Treasury Borrowing Advisory Committee

Quarterly Refunding November 2, 2004

Committee Charge Question 1 Quarterly Refunding Chart Package We will show you a revised version of the chart package we released on Monday of the week of the refunding. We would like the Committee’s view on the proposed changes and suggestions for further improvements.

2

Current Financing
Short-term and medium-term borrowing requirements, cash balance estimates, and issuance schedule • FY 2005 Q1 and FY 2005 Q2 Outlook – We expect net marketable borrowing of $100B this quarter and $147B next quarter • FY 2005 to FY 2009 OMB Outlook – Current coupons meet expected borrowing assuming:
• 5% projected GDP growth rate • Revenues rise to historical average • Expenditures fall below historical average

– Net interest is below 2.5% of GDP

3

4

5

6

7

30 Percentage of GDP

Drivers of Financing Needs

30 Percentage of GDP

25

25

Average Historical Difference: 2%
20 20

15

Outlays Revenue GDP Growth Estimated

15

10

Net Interest

10

5

5

0

0

SOURCE: OMB
-5 1960 -5 1965 1970 1975 1979 1984 1989 1994 1999 2004 2009

8

Projected Net Marketable Borrowing and Hypothetical Bill Auction Sizes
Average Announced Auction Size 40 $ Billions 35 If Coupon Auction Sizes Held Constant Net Borrowing 400 $ Billions 350

30 4-week 25 13-week 26-week 20 Net Marketable Borrowing (RHS)

300

250

200

15

150

10

100

5

50

0 2005 2006 2007 2008 2009

0

Assumes OMB's FY 2005 MSR deficit projections and coupon auction sizes remain at most recently announced amounts. Bill issuance sizes are shown in fixed shares to meet residual financing needs.

9

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

net borrowing 450 $ billions 400

40

35

Net Marketable Borrowing (RHS)

350

30

300

25

250

20

200

15

150

10

100

5

50

0 2005 BILLS 2-YEAR 3-YEAR 2006 5-YEAR 2007 10-YEAR 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).

10

Debt Portfolio
Maturity, issuance and outstanding profile

• Average maturity of issuance stabilizes, averaging 2.8 years • Maturity of outstanding drops from 4.6 years to 4 years over the next 5 years • Composition of nominal issuance is within historical ranges • Current issuance patterns would lead to a growing proportion of 5-year notes and TIPS in the portfolio • The percent of debt maturing over the next 3 years is projected to remain stable over the next 4 years, at roughly 60%

11

12

80%

Percentage Breakdown of Annual Issuance

80%

70%

70%

60%

60%

50%

50%

40%
Source: Treasury

Projected

40%

30%

30%

20%

20%

10%

10%

0% 1980

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

Bills

2-3 yrs

4-7 yrs

10-yrs

Bonds

TIPS

Projections based on OMB's FY 2005 MSR and assume coupon auction sizes remain at most recently announced amounts. Residual amounts financed with bills.

13

Distribution of Marketable Debt Outstanding by Security
35% 35%

30%

30%

25%

25%

20%

20%

15%

15%

10%

10%

5% Projected
Source: Treasury

5%

0% 1980 BILLS 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 TIPS 2-3 YR NOTES 4-7 YR NOTES 8-10 YR NOTES BONDS

0%

Projections based on OMB's FY 2005 MSR and assume coupon auction sizes remain at most recently announced amounts. Residual amounts financed with bills.

14

75% 70% 65%

Percentage of Debt Maturing in Next 12 to 36 Months

75% 70% 65%

Maturing in 36 Months 60% 55% 50% 45% 40% 35% 30% 25% 1980 Projected Maturing in 12 Months 60% 55% 50% 45% 40% 35% 30% 25% 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Maturing in 24 Months

Projections based on OMB's FY 2005 MSR and assume coupon auction sizes remain at most recently announced amounts. Residual amounts financed with bills.

15

$ Billions
400 Buybacks 300 over 10 years 5-10 years 200 2-under 5 years Bills 100

Treasury Annual Net Market Borrowing
400

300

200

100

0

0

-100

Projected

-100

-200

-200

-300
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

-300

Projections are based on FY 2005 OMB's MSR and assume coupon auction sizes remain at most recently announced amounts. Residual amounts amounts financed with bills.

16

Percentage of Portfolio 100% 90% 80% 70% 60% 50% 40% 30% 20% 10%

Distribution of Marketable Debt Outstanding by Maturity

Percentage of Portfolio 100% 90% 80% 70% 60% 50% 40% 30% 20% 10%

Source: Treasury

0% 2005 Bills 2006 1 year & under 2007 1-2 years 2008 2-10 years 2009 over 10 years

0%

Projections based on OMB's FY 2005 MSR and assume coupon auction sizes remain at most recently announced amounts. Residual amounts financed with bills.

17

Uncertainty
Stress to issuance and borrowing costs

• Deficit forecast errors for FY 2004 were comparable to previous forecast errors • Current issuance pattern equally well positioned for higher or lower deficits

18

Average Absolute Federal Budget Forecast Errors
1997 - 2004
250 $ billions 250 $ billions

200

200

CBO 150 OMB Primary Dealers 150

100

100

50
Average Error for FY 2004

50

0 14 months 11 months 8 months 5 months months until end of fiscal year 2 months

0

19

20

Capital Markets
Treasury’s share of global and domestic markets and Treasury’s liquidity

• Foreign holdings of Treasury debt are at historical highs • Treasuries represent a small proportion of the domestic debt stock • Debt outstanding as a percent of GDP compares favorably to that of many other large economies

21

22

80 Percentage of GDP 75 70 65 60 55 50 45 40 35 30 1997 1998

U.S. Debt Compared to the G7
U.S. Net General Government Debt G7 less US Median Net General Government Debt G7 less US Average Net General Government Debt

Percentage of GDP 80 75 70 65 60 55 50

Estimated

45 40

Net debt is federal, state and municipal government debt held by the public. (That is, it is net of claims of government entities on each other). Debt data are not always comparable across countries.

35
SOURCE: IMF, WEO September 2004

30 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

23

24

25

Net Dealer Positions in Treasuries
6 TIPS ($ billions) 5
nominal zero line

40 Nominal Treasuries ($ billions) 20 0 -20

4

3 -40 2 -60 1 -80 0
TIPS zero line

-100 -1 TIPS (LHS) Nominal Treasuries (RHS) -3 Feb-01 -160 Jun-01 Oct-01 Feb-02 Jun-02 Oct-02 Feb-03 Jun-03 Oct-03 Feb-04 Jun-04 Oct-04 Dealers net short TIPS for the first time (5/14/03) -120 -140

-2

Source: NY Fed

26

Committee Charge Question 2 Financing this Quarter We would like the Committee’s advice on the following: • The composition of Treasury notes to refund approximately $48 billion of privately held notes and bonds maturing on November 15 (this includes $3.1 billion of the 10 3/8% 11/15/04-09 that was called on 7/15/04). • The composition of Treasury marketable financing for the remainder of the October-December quarter, including cash management bills if necessary. • The composition of Treasury marketable financing for the January-March quarter.

27