Embed Size (px)
Citation preview
Presentation to the Treasury Borrowing Advisory Committee
U.S. Department of the TreasuryOffice of Debt Management
January 29, 2008
2Office of Debt Management
Fiscal Outlook
3Office of Debt Management
Revenue from individual and corporate tax receipts continues to grow, though at a more moderate pace…
Individual and Corporate Tax Receipts Fiscal Year to Date
0
200
400
600
800
1000
1200
1400
1600
1800
Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep
$ billions
0
200
400
600
800
1000
1200
1400
1600
1800$ billions
FY 2003FY 2004FY 2005FY 2006FY 2007FY 2008
2004 2005 2006 2007 20084.9% 15.0% 11.8% 12.4% 4.8%
Year-Over-Year Growth in Cumulative Receipts End of FY Q1
4Office of Debt Management
While the pace of expenditures has accelerated
Total Outlays Fiscal Year to Date
0
500
1000
1500
2000
2500
3000
Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep
$ billions
0
500
1000
1500
2000
2500
3000$ billions
FY 2003FY 2004FY 2005FY 2006FY 2007FY 2008
2004 2005 2006 2007 20086.2% 6.0% 7.6% 0.7% 8.8%
Year-Over-Year Growth in Cumulative Outlays End of FY Q1
5Office of Debt Management
Year-over-year growth in outlays has exceeded that of receipts since October, reversing the trend of the past fiscal year
Federal Outlays and Net Receipts Year over Year % Change
0.0%
2.5%
5.0%
7.5%
10.0%
12.5%
15.0%
Oct
-06
Nov
-06
Dec
-06
Jan-
07
Feb-
07
Mar
-07
Apr-
07
May
-07
Jun-
07
Jul-0
7
Aug-
07
Sep-
07
Oct
-07
Nov
-07
Dec
-07
Outlays Net Receipts
6Office of Debt Management
Mitigating volatility in cash balances resulting from net receipts, redemptions, and other factors remains challenging
Treasury Daily Operating Cash Balance
0
25
50
75
100
125
Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep
$ billions
0
25
50
75
100
125
FY 2006FY 2007FY 2008
$ billions
Note: Data through January 24, 2008.
7Office of Debt Management
Treasury’s bill issuance increased in the first quarter of FY 2008
Weekly Bills OutstandingFY 2004-2008
$750
$800
$850
$900
$950
$1,000
$1,050
$1,10010/3
10/10 10/1710/24
10/3111/7
11/14
11/21
11/29
12/5
12/12
12/19
12/26
1/2
1/9
1/16
1/23
1/30
2/6
2/13
2/20
2/273/6
3/133/20
3/274/34/104/174/24
5/15/8
5/15
5/22
5/29
6/5
6/12
6/19
6/26
7/3
7/10
7/17
7/24
7/31
8/7
8/14
8/21
8/28
9/49/11
9/189/25
FY '04
FY '05
FY '06
FY '07
FY '08
Outstanding Bills FYTD 2008 = $979 bil. FYTD 2007 = $932 bil.
Absolute Chg. y.o.y. + $47 bil.
