Treasury Borrowing Advisory Committee

Quarterly Refunding August 3, 2004

Liquidity and Reduced Financing Needs We would like the Committee’s view on reducing marketable issuance in the face of declining financing needs and the impact of such reductions on market liquidity.

2

Treasury Financing Requirements
($ Billions) April - June 2004
(Projected) (Actuals)

July - September 2004
(Projected)

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

22

26

91

-24 6 38 2 38

-23 4 31 14 31 -38 69 9 -8

10 -4 89 -4 89

21 45

21 45

45 35

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

3

Financing Residuals Given Current Issuance Calendar
Assumes current coupon issuance pattern and issuance amount-- Bill issuance at levels required to maintain outstanding FY $ amounts nearly equal to June 30, 2004 total outstanding 600 $ billions 600 $ billions

500

Deficits plus potential error in OMB estimate

500

400 FY05 OMB MSR Budget deficit forecast 300 Deficits minus potential error in OMB estimate 200

400

300

200

100

100

0

0

-100

-100

-200

Bars indicate estimated additional financing required In given year for different deficit outcomes 2004 2005 2006 Fiscal Year 2007 2008 2009

-200

-300

-300

*Potential errors estimated with linear least squares regression using OMB Budget forecasts since 1989 and MSR forecasts since 1998.

4

Bills as a Percentage of Treasury's Marketable Debt
40% 40%

35%

35%

30%

Bills Maintained at Roughly 25% (see next 5 charts)

30%

25%

25%

20%
Coupon Auction Sizes Held Constant

20%

15% 1980

15% 1985 1990 1995 2000 2005

5

Projected Net Marketable Borrowing and Hypothetical Auction Sizes
If Bill Issuance held Constant as a percent of Portfolio 45 auction sizes
$ billions Announced

net borrowing 450 $ billions Net Marketable Borrowing (RHS) 400

40

35

350

30

300

25

250

20

200

15

150

10

100

5

50

0 2004 BILLS 2-YEAR 2005 3-YEAR 5-YEAR 2006 10-YEAR 2007 5-YEAR TIPS 2008 10-YEAR TIPS 2009 20-YEAR TIPS

0

* *For bills, the average auction size equals the amount outstanding at the end of the fiscal year divided by 43 (i.e., 4 1-month auctions, 13 3-month auctions, plus 26 6-month auctions).

6

Historical and Hypothetical Distribution of Treasury's Marketable Debt
35% 35%

30%

30%

25%

25%

20%

20%

15%

15%

10%

10%

5%

projections if bills held constant as % of portfolio

5%

0% 1980

0% 1982 1984 1986 1988 1990 1992 1994 1996 end of fiscal year 1998 2000 2002 2004 2006 2008

BILLS

2-3 YR NOTES

4-7 YR NOTES

8-10 YR NOTES

BONDS

TIPS

Assumes hypotheical auction sizes for '04 - '09 projections.

7

80% 70%

Historical and Hypothetical Distribution of Treasury's Marketable Debt Issuance

80% 70%

60% 50% 40% 30% 20%
projections if Bills held constant as % of portfolio

60% 50% 40% 30% 20%

10% 0% 1980

10% 0% 1982 1984 1986 1988 1990 1992 1994 1996 calendar year 1998 2000 2002 2004 2006 2008

BILLS

2-3 YR NOTES

4-7 YR NOTES

8-10 YR NOTES

BONDS

TIPS

Assumes hypotheical auction sizes for '04 - '09 projections.

8

Percentage of Debt Maturing in Next 12 to 36 Months
75% 70% 65% 60% 55% 50% 45% 40% 35% 30% 25% 1980 75% 70%

Maturing in 36 Months

65% 60% 55%

Maturing in 24 Months

projections '04 - '09 if bills held constant as percent of portfolio

50% 45% 40% 35% 30% 25%

Maturing in 12 Months

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

calendar year
Assumes hypotheical auction sizes for '04 - '09 projections.

