Office of Debt Management - U.S. Department of the Treasury
Office of Debt Management Overview of Treasurys Office of Debt Management Debt Management at the Treasury Secretary Deputy Secretary Undersecretary for Domestic Finance Responsible for developing policy related to government financing Acting Assistant Secretary for Financial Markets (Seth Carpenter) Deputy Assistant Secretary Federal Finance (James Clark) Office of
Debt Management 2 Fiscal Assistant Secretary Bureau of the Fiscal Service Office of Fiscal Projections Operations: runs the debt auction and accounting systems Develops the cash balance forecast used by ODM to make financing decisions Independence of the Treasury and Federal Reserve Treasurys mission is to maintain a strong economy and create economic and job opportunities by promoting the conditions that enable economic growth at home and abroad, strengthen national security by combating threats and protecting the integrity of the
financial system, and manage the U.S. Governments finances and resources effectively. Federal Reserve Sets and Implements Monetary Policy 3 Treasurys Relationship with the Federal Reserve Federal Reserve Acts as a Fiscal Agent for Treasury 4 Receives tenders in Treasury auctions Maintains marketable Treasury securities in book-entry form Maintains the Treasurys checking account Maintains contact with primary dealers
Conducts Treasurys foreign exchange transactions Treasury Financing Our Debt Management Objectives Regular and predictable Least expected cost over time Managing interest rate risk Supporting market functioning and liquidity Maintaining a broad investor base
Most widely acknowledged Constraints Uncertainty (Sources: legislative commitments, macro-economic forecast errors, technical modeling factors all create uncertainty in deficit forecasts) Size - Treasury is too large to behave opportunistically in the credit markets Policy Outcomes Treasury is a regular and predictable market participant, not a market timer Treasury doesnt react to current rate levels or short-term fluctuations in demand Treasury needs flexibility to respond to uncertainty -- to rapidly raise cash or pay down debt shorter maturities provide more flexibility Treasury seeks continuous improvement in the auction process
Treasury strives for transparency and consults often with market participants 5 Least Cost Over Time and Regular and Predictable Least Cost Interest expense is important, as the Mid-Session Review forecasts that the U.S. government will reach primary surplus. For a given amount of debt issuance, the expected relative cost over time of issuing at different points on the curve matter. Regular and Predictable Being regular and predictable argues against being opportunistic. Issuance experience, complemented by surveys of the primary dealers, informs Treasurys view on the speed of any adjustment to auction sizes. 6
Greater liquidity reduces Treasurys funding costs over the long run. However, limiting the speed of adjustment of issuance implies slowly adjusting to shifts in expected cost. Market Functioning A liquid, efficient market for Treasury securities is central to the financial system. Historically, a liquid market garners a liquidity premium for a security, which leads to greater cost savings. The private sector uses Treasury securities as a benchmark for issuance. A minimum level of issuance can help to maintain a liquid market at all points on the curve. 7 Types of Marketable Treasury Securities
Bills Maturities less than 1-year, sold at competitive auction at a discount to par. Returns par at maturity. Notes Maturities from 1-year to 10-years, sold at competitive auction, semi-annual coupon payments. Bonds Maturities > 10-years, sold at competitive auction, semi-annual coupon payments. Treasury Inflation Index Securities (TIPS) Maturities of 5-, 10- and 30-years. Sold at competitive auction. Semi-annual coupon payments. TIPS have a Real Rate Coupon. Principal is indexed to NSA-CPI. Floating Rate Notes (FRN) 2-year maturity. Sold at competitive auction; quarterly interest payments with weekly reset. Indexed to the 13week T-bill auction result. 8 Uses of Treasury Securities Almost every single view in financial markets can be expressed through the Treasury market
Every 4 weeks Monthly Monthly Monthly Monthly Quarterly, with 2 re-openings Quarterly, with 2 re-openings Treasury Inflation Protected Securities (TIPS) 5-year TIPS 10-year TIPS 30-year TIPS Annual , with 2 re-openings Semi-annual with 2 re-openings Annual , with 2 re-openings Floating Rate Notes (FRNs) 2-Year FRN 10 Quarterly, with 2 re-openings Debt Management Policy Tools Auction Sizes Auction Frequency
Security Offering Menu Buybacks Auction Regulations Market monitoring, consulting, and surveillance 11 Determinants of Treasury Borrowing Needs Volume of Maturing Issues (Rollover) Budgetary Requirements Changes in Cash Balance
12 Classes of Treasury Securities Marketable Can be traded in the secondary market Sold at auction, rates set via competitive bidding e.g., Bills, Notes, Bonds, TIPS, and FRNs (zeroes are created by market participants - not issued directly by Treasury) Non-Marketable Can only be sold to Treasury Sold by subscription, rates set administratively e.g., Savings Bonds, State and Local Government Series Government Accounts (bulk of which is Trust Funds) Updated data on the distribution of Treasury securities outstanding can be found at: 13 https://www.treasurydirect.gov/govt/reports/pd/mspd/mspd.htm
Who Holds Treasury Securities? The safety and liquidity of the Treasury market make it very attractive to global investors. Treasury maintains detailed statistics on the global distribution of Treasury holdings through the Treasury International Capital (TIC) System. The most up to date TIC data can be found at http:// www.treasury.gov/resource-center/data-chart-center/tic/Pages/inde x.aspx 14 Who Buys Treasury Securities at Auction? The Primary Dealers are a critical part of the primary market for Treasury securities and are required to participate in every Treasury auction. Updated analysis and statistics on the Primary Dealers can be found at: http:// www.newyorkfed.org/markets/primarydealers.html
The Federal Reserve does not bid competitively in Treasury auctions. The Fed can roll its maturing securities at the auction; any such awards to the Fed from rolling maturing securities are treated as an auction add on. The Fed can also acquire securities in the secondary market. Foreign accounts do not participate significantly in the primary market, but do acquire holdings in the secondary market. The most recent Treasury auction allotment data can be found at: http:// www.treasury.gov/resource-center/data-chart-center/Pages/investor _class_auction.aspx 15 Quarterly Refunding and the Treasury Borrowing Advisory Committee The Treasury Borrowing Advisory Committee (TBAC) includes representatives from firms that actively trade Treasury securities and firms that make large investments in Treasury securities.
At quarterly refunding meetings, the TBAC responds to questions and discussion charts presented by Treasury, and representatives present their own analysis. Changes in debt management policy are usually announced through quarterly refunding statements, issued at the end of the meeting. 16 Shortly after the meeting, all documents related to the quarterly refunding process are posted online at: http:// www.treasury.gov/resource-center/data-chart-center/quarterly-refun ding/Pages/default.aspx
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