Percent Chg. y.o.y. + 5%
8Office of Debt Management
Maturing 3-year and 5-year notes create large outflows and cash management challenges
Coupons MaturingJanuary 15, 2008-May 15, 2037
0
20
40
60
80
100
120
15-J
AN-2
008
31-J
AN-2
008
15-F
EB-2
008
29-F
EB-2
008
31-M
AR-2
008
30-A
PR-2
008
15-M
AY-2
008
31-M
AY-2
008
30-J
UN
-200
831
-JU
L-20
0815
-AU
G-2
008
31-A
UG
-200
815
-SEP
-200
830
-SEP
-200
815
-OC
T-20
0831
-OC
T-20
0815
-NO
V-20
0830
-NO
V-20
0815
-DEC
-200
831
-DEC
-200
815
-JAN
-200
931
-JAN
-200
915
-FEB
-200
928
-FEB
-200
915
-MAR
-200
931
-MAR
-200
915
-APR
-200
930
-APR
-200
915
-MAY
-200
931
-MAY
-200
915
-JU
N-2
009
30-J
UN
-200
915
-JU
L-20
0931
-JU
L-20
0915
-AU
G-2
009
31-A
UG
-200
915
-SEP
-200
930
-SEP
-200
915
-OC
T-20
0931
-OC
T-20
0915
-NO
V-20
0930
-NO
V-20
0915
-DEC
-200
931
-DEC
-200
915
-JAN
-201
015
-FEB
-201
015
-MAR
-201
015
-APR
-201
015
-MAY
-201
015
-JU
N-2
010
15-J
UL-
2010
15-A
UG
-201
015
-SEP
-201
015
-OC
T-20
1015
-NO
V-20
1015
-DEC
-201
015
-JAN
-201
115
-FEB
-201
128
-FEB
-201
131
-MAR
-201
115
-APR
-201
130
-APR
-201
131
-MAY
-201
130
-JU
N-2
011
31-J
UL-
2011
15-A
UG
-201
131
-AU
G-2
011
30-S
EP-2
011
31-O
CT-
2011
30-N
OV-
2011
31-D
EC-2
011
15-J
AN-2
012
31-J
AN-2
012
15-F
EB-2
012
29-F
EB-2
012
31-M
AR-2
012
15-A
PR-2
012
30-A
PR-2
012
31-M
AY-2
012
30-J
UN
-201
215
-JU
L-20
1231
-JU
L-20
1215
-AU
G-2
012
31-A
UG
-201
230
-SEP
-201
231
-OC
T-20
1215
-NO
V-20
1230
-NO
V-20
1231
-DEC
-201
215
-FEB
-201
315
-MAY
-201
315
-JU
L-20
1315
-AU
G-2
013
15-N
OV-
2013
15-J
AN-2
014
15-F
EB-2
014
15-M
AY-2
014
15-J
UL-
2014
15-A
UG
-201
415
-NO
V-20
1415
-JAN
-201
515
-FEB
-201
515
-MAY
-201
515
-JU
L-20
1515
-AU
G-2
015
15-N
OV-
2015
15-J
AN-2
016
15-F
EB-2
016
15-M
AY-2
016
15-J
UL-
2016
15-A
UG
-201
615
-NO
V-20
1615
-JAN
-201
715
-FEB
-201
715
-MAY
-201
715
-JU
L-20
1715
-AU
G-2
017
15-N
OV-
2017
15-M
AY-2
018
15-N
OV-
2018
15-F
EB-2
019
15-A
UG
-201
915
-FEB
-202
015
-MAY
-202
015
-AU
G-2
020
15-F
EB-2
021
15-M
AY-2
021
15-A
UG
-202
115
-NO
V-20
2115
-AU
G-2
022
15-N
OV-
2022
15-F
EB-2
023
15-A
UG
-202
315
-NO
V-20
2415
-JAN
-202
515
-FEB
-202
515
-AU
G-2
025
15-J
AN-2
026
15-F
EB-2
026
15-A
UG
-202
615
-NO
V-20
2615
-JAN
-202
715
-FEB
-202
715
-AU
G-2
027
15-N
OV-
2027
15-A
PR-2
028
15-A
UG
-202
815
-NO
V-20
2815
-FEB
-202
915
-APR
-202
915
-AU
G-2
029
15-M
AY-2
030
15-F
EB-2
031
15-A
PR-2
032
15-F
EB-2
036
15-F
EB-2
037
15-M
AY-2
037
$ Billions
10 YR IIS NOTE 10 YR NOTE 2 YR NOTE
20 YR IIS BOND 3 YR NOTE 30 YR BOND
30 YR IIS BOND 5 YR IIS NOTE 5 YR NOTE
9Office of Debt Management
Net international purchases of US securities increased over September, October and November
Net Foreign Purchases of US Long-Term Securities
-50
0
50
100
150
200
Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07
$ Billions
-50
0
50
100
150
200
$ Billions
10Office of Debt Management
In addition, international demand was robust across Treasury, Agency and Corporate Securities
Net Foreign Purchases of Long-Term Mktble US Treas Bonds & Notes (Mil.$)
-30,000
-20,000
-10,000
0
10,000
20,000
30,000
40,000
50,000
60,000
May
-01
Jan-
02
Sep-
02
May
-03
Jan-
04
