Overview of U.S. Treasury Debt Management Karthik Ramanathan Director Office of Debt Management June 2008

Office of Debt Management 2 Contents I.Overview and Objectives II.Composition of Portfolio III.Determinants of Borrowing Needs and Policy Tools IV.International Investments V.Overview of TIPS Program

Office of Debt Management 3 I. Overview and Objectives Size of Operations is Hard to Grasp  $4.4 trillion issued in 219 auctions in FY 2007  $238 billion paid in net interest in FY 2007 represented 8.7% of Government expenditures  More than $1 trillion moved between accounts on NBES daily  More than $565 billion traded daily (primary dealers) For comparison total global equity trading is under $420 billion daily  $4.6 trillion in marketable debt outstanding as of May 31, 2008 represents roughly a quarter of U.S. credit markets * includes holdings by the Federal Reserve

Office of Debt Management 4 Treasury Issuance Objectives and Constraints Our Objective Lowest cost of financing over time Constraints Uncertainty: Forecast errors, legislation, etc. all create uncertainty in deficit forecasts, debt limit problems Size: Treasury is too large to behave opportunistically Fluctuations in non-marketable debt: Savings Bonds, State and Local Government Securities Short-term balances: Adequate cash balances to cover expenses

Office of Debt Management 5 Flexibility is Key as a Result of Large Swings in the Deficit

Office of Debt Management 6 Lowest Cost over Time Implies a Diversified Debt Portfolio Spread debt across maturities to… Reduce risk Diversify the investor base Improve cash management Facilitate regular and predictable issuance

Office of Debt Management 7 Promote market transparency Provide a structured framework for investor participation Be available to customers for feedback and guidance Listen and be credible Ensure regulation Broadly speaking, to protect investors Establish consistent, fair practices across markets Create a level playing field Instill investor confidence in markets But don’t over regulate Don’t interfere with price discovery Let bond market participants develop trading practices Let market participants work through problems—don’t overreact. Encourage solutions and innovation through market based, private working groups Deep, Liquid Markets Promote Capital Flows

Office of Debt Management 8 Treasury Issuance Outcomes Policy Outcomes We are regular market participants, not market timers -- “Regular and predictable” We don’t react to interest rate levels We need flexibility We strive for transparency

Office of Debt Management 9 Transparency and Predictability Leads to Greater Investor Participation over the Long Run Source: FRB-NY Average 2007 Daily Trading Volume = $565 Billion

Office of Debt Management 10 II. Composition of Portfolio  Marketable Debt $4.6 trillion outstanding, can be traded in the secondary market Sold at auction, rates set via competitive bidding  Non-Marketable Debt $515 billion outstanding Can only be sold to Treasury Sold by subscription, rates set administratively Savings bonds, State and Local Government Series (SLGS)  Government Account Series Approximately $4.2 trillion (mostly special non-marketables) in 135 funds Federal Old Age Survivors Fund $2.1 trillion Civil Service Retirement Fund$679 billion Hospital Insurance Trust Fund$323 billion

Office of Debt Management 11 Non-Marketable Treasury Securities  State and Local Government Series (SLGS) $280 billion outstanding Special securities issued to municipalities to assist them with compliance on arbitrage- rebate regulations  U.S. Savings Bonds $195 billion outstanding Both Series E and Series I (inflation protected) Targeted at small retail investors  Foreign Government Series and Other (ex Govt Acct) $40 billion, (e.g., Brady bond zeros)

Office of Debt Management 12 Composition of Marketable Debt

Office of Debt Management 13 Composition of Non-Marketable Debt

Office of Debt Management 14 Composition of Total Debt Outstanding $9.4 trillion outstanding

Office of Debt Management 15 Interest Costs on Marketable Debt

Office of Debt Management 16 III. Determinants of Borrowing Needs and Policy Tools  Changes in Cash Balance  Budget Deficit/Surplus  Economic Outlook  Volume of Maturing Issues (rollover of existing issues)

Office of Debt Management 17 …And, Volatility in Cash Balances Key Receipt Dates 1 st of Month – Individual withheld taxes Mar. 15, Jun. 15, Sept. 15, Dec. 15- Corporate Taxes Jan. 15, Apr. 15, Jun. 15, Sept. 15 Individual Non- withheld Taxes Key Outlay Dates 1st of each month – Medicare, SSI, VA, CSRDF 3 rd of each month Main Social Security payments 2 nd /3 rd /4 th Wed of each month Soc. Sec. cycle payments Feb. 15, May 15, Aug. 15, Nov. 15 Interest payment dates— Feb 1 - April 15 – Individual tax refunds

Office of Debt Management 18 Estimating Financing Needs  Each morning, the Office of Fiscal Projections (OFP) updates its forecasts for government financing using the latest available data RevenuesOutlays (Deficit)/ Surplus Corporate Taxes Individual Taxes Excise Taxes Estate and Gift Taxes Customs Duties Defense Spending Education Expenses Social Security Medicare/Medicaid Federal employee payroll ETC… = FY2008 $2.52 trillionFY2008 ($2.93 trillion)FY2008 ($410 billion) + = Based on OMB’s Budget of the United States Government FY2009

Office of Debt Management 19 Average Absolute Federal Budget Forecast Errors FY *Average Error for FY 1997 – 2006 based on forecasts by CBO, OMB, and Primary Dealers

Office of Debt Management 20 Debt Management Policy Tools  Auction Sizes  Auction Frequency  Security Offering Menu  Auction Regulations  Market monitoring, consultation, and surveillance

Office of Debt Management 21 IV. International Investments

Office of Debt Management 22 Foreign Holdings as a Percent of Total Marketable Debt

Office of Debt Management 23 V. Overview of TIPS Program  First TIPS were issued in January Treasury now is the largest issuer of inflation linked bonds globally.  26 issues ranging from 2009 to The TIPS curve is complete out to 10 years.  To date only three TIPS issues have matured – in July 2002, January 2007, and January  As of May 31, 2008 TIPS market capitalization totaled over $494 billion; or about 11% of marketable Treasuries outstanding.  Average daily trading volume in 2008 is near $10 billion according to primary dealer estimates.  There is a higher concentration of dealer volume relative to nominal Treasuries. TIPS ownership is also more concentrated.

Office of Debt Management 24 Additional Information  Office of Debt Management  Federal Reserve Information