% Debt Maturing/ 50% Total Debt
Using CBO's Baseline plus Policy Forecast

48%

20%

46%

Issuance as a % of GDP (LHS)
18% 44%

16%

42%

14%
Using OMB's MSR Forecast

40%

12%

38%

10%

36%

% of Debt Maturing in 12 Months (RHS)
8% 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003

Projections '04 - '08

34% 2005 2007

* Projections assume current coupon auction sizes remain the same and remaining borrowing needs are financed with bills. ** Nominal GDP growth of 5% is assumed for Issuance as a Percentage of GDP measure. *** Debt Maturing and Issuance include Fed holdings. Issuance is composed of coupon issuance plus bills outstanding at the end of the period.

12%

Long-Term Issuance as a Percentage of Total Annual Issuance

12%

11%

11%

10%
Projection for FY'04

10%

9%
average:8.3%

9%

8%

8%

7%

7%

6%

6%

5% 1981

5% 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003

* Long-Term issuance is any issuance with a maturity of 10 years or greater. ** Total Annual Issunace is composed of all coupon issuance over the previous four quarters plus bills outstanding at the end of the period. *** Projection is calculated using current auction sizes and the OMB's July '03 MSR deficit forecast for FY04 of $475 billion.

Treasury Inflation-Protected Securities
We are currently considering adding an additional TIPS security to our financing calendar. What criteria should we use in determining the appropriate maturity for a new issue?

Total Annual Issuance of TIPS
Nominal Amounts and as a Percentage of Annual Issuance
3.5% percent Percentage of Total Issuance (LHS) FY '04 Projections 2.5% (with current auction sizes) 30 2.0% 25 20 15 1.0% 10 0.5% 5 0 1997 1998 1999 2000 2001 2002 2003 2004 45 $ billions 40 35

3.0%

Annual Issuance (RHS)

1.5%

0.0%

calendar year
* Annual Issuance equals total TIPS issuance over the previous four quarters. ** Total Annual Issuance is composed of all coupon issuance over the previous four quarters plus bills outstanding at the end of the period. *** FY '04 Projections based on current auction sizes and the OMB's July '03 MSR deficit forecast for FY '04 of $475 billion.

TREASURY BID YIELD CURVE COB: 10-28-2003, Tuesday 6 6

5 coupon equivalent yield (bills) bank discount rate (bills) yield to maturity yield to first call (price > par) yield curve fitting points pre-auction quote (w.i. trading) inflation-indexed security

5

4

4

3

3

2

2

1

1

0 2003

2005

2007

2009

2011

2013

2015

2017

2019

2021

2023

2025

2027

2029

2031

2033

0 2035

35%

Treasury Securities as a Percentage of the Financial Assets Held in Pension Funds

35%

30%

30%

25%

25%

20%

20%

State & Local Gov't
15% 15%

10%

10%

Total
5% 5%

Private
0% 1960 0% 1965 1970 1975 1980 1985 1990 1995 2000

Source: Federal Reserve Board, Flow of Funds; Haver

Treasury Securities as a Percentage of the Financial Assets Held by Insurance Companies
25% 25%

20% Other Insurance

20%

15%

15%

10% Total

10%

5% Life Insurance

5%

0% 1960

0% 1965 1970 1975 1980 1985 1990 1995 2000

Source: Federal Reserve Board, Flow of Funds; Haver

20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 1960

Treasury Securities as a Percentage of the Financial Assets Held in Mutual Funds

20% 18%

Nearly $15 billion held in TIPS Mutual Funds today Compared with less than $1 billion at the end of 2000

16% 14% 12% 10% 8% 6% 4% 2% 0%

1965

1970

1975

1980

1985

1990

1995

2000

Source: Federal Reserve Board, Flow of Funds; Haver

Market Conditions
RP fails, particularly on the May ‘13 10-year note, persist at an elevated level. We would like the Committee’s feedback on current market conditions and how effective private sector initiatives and regulatory measures have been in handling the fails situation.

Overnight RP and 10-year Treasury Rates
9% 8% 7% 6% 5% 4% 3% 2% Overnight RP 1% 0% 1991 1% 0% 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 9% 8% 7% 6% 5% 4% 3% 2%

10-year

Source: Bloomberg

May 10-year Note Fails
• Not much improvement over past two months • Spillover into cash market has been recent and small • No signs that overall liquidity has been impaired • No improvement forecasted in near term

Financing This Quarter
We would like the Committee’s advice on the following: • The composition of Treasury notes to refund approximately $24.8 billion of privately held notes and bonds maturing on November 15 (including $3.4 billion of the 8-3/4% 11/15/03-08 that was called on 7/15/03). • The composition of Treasury marketable financing for the remainder of the October-December quarter, including cash management bills. • The composition of Treasury marketable financing for the January-March quarter.