Sep-
04
May
-05
Jan-
06
Sep-
06
May
-07
Net Foreign Purchases of GSE & Fed Agency Bonds (Mil.$)
-10,000
0
10,000
20,000
30,000
40,000
50,000
May
-01
Jan-
02
Sep-
02
May
-03
Jan-
04
Sep-
04
May
-05
Jan-
06
Sep-
06
May
-07
Net Foreign Purchases of US Corporations & Other Bonds (Mil.$)
-10,000
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
May
-01
Jan-
02
Sep-
02
May
-03
Jan-
04
Sep-
04
May
-05
Jan-
06
Sep-
06
May
-07
11Office of Debt Management
Foreign Holdings of US Treasury Securities (Bil.$)
0
50
100
150
200
250
300
350
400
450
500
550
600
650
700
750
May
-02
Jan-
03
Sep-
03
May
-04
Jan-
05
Sep-
05
May
-06
Jan-
07
Sep-
07
Japan: Holdings of US Treasury Securities (Bil.$) China: Holdings of US Treasury Securities (Bil.$)
United Kingdom: Holdings of US Treasury Securities (Bil.$) OPEC: Holdings of US Treasury Securities (Bil.$)
Caribbean Banking Centers: Holdings of US Treasury Securities (Bil.$) Brazil: Holdings of US Treasury Securities (Bil.$)
Japan
China
UK
Oil Exporters
Brazil
Caribbean
The increases in year-over-year holdings of Treasuries by the UK, Brazil and Oil Exporters continue to be large
Nov. 2006 Nov. 2007 % changeJapan 615.9 580.9 -6%China 393.8 386.8 -2%
UK 72.6 313.1 331%Oil Exporters 106.4 127.6 20%
Brazil 51.0 120.6 136%
Change in Holdings of Treasury Securities($ Billions, Y-O-Y % change)
12Office of Debt Management
Estimates of the FY 2008 deficit have risen from $203 billion in November 2007 to $326 recently
FY 08 Deficit Estimates $ billions
Primary Dealers* CBO OMB
Current: 326 219 258
Range based on average absolute forecast error 242-410 142-296 150-366
Estimates as of: January 08 January 08 July 07Note: Ranges based on errors from 2003-2007.
* Primary Dealers reflect average estimate.
13Office of Debt Management
In 2001 – 2002, Treasury financed an increasing deficit primarily through increases in bill and shorter-term coupon issuance
Changes in Issuance in Response to Increasing Deficits:2001 Revisited
$5.0
$10.0
$15.0
$20.0
$25.0
$30.0
1/2/
2001
2/2/
2001
3/2/
2001
4/2/
2001
5/2/
2001
6/2/
2001
7/2/
2001
8/2/
2001
9/2/
2001
10/2
/200
1
11/2
/200
1
12/2
/200
1
1/2/
2002
2/2/
2002
3/2/
2002
4/2/
2002
5/2/
2002
6/2/
2002
7/2/
2002
Size
of L
ast O
fferin
g (b
illio
ns)
3-Month (Weekly) 6-Month (Weekly) 2-Year (Monthly) 5-Year (Monthly)
Security January 2001 (bil) July 2002 (bil) Change in 18 months (bil)3-Month $12.5 $17.0 $4.56-Month $10.0 $15.0 $5.02-Year $10.0 $27.0 $17.05-Year $12.0 $22.0 $10.0
Issuance Sizes and Speed of Change in a Changing Deficit Environment
14Office of Debt Management
Potential Financing Considerations in FY 2008
Increase bills as a percent of the portfolioIncrease nominal coupons from current low levelsPotentially issue longer-dated cash management bills to bridge low points in cash balances during tax refund season and if proposedfiscal stimulus is enacted
15Office of Debt Management
Given recent trends in the fiscal outlook, what are the TBAC’s thoughts on Treasury’s debt issuance? In addition, Treasury would like the Committee’s views on the proposed fiscal stimulus and how such stimulus could be financed by Treasury.
16Office of Debt Management
Low Interest Rate Environment
17Office of Debt Management
Stress Across Financing Markets
1- Month and 3 Month AA Financial CP Spread versus 1m and 3m LIBOR
0.00
0.20
0.40
0.60
0.80
1.00
02-A
pr-0
3W
24-S
ep-0
3W
17-M
ar-0
4W
08-S
ep-0
4W
02-M
ar-0
5W
24-A
ug-0
5W
15-F
eb-0
6W
09-A
ug-0
6W
31-J
an-0
7W
25-J
ul-0
7W
16-J
an-0
8W
Asset Backed Commercial Paper Outstanding (SA, Bil$)
400
500
600
700
800
900
1000
1100
1200
02-A
pr-0
3W
24-S
ep-0
3W
17-M
ar-0
4W
08-S
ep-0
4W
02-M
ar-0
5W
24-A
ug-0
5W
15-F
eb-0
6W
09-A
ug-0
6W
31-J
an-0
7W
25-J
ul-0
7W
16-J
an-0
8W
2-Year Treasury versus AAA 2-Year Muni
2.00
2.50
3.00
3.50
4.00
4.50
5.00
5.50
1/3/
2005
3/3/
2005
5/3/
2005
7/3/
2005
9/3/
2005
11/3
/200
5
1/3/
2006
3/3/
2006
5/3/
2006
7/3/
2006
9/3/
2006
11/3
/200
6
1/3/
2007
3/3/
2007
5/3/
2007
7/3/
2007
9/3/
2007
11/3
/200
7
1/3/
2008
2-Year CMT2-Year Muni
Moody's Seasoned Baa/Aaa Corporate Bond Spread
0.70
0.80
0.90
1.00
1.10
1.20
1.30Fe
b-06
Apr-
06
May
-06
Jul-0
6
Aug-
06
Oct
-06
Nov
-06
Jan-
07
Feb-
07
Apr-
07
May
-07
Jul-0
7
Aug-
07
Oct
-07
Dec
-07
Jan-
08
18Office of Debt Management
In 2001 and 2003, increases in fails were seen when the Fed Funds rate was declining and remained at low levels
Primary Dealer Treasury Security Settlement FailsInterest Rate Environment
0
50
100
150
200
250
300
350
1/4/
1995
7/4/
1995
1/4/
1996
7/4/
1996
1/4/
1997
7/4/
1997
1/4/
1998
7/4/
1998
1/4/
1999
7/4/
1999
1/4/
2000
7/4/
2000
1/4/
2001
7/4/
2001
1/4/
2002
7/4/
2002
1/4/
2003
7/4/
2003
1/4/
2004
7/4/
2004
1/4/
2005
7/4/
2005
1/4/
2006
7/4/
2006
1/4/
2007
7/4/
2007
1/4/
2008
$ Billions
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00Percent
W eekly Effective Fed Funds Rate
Average Daily Fails to Receive
Correlation Coefficient = -0.51873
Source: FRBNY FR2004 Settlement Fails Data & FRB H.15
19Office of Debt Management
Fails also occurred in other sectors of the financial markets during the low rate environment
Primary Dealer Settlement FailsInterest Rate Environment
0
20
40
60
80
100
120
140
160
180
1/4/
1995
7/4/
1995
1/4/
1996
7/4/
1996
1/4/
1997
7/4/
1997
1/4/
1998
7/4/
1998
1/4/
1999
7/4/
1999
1/4/
2000
7/4/
2000
1/4/
2001
7/4/
2001
1/4/
2002
7/4/
2002
1/4/
2003
7/4/
2003
1/4/
2004
7/4/
2004
1/4/
2005
7/4/
2005
1/4/
2006
7/4/
2006
1/4/
2007
7/4/
2007
1/4/
2008
$ Billions
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00Percent
Avg. Daily Agency Receive (LHS)Avg. Daily MBS Receive (LHS)Avg. Daily Corporate Receive (LHS)W eekly Effective Fed Funds Rate (RHS)
Source: FRBNY FR2004 Settlement Fails Data & FRB H.15
20Office of Debt Management
Since the last era of lower rates…
FICC standardization of netting procedure for broker dealers
Establishment of the Treasury Market Practices Group
Issuance of Treasury Market Best Practices– “We recommend that all Treasury market participants incorporate
best practices into their operations in order to promote tradingintegrity and support a efficient marketplace.”
