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Treasury Debt Management

Timothy Bitsberger
Deputy Assistant Secretary
U.S. Treasury Department
Treasury Inflation-Protection Securities
Treasury’s Perspective

• Widen investor base

• Reduce/eliminate term premium

Investor’s Perspective

• Improve portfolio diversification

• Protect against inflation better than real estate,


commodities, or other real assets
TIPS Structure
• The principal value is adjusted for inflation by multiplying the value at
issuance by an index ratio that changes daily. The inflation accrual on
principal is paid at maturity.
• The coupon payments are a fixed percentage, determined at auction, of the
inflation-adjusted value of the principal.
• The principal repayment at maturity is protected against deflation, but the
semi-annual coupon payments are not protected against deflation.
• The inflation accrual is based on the CPI-U NSA with a 3-month lag
(e.g., index number for July 1st is based on the April CPI report which was
released in mid-May).
• Daily indexed numbers are calculated using straight-line interpolation between
first-of-month numbers.
• The index ratio for a particular valuation date is the index number for that date
divided by the index number for the dated date.
• Index Ratio Value Date = Index number for value date
Index number for dated date
TIPS Auction Schedule
July 2004
- 10-yr TIPS, auction 7/8/04, settle 7/15/04, mature 7/15/14
- 20½-yr TIPS, auction 7/27/04, settle 7/30/04, mature 1/15/25

October 2004
- 9¾-yr TIPS, auction 10/7/04, settle 10/15/04, mature 7/15/14
- 5½-yr TIPS, auction 10/26/04, settle 10/29/04, mature 4/15/10

January 2005
- 10-yr TIPS, auction 1st half of month, settle on 15th, mature 1/15/15
- 20-yr TIPS, auction 2nd half of month, settle last business day of month, mature 1/15/25

April 2005
- 9¾-yr TIPS, auction 1st half of month, settle on 15th, mature 1/15/15
- 5-yr TIPS, auction 2nd half of month, settle last business day of month, mature 4/15/10

* Tentative Schedule
TIPS Supply
Inflation-Adjusted Par Amount Outstanding

220
$billions
200
180
160
140
120
100
80
60
40
20
0
1997 1998 1999 2000 2001 2002 2003 June '04
calendar year
Source: US Treasury
TIPS Annual Issuance
$70
billions

5-yr TIPS
60 10-yr TIPS
20-yr TIPS
30-yr TIPS
50

40

30

20

10

0
1997 1998 1999 2000 2001 2002 2003 2004 est
calendar year

* 2004 issuance amounts are tentative and not necessarily indicative of future auction sizes.
TIPS Trading Volume Increasing
Average Daily TIPS Transactions by Primary Dealers
$14
billions 14
$ billions

12 12

10 10
Weeks with a TIPS Auction

8 8

6 6
3-month MA of
Nonauction Weeks
4 4

2 2

Non-Auction Weeks
0 0
Jan-98 Jul-98 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04

* Source: New York Fed


Net Dealer Positions in Treasuries
6TIPS 40
Nominal Treasuries
($ billions) ($ billions)

5 20

nominal zero line


0
4

-20
3

-40
2
-60

1
-80
TIPS zero line
0
-100
Dealers net
-1 short TIPS for
TIPS (LHS) -120
the first time
Nominal Treasuries (RHS) (5/14/03)
-2 -140
Feb-01 Jun-01 Oct-01 Feb-02 Jun-02 Oct-02 Feb-03 Jun-03 Oct-03 Feb-04 Jun-04

* Source: New York Fed


SIZE OF GLOBAL INFLATION-INDEXED
BOND MARKET VS. OTHER ASSET CLASSES
1,000

900

800

700

600
US$ Billions

500

400

300

200

100

0
Global Inflation Indexed Global High Yield Emerging Market Debt Emerging Market European Corporates
Equities

Asset Class
Source: Bridgewater Associates
Distribution of Competitive Auction Awards of 10-Year Treasury Notes

10-Year TIPS 10-Year Nominal Notes


July '03, Oct '03, Jan '04, & Apr '04 Nov '03, Dec '03, Feb '04, & Mar '04

Financial Insts.,
Other, 8% Other, 3%
1%
Financial Insts.,
1%

Investment
Funds, 10%

Investment
Funds, 31%
Foreign &
International,
Primary 22%
Dealers, 54% Primary
Dealers, 64%

Foreign &
International,
7%
I/I BOND CORRELATION TO OTHER ASSETS AND INFLATION

Correlation of TIPS (10-Year Duration) to…


US Equities US Nominal Bonds
Jan. 1970 - Feb. 2004 US CPI S&P 500 10-Year Duration
1 Month 0.18 0.09 0.60
3 Month 0.28 0.02 0.67
1 Year 0.49 -0.21 0.30
3 Year 0.65 -0.54 -0.27
5 Year 0.75 -0.56 -0.28

Source: Bridgewater Associates


10-Year TIPS and Nominal Yields
Nominal
7.0 Yield TIPS Yield
5.0

6.5 4.5
TIPS 10yr
(RHS)
6.0 4.0

5.5 3.5

5.0 3.0
Nominal 10yr
(LHS)
4.5 2.5

4.0 2.0

3.5 1.5

3.0 1.0
Jul-98 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04
10-Year TIPS Breakeven Rates
3.0
Percent 3.0
Percent

2.5 2.5
auction
dates

2.0 2.0

1.5 1.5

1.0 1.0

0.5 0.5

0.0 0.0
Jan-98 Jul-98 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04
5yr - 10yr Yield Spread
basis
130 points 130
basis points

110 110

Nominal Treasuries
90 90

70 70

50 50

30 30
TIPS

10 10

-10 -10

-30 -30

-50 -50
Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04
Monthly Inflation Accrual on TIPS
1.0% 1.0%

0.8% 0.8%

Average Monthly
0.6% 0.6%
Inflation Accrual

0.4% 0.4%

0.2% 0.2%

0.0% 0.0%

-0.2% -0.2%

-0.4% -0.4%

1997 1998 1999 2000 2001 2002 2003 2004


-0.6% -0.6%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec