Agence France Trésor

Sébastien BOITREAUD, Deputy Chief Executive, AgenceFrance Trésor

Europlace Stockholm – 29 March 2007

AFT Funding StrategyAFT Funding Strategy

Focus on Inflation-linked BondsFocus on Inflation-linked Bonds

Funding requirement in €bn 2007

Long-term debt redemption 31.9

Medium-term debt redemption 37.2

Budget deficit 42.0

Total financing requirement 111.0

2007 Funding Requirement and Sources

Funding sources in €bn 2007

Medium- and long-term issuance (OAT/BTAN) net of buybacksMedium- and long-term issuance (OAT/BTAN) net of buybacks 102.5102.5

Cancellation of State Securities by the CDP 8.1

Net change in T-bills (BTF) 24.5

Change in Treasury correspondents’ deposits -8.4

Change in the Treasury account -15.9

Total financing sources 111.0

AFT Mandate and Strategy

• Agence France Trésor manages central government debt and cash under the most secure conditions in the best interest of the taxpayer.

• In order to minimise debt costs over time, AFT sets priority to stability and predictability. AFT does not aim at beating the market through opportunistic transactions.

• AFT seeks the highest liquidity standard, is committed to transparency, and aims at relevance and innovation in the management of the French Republic debt.

OATs and BTANs Outstanding as of 28 February, 2007

0

20

40

60

80

100

120

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

19

20

20

20

21

20

22

20

23

20

25

20

29

20

32

20

35

20

38

20

55

€bn

BTAN OAT OATi & OAT€i & BTAN€i

0

5

10

15

20

25

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

201

6

2017

>201

7

205

5

BTAN OAT OATi & OAT€i BTAN€i

Sustained Interest from Non-French Investors

Source: Banque de France

Round 24.2% of non euro holdings, end of 2004, CPIS IMF

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

60%

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

Part

de l

'en

co

urs

to

tal

de d

ett

e d

éte

nu

par

des n

on

résid

en

ts

AFT Funding StrategyAFT Funding Strategy

Focus on Inflation-linked BondsFocus on Inflation-linked Bonds

A Structural Demand

Index-linked bonds provide:• Ability to invest on a real-yield basis• Diversification for portfolio managers

– Improved efficient frontier

– Good performance record

• Better asset and liability matching– Evolution of regulatory and accounting framework will

increase demand

• Market expectations of future inflation, through inflation break-evens– Valuable indicators for central banks

Why Issue Inflation-Linked Bonds?

• Optimizing the State’s Balance Sheet

– Asset-liability management: Revenues are correlated with inflation, directly or indirectly

– Budget smoothing: Inflation is negatively correlated with fiscal deficits

– Diversification of the State’s liability portfolio

• Meeting Strong Demand

– And diversifying the investor base

• Providing a Public Good

– Expanding the hedging opportunities of private agents

– Providing policymakers with a market measure of expected inflation

• Is it Cost-Efficient?

– In an efficient market, inflation is fairly priced and nominal and real bonds are equivalent

– Additionally, the inflation-risk premium is eliminated

Theoretical studies to support these assertions (see next page)

A Risk Management Framework for Government Debt Strategies: Results

• with cost measure = average debt cost : classic cost-risk curve, i.e. issuance of ILBs decreases cost but increases volatility of debt interest cost

• with cost measure = average fiscal balance : U-shaped cost-risk curve, i.e. there exists an optimum in inflation share of the debt portfolio. Depending on parameters, optimum varies between 10% and 20%.

Building the Real Curve

• 1998: 10yr French Linker OATi 2009First ever euro-denominated linker

• 1999: 30yr French Linker OATi 2029• 2001: 10yr Euro Linker OAT€i 2012

First euro-zone linker• 2002: 30yr Euro Linker OAT€i 2032• 2003: 10yr French Linker OATi 2013• 2004: 15yr Euro Linker OAT€i 2020

7yr French Linker OATi 201110yr Euro Linker OAT€i 2015

• 2005: 10yr French Linker OATi 2017• 2006: 5yr Euro Linker BTAN€i 2010• 2007: 30yr Euro Linker OAT€i 2040

• N.B. 2003: 22yr Greek linker, 5yr Italian linker2004: 10yr, 30yr Italian linkers

2006: 10yr German linker

Key Figures for French Index-Linked Bonds

Face value as of 23 March 2007:• French Inflation (OATi): €56.4bn

– OATi 3% 2009: €13.8bn– OATi 1.6% 2011: €11.0bn– OATi 2.5% 2013: €13.9bn– OATi 1% 2017: €11.2bn– OATi 3.4% 2029: €6.4bn

• Euro Area Inflation (OAT€i): €54.0bn– BTAN€i 1.25% 2010: €5.8bn – OAT€i 3% 2012: €14.5bn– OAT€i 1.6% 2015: €10.0bn– OAT€i 2.25% 2020: €11.0bn– OAT€i 3.15% 2032: €8.7bn– OAT€I 1.80% 2040: €4.0bn

Total (inflated) as of 28 February 2007: €114bn– 12.6% of Total Marketable Debt– 13.6% of Medium- and Long-Term Debt (OATs and BTANs)

AFT Commitments Regarding ILBs

• Regularity: Monthly issuance since 2004 (excluding August and December)

• Predictability: ILB auction on 3rd Thursday of the month, 11:50 am, Paris time

• Relevance: AFT is committed to issuing at least 10% of its financing program in linkers and significantly more if justified by demand (17.5% in 2006)

• Ensuring liquidity through primary issuance and through primary dealers’ market making

• Building two real curves: French & European inflation, and ensuring their liquidity

€bnVolumes Bid and Served at OATi/€i Auctions

0

1

2

3

4

5

6

7

févr-04

avr-04

juin-04

sept-04

nov-04

févr-05

avr-05

juin-05

sept-05

nov-05

févr-06

avr-06

juin-06

sept-06

nov-06

févr-07

bid served

A Sustained Demand …

€m

Volumes issued

0

500

1 000

1 500

2 000

2 500

3 000

3 500

4 000

4 500

Jan-2002

Mar-2002

Jun-2002

janv-03

avr-03

juin-03

sept-03

janv-04

mars-04

mai-04

juil-04

oct-04

janv-05

mars-05

mai-05

juil-05

oct-05

janv-06

mars-06

mai-06

juil-06

oct-06

janv-07

OATi OAT€i-BTAN€i

… for both OATis and OAT€is

Foreign Holdings of OATi and OAT€i

2002 2003 2004 2005 2006-Q2

OATi 31.9% 31% 37.2% 44.1% 47.3%

OAT€i 56.3% 64.1% 69.1% 73.5% 69.5%

OAT 34.2% 39% 40.6% 49.7% 50.9%

Notes and bonds

41.9% 47.3% 49.1% 56.5% 57.9%

Source: Banque de France

Turnover on ILBs: OATi & OAT€i

Total Turnover (buy+sell)

Net buyer over 2004 - 2005

Net seller over 2004 – 2005

Source AFT, based on monthly reporting by primary dealers

2004 – 2005

Americas18%

Asia5%

Others3%

Eurozone29%

Europe exc EU45%

Americas19%

Asia3%

Others3%

Eurozone37%

Europe exc EU38%

-4 000

-2 000

0

2 000

4 000

6 000

8 000

10 000

12 000

14 000

America Asia Others Eurozone Europe exclEU

20

04

20

05

Market Turnover in French Government Inflation-Linked Bonds (in € bn per month)

Strong Liquidity in Index-linked Government Bonds

Source: AFT

0

10

20

30

40

50

60

juil 1999

nov 1999

mars 2000

juil 2000

nov 2000

mars 2001

juil 2001

nov 2001

mars 2002

juil 2002

nov 2002

mars 2003

juil 2003

nov 2003

mars 2004

juil 2004

nov 2004

mars 2005

juil 2005

nov 2005

mars 2006

juil 2006

nov 2006

OATi-29OATei-12

OATi-13

OATei-32

OATei-20

OATi-11

OATi-17OATei-15

BTANei-10

Comparable Turnover in TIPS and French ILBs

Trading Turnover of French Government Inflation-Linked Bonds

Weekly Trading Volume Relative to Outstanding Debt

Source: AFTSource: NY Fed

2005: Monthly average trading volume relative to outstanding debt:

Total debt: 37,3%

Inflation-linked bonds: 49,03%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

1998 1999 2000 2001 2001 2002 2003 2004

Total

More Information on…

www.aft.gouv.fr

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21

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