Changes to SOMA Securities Lending Program Limits
21Office of Debt Management
Considerations
Buy-in Rule
Negative Rate Repo Trading
Increased coordination of settlement among custodians, asset managers, clearing corporations, etc.
Other private sector/public sector initiatives
22Office of Debt Management
Current market conditions, coupled with the potential for lower interest rates raises the potential risk of systemic fails, a risk that we believe could impair liquidity and raise our cost of borrowing. Should any additional steps be taken to minimize the likelihood or impact of systemic fails so that overall market liquidity is notnegatively impacted by Treasury repo financing?
Treasury Borrowing Advisory Committee Presentation to the U.S. Treasury
Cyclical Influences on Federal Finances
January 29, 2008
2
Overview
• Economic cycles generally produce larger than anticipated swings in federal budget balances and the volatility seems to have increased even as the economy has become less cyclical. While the extreme volatility of the last cycle is not likely to be repeated, it is a cautionary background and highlights real upside risks to funding needs.
• If the economy avoids recession and the stock market does not deteriorate further – an optimistic though still reasonable scenario - the deficits in both 2008 and 2009 could still approach $400bl.
• If a full scale recession and market correction plays out – a scenario that many now anticipate -the 2009/2010 deficits could hit $800bl or more and approach the levels of the early 1980s as a share of GDP. It would be worth paying a deficit price in 2008, if this significantly reduces the chances of recession and much higher deficits in 2009 and beyond. However fiscal stimulus is difficult to time and can be inefficient.
• Treasury funding changes have tended to lag swings in funding needs and a quicker response this time is appropriate. Planning for $400bl deficits, with an eye to the possibility that they go considerably higher is a prudent course.
• Stock market and economic developments over the next 3-6 months should provide an early warning of greater funding needs ahead.
3
Tax receipts are highly cyclical
• Receipts are more volatile than outlays and were particularly volatile in the last cycle.
• While the weakness in GDP during recessions makes both revenues and spending swing as a % of GDP, over ¾ of the cyclical deficit swing typically occurs on the revenue side.
• The start of recession-induced weakness in revenues is roughly coincident with the downturn, but continues well into the recovery both because counter-cyclical policy has tended to be “late” and because revenues (particularly non-withheld income taxes) tend to lag.15%
18%
21%
24%
69 73 77 81 85 89 93 97 01 05
Federal Receipts as % of GDP (4-qtr total)Federal Out lays as % of GDP (4-qtr total)
4
Budget Balances have become more volatile despite more moderate economic cycles
• While GDP has become less volatile over time, budget balances have become more volatile. The swing in the federal deficit over the past business cycle was the largest we have seen.
6.2%2001 recession
2.1%Average 1954-95
Change in Budget Balance from Peak of Economic Expansion to
Trough of Deficit (% of GDP)
-6%
-3%
0%
3%
54 58 62 66 70 74 78 82 86 90 94 98 02 06
Federal Budget Balance as% of GDP (4-qtr total)
5
Budget balance projections show large cyclical errors
• CBO projections (as well as those of others) have typically under predicted deficits in downturns (even after factoring in stimulus legislation).
• The errors have tended to persist, remaining positive during upturns and negative through out the period of weakness.
• The extreme volatility of the budget balance and the size of the forecast errors in the last cycle are a cautionary background for deficit forecasts in the current cycle.
• The fact that the size of the positive errors in the current cycle are similar to those of the past cycle (although they have not persisted as long and thus are not cumulatively as large) is also cautionary when considering the deficit implications of a possible recession.