9

Treasury's Marketable Debt Issuance
2,500 $ billions 2,500 $ billions

2,000
projections if bills held constant as % of portfolio

2,000

1,500

1,500

1,000

1,000

500

500

0 1980

0 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 calendar year

Bill Issuance

Coupon Issuance

Total Issuance

Assumes hypotheical auction sizes for '04 - '09 projections. Bill issuance is net issuance while coupon issuance is gross issuance.

10

Distribution of Inflation, Interest Rate, and Deficit We will present charts to the Committee showing projected levels of interest rates, inflation and deficits and a range of probable outcomes. Does the Committee have a views on whether these are the appropriate variables to focus on? Is there anything presented within these charts that raises concerns? Are there any related indicators that Treasury should consider?

11

300 $ Billions

Budget Probability Distribution

300

200

25th and 75th Percentile Confidence Interval (based on CBO's realized forecast errors from 1981 - 2003) 200 Budget Surplus (Deficit)

100

100

0

0

-100

-100

-200

-200

-300

-300

-400

Baseline 2004 Treasury's estimate 2005 - 2009 OMB's MSR estimate 2010 - 2014 OMB's 2009 level

-400

-500

-500

-600 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

-600

12

16

Percent

16

Term Structure Probability Distribution
14

14

6-month Yield 10-year Yield
12 12

10

Range of possible outcomes is based on 10-year historical data

10

8

8

6

6

4

4

Baseline
2 2

Sources: OMB's forecast
0 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 0

13

16 Percent

16

Inflation Probability Distribution
14

14

12

12

CPIU Annual Growth Rate
10 10

8

8

Range of possible outcomes is based on 10-year historical data
6 6

4

4

2

2

Sources: OMB's forecast
0 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 0

14

500 450 400 350 300

$ Billions

500

Contribution of Various Risk Factors to Uncertainty in Interest Expense
Fiscal Risk Interest Rate Risk Inflation Risk
Baseline

450 400 350 300 250 200 150 100 50 0 -50

250 200 150 100 50 0 -50 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

2014

ASSUMPTIONS: (a) Current coupon issuance is kept constant (b) Under the optimistic fiscal scenario coupon issance is adjusted slightly to maintain non-zero bill issuance (c) Budget deficit, interest rate, and inflation are uncorrelated

15

700

$ Billions

700

600

Contribution of Various Risk Factors to Uncertainty in Interest Expense

600

500

400

Fiscal Risk Interest Rate Risk Inflation Risk
Baseline

500

400

300

300

200

200

100

100

0

0

-100

-100

-200

-200

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028
ASSUMPTIONS: (a) Current coupon issuance is kept constant (b) Under the optimistic fiscal scenario coupon issance is adjusted slightly to maintain non-zero bill issuance (c) Budget deficit, interest rate, and inflation are uncorrelated (d) Fiscal, Interest rate, and inflation numbers are kept at 2014 level from 2015 - 2028

16

700

$ Billions

700

Cost and Volatility of Different Issuance Portfolios
600

600

Current Issuance
500

Long-term Concentrated Issuance Short-term Concentrated Issuance

500

400

400

300

300

200

200

100

100

Variability due to interest rate risk
0 0

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028
ASSUMPTIONS: (a) Fiscal, Interest rate, and inflation numbers are kept at 2014 level from 2015 - 2028 (b) Long-term concentrated issuance: 77% of coupons in 5-year to 20-year, the rest of coupons in less than 5-year (c) Short-term concentrated issuance: 62% of coupons in less than 5-year, the rest of coupons in 5-year to 20-year (d) Coupons issuance is kept constant for all portfolios; bills pick up the residual financing

17

18 16 14 12 10 8 6

Contribution of Various Risk Factors to Uncertainty in Interest Expense

18 16 14 12 10 8 6

Fiscal Risk Interest Rate Risk Inflation Risk

Baseline

4 2 0 -2 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Interest Expense / Outlays (Percent)

