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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