Project ion Error on Budget Balance (Bn $)
-500
-400
-300
-200
-100
0
100
200
300
1983 1986 1989 1992 1995 1998 2001 2004 2007
Current Fiscal YearNext Fiscal Year
6
Equity markets are a more significant source of federal revenues
0%
25%
50%
75%
100%
125%
150%
175%
200%
225%
52 56 60 64 68 72 76 80 84 88 92 96 00 04
Stock Market Wealth as % of GDP
• When considering the current vulnerability of the deficit to cyclical weakness there are good reasons not to expect a repeat of the last cycle’s extreme volatility. At the same time, the impact would likely still be considerable and greater than generally thought.
• The magnitude of the swing in the equity market in the last cycle was unprecedented and presumably was a key reason why receipts surged during the expansion and collapsed in the recession. It is not just capital gains. Stock options and incentive related pay have grown and are a greater share of personal income.
• The rise in the equity market has been considerably less this time around (although still much greater than earlier cycles) suggesting less vulnerability. The rise in house prices is unlikely to have had anywhere near the same impact on tax revenue.
7
Personal tax receipts vulnerable, but not as much as last downturn
• The effective personal tax rate has risen, however it is up only about one percentage point (from the post rebate clean 2005 level) compared to the three point rise in the previous cycle.
• However the rise is much greater than it was in the late 1980s and a good portion would presumably be reversed in the face of a recession and market downturn. (The rise in the late 1970s, reflected the bracket creep impact of extremely high inflation.)9
10
11
12
13
14
15
75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07
Individual Income Taxes as a % ofPersonal Income
8
In particular, withheld receipts seem less vulnerable
• The major difference in the current cycle is that the withheld tax rate has not risen significantly in the current cycle.
• This suggests that the roughly coincident impact of the cycle on withheld taxes will not be anywhere near as severe as that in the past cycle.
7
8
9
10
11
75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07
Withheld Individual Income Taxes as a %of Personal Income
9
Within individual, nonwithheld receipts seem most at risk
• Nonwithheld receipts are more driven by capital gains and irregular sources of income and have risen almost as much as during the 1990s, which suggests a clear vulnerability.
• Even in a mild recession and with only a moderate equity market contraction, nonwithheld receipts could fall by a percentage point of GDP.
• Since final settlements are the largest component of nonwithheld, it is fiscal 2009 receipts that are at risk (since still good equity performance in 2007 should support the April 2008 final settlement). Weakness in estimated payments during 2008 would provide a warning that 2009 receipts are vulnerable.
2
3
4
5
75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07
Nonwithheld Individual Income Taxesas a % of Personal Income
10
Corporate receipts are another source of vulnerability
• Profit margins have risen rapidly to unusually high levels and the corporate sector is generating a greater share of revenues.
• Corporate margins are likely to weaken - they already have in the financial sector - even in the absence of a recession. The weakness of the dollar, however, will be a supportive factor that wasn’t there in 2001-2002.
• A one percentage point of GDP drop in corporate receipts would not be an unreasonable expectation in a very mild recession.1.0
1.5
2.0
2.5
3.0
3.5
70 73 76 79 82 85 88 91 94 97 00 03 06
Corporate Tax Receipts as a% of GDP
11
Incoming data do not yet suggest significant weakness
• Growth in individual receipts is holding up, while corporate receipts growth has not done much worse than flatten.
• The January personal income tax payment seems to be coming in reasonably solidly and withheld receipts have eased only very modestly.
• However, it is too soon to see the full impact of slower profit growth in corporate receipts or the impact of a weak stock market in individual receipts—these would show up in quarterly payments starting in March and April and particularly in final settlements in April 2009
-30000
-20000
-10000
0
10000
20000
30000
40000
50000
60000
70000
Mar06
Jun06
Sep06
Dec06
Mar07
Jun07
Sep07
Dec07
Individual Receipts (Diff Y/ Y)
Corporate Receipts (Diff Y/ Y)
12
The 3T’s will Be Tricky to Accomplish• Many observers have stressed that fiscal stimulus should be timely,
targeted, and temporary. Yet is difficult to achieve efficient fiscal stimulus.
