U.S. Secondary Market

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U.S. Secondary Market
http//www.treas.gov/offices/domestic-finance/deb
t-management/index.html October 2006
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Contrasts

• Dealers have been awarded 64 of bonds in
  auctions since 2000
• Primary Dealer holdings as of Oct 11
  -122 billion
• Primary Dealer holdings of corporate bonds as of
  Oct 11 198 billion

Sources Treasury and FRBNY
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Source FRBNY
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U.S. Debt Shares1st Qtr 2006

• Mortgage-Related 24
• Corporate 20
• Treasuries 17
• Money Market 13
• Agencies 10
• Municipal 9
• Asset-Backed 8

Source Bond Market Association
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Drivers of Debt Issuance
Internal Short-Term Projections
Financing Needs
Market Deficit Estimates
OMB Deficit Estimates
Market Needs
Market Consultation
Internal Analysis, External Consultation
Portfolio Needs
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Market Consultation

• Market chatter phone calls, market lit.
• FRBNY
• Formal Primary dealer agenda
• Periodic interviews
• TBAC
• Open lines

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Portfolio Needs

• Interest cost over time
• Various risks (Operational, Cost Volatility,
  Rollover)
• Flexibility to respond to uncertainty in
  borrowing needs
• Capacity Constraints on issue sizes and changes
  in issue sizes for bills and coupons
• Providing liquidity and Benchmark status
• Expanding the investor base

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Price Signals

• Market participants operate with uncertainty of
  prices source of demand for Treasury securities
  (risk avoidance, risk transferance, risk taking)
• We provide value to the market by providing some
  degree of certainty of supply of Treasuries

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Regular and Predictable

• The dates and times of our auctions are published
  well in advance
• http//www.treas.gov/offices/domestic-finance/debt
  -management/auctions/
• Changes in the schedule are discussed with market
  participants and announced well in advance of
  auctions
• Changes in the sizes of auctions are small

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Predictability Applies Broadly

• Policy changes announced quarterly
• Target 1100 releases of auctions
• Target results releases 200 minutes after
  auction close, /- 30 seconds
• http//www.publicdebt.treas.gov/of/ofaucrt.htm

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So, how does regular issuance in predictable
sizes work with volatile cash flows?

• Entitlement payments are generally more than 20
  billion in a day at the beginning of the month.
• Receipts can exceed 60 billion in a day at
  mid-month
• Daily swings in cash balances can be over 50
  billion.
• Previous days activity at
• http//www.fms.treas.gov/dts/index.html

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Treasury Tax Loan Accounts

• Accounts at commercial banks
• Overnight accounts
• Interest paid (Fed funds less 25 bps)
• Also have account at Fed (target of 5 billion)
• Efforts to boost returns (TIO, RP)
• Term investment auctions
• http//fms.treas.gov/tip/index.html

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Securities Lending

• Address Market Failure insufficient incentive
  to deliver securities in low rate environments
  when supply is tight
• Objective increase certainty of availability of
  supply
• Aimed at RP market, but implications for cash and
  futures markets
• Implementation uncertain pricing difficult,
  legislation needed, possible alternatives