4 2 0 -2

ASSUMPTIONS: (a) Current coupon issuance is kept constant (b) Under the optimistic fiscal scenario coupon issance is adjusted slightly to maintain non-zero bill issuance (c) Budget deficit, interest rate, and inflation are uncorrelated (d) Outlays numbers, obtained from the OMB, are at 2009 level for 2010 - 2014 (e) Net interest is used for 1962 - 2003

18

22 20 18 16 14 12 10 8 6 4 2 0 -2 -4 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 Interest Expense / Outlays (Percent)

22

Contribution of Various Risk Factors to Uncertainty in Interest Expense

20 18 16 14

Baseline

12 10

Fiscal Risk Interest Rate Risk Inflation Risk

8 6 4 2 0 -2 -4

ASSUMPTIONS: (a) Current coupon issuance is kept constant (b) Under the optimistic fiscal scenario coupon issance is adjusted slightly to maintain non-zero bill issuance (c) Budget deficit, interest rate, and inflation are uncorrelated (d) Fiscal, Interest rate, and inflation numbers are at 2014 level for 2015 - 2028 (e) Outlays numbers are OMB's forecast for 2004 - 2009 and are kept at 2009 level for 2010 - 2028 (f) Net interest is used for 1962 - 2003

19

4.0

3.5

Contribution of Various Risk Factors to Uncertainty in Interest Expense

4.0

3.5

3.0

3.0

2.5

2.5

2.0

2.0

1.5

Fiscal Risk Interest Rate Risk Inflation Risk

Baseline
1.5

1.0

1.0

0.5

0.5

0.0

Interest Expense / GDP (Percent)

0.0

-0.5 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

-0.5

ASSUMPTIONS: (a) Current coupon issuance is kept constant (b) Under the optimistic fiscal scenario coupon issance is adjusted slightly to maintain non-zero bill issuance (c) Budget deficit, interest rate, and inflation are uncorrelated (d) GDP numbers are OMB's forecast for 2004 - 2009, and are assumed to grow at 5% for 2010 - 2014 (e) Net interest is used for 1962 - 2003

20

4.0

4.0

3.5

Contribution of Various Risk Factors to Uncertainty in Interest Expense

3.5

3.0

3.0

2.5

2.5

2.0

2.0

1.5

Fiscal Risk Interest Rate Risk Inflation Risk

1.5

Baseline
1.0

1.0

0.5

0.5

0.0

Interest Expense / GDP (Percent)

0.0

-0.5 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028

-0.5

ASSUMPTIONS: (a) Current coupon issuance is kept constant (b) Under the optimistic fiscal scenario coupon issance is adjusted slightly to maintain non-zero bill issuance (c) Budget deficit, interest rate, and inflation are uncorrelated (d) Fiscal, Interest rate, and inflation numbers are at 2014 level for 2015 - 2028 (e) GDP numbers are OMB's forecast for 2004 - 2009, and are assumed to grow at 5% for 2010 - 2028 (f) Net interest is used for 1962 - 2003

21

Foreign Ownership of Treasury Securities Treasury is frequently asked about levels of foreign ownership. We believe that broad, diversified ownership helps Treasury achieve its objective of lowest cost borrowing over time. Does the Committee have any views they would like to share with us on this issue?

22

Percent 50 45 40 35 30 25 20 15 10 5 0 1993
1 2 3
Department of the Treasury Office of Debt Management

FOREIGN HOLDINGS AS A PERCENT OF TOTAL PRIVATELY HELD PUBLIC DEBT 1

Percent 50% 50 45 40

Benchmark revision of June 2003 Benchmark revision of June 2002
2

2

35 28% 30 25 20 15

Benchmark revision of March 2000

2

Estimated Foreign Holdings Foreign and International Institutional Holdings at FRBNY

10
3

5 2002 2003 2004 0

1994

1995

1996

1997

1998 1999 Calendar Quarter

2000

2001

Privately held debt excludes holdings of the Federal Reserve. Series for estimated foreign holdings. Data through May 31, 2004. See http://www.treas.gov/tic/index.html. Source: Federal Reserve Bank of New York statistical release H4.1.
August 2, 2004-13