– Timely: The current proposal includes tax rebate checks sent to households. Checks may reach households in June which is still aconsiderable ways off. Monetary policy stimulus has been aggressive and will be taking effect as fiscal policy hits. Tax deductions on capital purchases were also included, however capital spending decisionscannot be made on a dime and the impact would take time.
– Targeted: Each dollar should generate the maximum possible near-term GDP effect. Most analysis suggests that at most 2/3 of the previous tax rebate was spent over a period of 2-3 quarters, with the impact of the business tax deduction having an even less certainimpact. While the impact on the deficit will be certain, the stimulus to the economy will not be.
13
The 3T’s will Be Tricky to Accomplish cont.
– Temporary: The deficit will not be impacted too severely by the economic/market weakness in 2008 and can handle the impact of a stimulative fiscal package. By 2009 the deficit will be rising for economic reasons and countercyclical fiscal stimulus would potentially push the deficit to levels much higher than people anticipate.
Bottom Line: In general monetary policy can address cyclical fluctuations more efficiently than fiscal policy. There is a risk that, as with 2003, there will be fiscal stimulus on top of aggressivemonetary stimulus which may have unwanted effects down the line.
14
Treasury issuance challenging at cyclical turning points• Bill issuance has tended to absorb swings in borrowing needs in the short
term• Financing needs can change sharply, making issuance decisions difficult.
Treasury Marketable Issuance, 4qtr moving average
-80
-60
-40
-20
0
20
40
60
80
100
120
Q4-198
1Q4-1
982
Q4-198
3Q4-1
984
Q4-198
5Q4-1
986
Q4-198
7Q4-1
988
Q4-198
9Q4-1
990
Q4-199
1Q4-1
992
Q4-199
3Q4-1
994
Q4-199
5Q4-1
996
Q4-199
7Q4-1
998
Q4-199
9Q4-2
000
Q4-200
1Q4-2
002
Q4-200
3Q4-2
004
Q4-200
5Q4-2
006
Net Coupon IssuanceNet Bill Issuance 30yr cut 3yr cut
15
Starting point – room to grow but…
• Room to grow:– Gross coupon issuance has
declined over the past several years
– Net bill issuance was negative in 2005/06 and showed clear signs of supply/demand imbalance in 2007
• But…– SLGS issuance, which took
away nearly $60bn in marketable issuance needs in 2007, will likely not be significant in 2008
– Maturing debt is set to rise by over $50bn in 2008 so gross issuance already needed to increase by that just to keep net issuance steady
– Elimination of the 3yr, where $30bn was issued in 2007, will need to be made up in gross issuance elsewhere along the curve
-20
-10
0
10
20
30
40
50
60
70
80
2000 2001 2002 2003 2004 2005 2006 2007 FYTD 2008
$bn
Net SLGS Issuance (fiscal year)
Gross Coupon Issuance
0
50
100
150
200
250
Q1-19
80
Q1-19
83
Q1-19
86
Q1-19
89
Q1-19
92
Q1-19
95
Q1-19
98
Q1-20
01
Q1-20
04
Q1-20
07
$bn
2-5yrs5-10yrOver 10 yrsTotal Gross Coupon Issuance
16
How Much Issuance Might Need to ChangeHypothetical Issuance Breakdown Under Various Deficit Projections
Hypothetical Auction Sizes (assuming no change from current schedule)
Deficit ($bn) Bills 2-under 5yr 5-10yr Over 10yrs
200 3700 310 330 45
400 3800 350 400 55
1000 4200 660 680 70
Deficit ($bn) 2yr 5yr 10yr 30yr 5yr TIPS 10yr TIPS 20yr TIPS
200 26 16 12 8 8 8 7
400 29 20 14 10 8 9 8
1000 55 35 22 14 12 15 9
• The current schedule appears adequate and flexible for an expected deficit of $200bn• At a $400bn expected deficit, the current schedule appears adequate, but not flexible
enough to absorb downside surprises. Along with more frequent issuance, for example issuing monthly 10yr notes, adding an additional maturity point, such as bringing back the 1yr bill or 3yr note should be considered.
• Beyond a $400bn deficit, additional maturity points would likely be needed for well functioning auctions.
