Debt Management
Treasury Was Able to Fund Economic Stabilization and Recovery Expenditures in a Short Period of Time, but Debt Management Challenges Remain Gao ID: GAO-10-498 May 18, 2010This report is part of GAO's requirement, under the Emergency Economic Stabilization Act of 2008, to monitor the Department of the Treasury's (Treasury) implementation of the Troubled Asset Relief Program and submit special reports as warranted from oversight findings. It evaluates Treasury's borrowing actions since the start of the crisis, and how Treasury communicates with market participants in the context of the growing debt portfolio and the medium- and long-term fiscal outlook. GAO analyzed market data; interviewed Treasury, the Federal Reserve Bank of New York, and market experts; and surveyed major domestic holders of Treasury securities.
The economic recession and financial-market crisis, and the federal government's response to both, have significantly increased the amount of federal debt. While the composition of Treasury's debt portfolio changed in response to this increase, Treasury has taken a number of steps in the past year to return the composition of the debt portfolio to pre-market crisis structure. One action Treasury has undertaken has been to reduce its reliance on cash management bills (CMB). While CMBs provided Treasury with needed borrowing flexibility immediately following the financial market crisis in 2008, Treasury paid a premium for its sustained use of CMBs in 2008 and 2009. In recent months, Treasury also has begun to stabilize shorter-term bill issuance and increase issuance of longer-term coupons. Given the medium- and long-term fiscal outlook, Treasury will continue to be presented with the challenge of raising significant amounts of cash at the lowest costs over time. This makes evaluating the demand for Treasury securities increasingly important. Sufficient information from market participants on their demand for Treasury securities, including the type of information that GAO received from its survey of the largest domestic holders of Treasury securities, will be critical as Treasury moves forward to meet these challenges. In GAO's survey, investors reported increased demand for Treasury Inflation Protected Securities (TIPS) and suggested ways for Treasury to further improve TIPS liquidity and thereby lower borrowing costs. Treasury receives input from market participants through a variety of formal and informal channels, but overall satisfaction with these communication channels varies by type of market participant. Market participants suggested to GAO a number of changes including increasing investor diversification on the Treasury Borrowing Advisory Committee (TBAC) and regular collection of information from end-investors. Primary dealers, who are satisfied with their communication, raised concerns about the recent increase in direct bidding and its effect on Treasury auctions.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Susan J. Irving Team: Government Accountability Office: Strategic Issues Phone: (202) 512-9142GAO-10-498, Debt Management: Treasury Was Able to Fund Economic Stabilization and Recovery Expenditures in a Short Period of Time, but Debt Management Challenges Remain
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Report to Congressional Committees:
United States Government Accountability Office:
GAO:
May 2010:
Debt Management:
Treasury Was Able to Fund Economic Stabilization and Recovery
Expenditures in a Short Period of Time, but Debt Management Challenges
Remain:
GAO-10-498:
GAO Highlights:
Highlights of GAO-10-498, a report to congressional committees.
Why GAO Did This Study:
This report is part of GAO‘s requirement, under the Emergency Economic
Stabilization Act of 2008, to monitor the Department of the Treasury‘s
(Treasury) implementation of the Troubled Asset Relief Program and
submit special reports as warranted from oversight findings. It
evaluates Treasury‘s borrowing actions since the start of the crisis,
and how Treasury communicates with market participants in the context
of the growing debt portfolio and the medium- and long-term fiscal
outlook. GAO analyzed market data; interviewed Treasury, the Federal
Reserve Bank of New York, and market experts; and surveyed major
domestic holders of Treasury securities.
What GAO Found:
The economic recession and financial-market crisis, and the federal
government‘s response to both, have significantly increased the amount
of federal debt. While the composition of Treasury‘s debt portfolio
changed in response to this increase, Treasury has taken a number of
steps in the past year to return the composition of the debt portfolio
to pre–market crisis structure. One action Treasury has undertaken has
been to reduce its reliance on cash management bills (CMB). While CMBs
provided Treasury with needed borrowing flexibility immediately
following the financial market crisis in 2008, Treasury paid a premium
for its sustained use of CMBs in 2008 and 2009. In recent months,
Treasury also has begun to stabilize shorter-term bill issuance and
increase issuance of longer-term coupons. Given the medium- and long-
term fiscal outlook, Treasury will continue to be presented with the
challenge of raising significant amounts of cash at the lowest costs
over time. This makes evaluating the demand for Treasury securities
increasingly important.
Figure: Congressional Budget Office Estimate of Debt Held by the
Public and Percent of GDP, Based on President‘s Budgetary Proposals,
2009 to 2020:
[Refer to PDF for image: combined vertical bar and line graph]
Fiscal year, actual: 2009;
Debt held by the public: $7.5 trillion;
Debt held by the public as a percentage of gross domestic product:
53.0%.
Fiscal year, projected: 2010;
Debt held by the public: $9.2 trillion;
Debt held by the public as a percentage of gross domestic product:
63.2%.
Fiscal year, projected: 2011;
Debt held by the public: $10.5 trillion;
Debt held by the public as a percentage of gross domestic product:
70.1%.
Fiscal year, projected: 2012;
Debt held by the public: $11.6 trillion; Debt held by the public as a
percentage of gross domestic product: 73.6%.
Fiscal year, projected: 2013;
Debt held by the public: $12.5 trillion;
Debt held by the public as a percentage of gross domestic product:
74.8%.
Fiscal year, projected: 2014;
Debt held by the public: $13.3 trillion;
Debt held by the public as a percentage of gross domestic product:
75.7%.
Fiscal year, projected: 2015;
Debt held by the public: $14.3 trillion;
Debt held by the public as a percentage of gross domestic product:
77.4%.
Fiscal year, projected: 2016;
Debt held by the public: $15.3 trillion;
Debt held by the public as a percentage of gross domestic product:
79.6%.
Fiscal year, projected: 2017;
Debt held by the public: $16.4 trillion;
Debt held by the public as a percentage of gross domestic product:
81.8%.
Fiscal year, projected: 2018;
Debt held by the public: $17.6 trillion;
Debt held by the public as a percentage of gross domestic product:
84.3%.
Fiscal year, projected: 2019;
Debt held by the public: $18.9 trillion;
Debt held by the public as a percentage of gross domestic product:
87.1%.
Fiscal year, projected: 2020;
Debt held by the public: $20.3 trillion;
Debt held by the public as a percentage of gross domestic product:
90.0%.
Source: CBO data.
[End of figure]
Sufficient information from market participants on their demand for
Treasury securities, including the type of information that GAO
received from its survey of the largest domestic holders of Treasury
securities, will be critical as Treasury moves forward to meet these
challenges. In GAO‘s survey, investors reported increased demand for
Treasury Inflation Protected Securities (TIPS) and suggested ways for
Treasury to further improve TIPS liquidity and thereby lower borrowing
costs. Treasury receives input from market participants through a
variety of formal and informal channels, but overall satisfaction with
these communication channels varies by type of market participant.
Market participants suggested to GAO a number of changes including
increasing investor diversification on the Treasury Borrowing Advisory
Committee (TBAC) and regular collection of information from end-
investors. Primary dealers, who are satisfied with their
communication, raised concerns about the recent increase in direct
bidding and its effect on Treasury auctions.
What GAO Recommends:
GAO recommends that the Secretary of the Treasury should continually
review methods for collecting market information and consider
conducting a periodic survey of end-users and broadening the TBAC. The
Secretary of the Treasury should also continue to reduce the amount
and term to maturity of CMBs and consider increasing the number of
TIPS auctions and distributing them more evenly throughout the year,
and study the effect of the recent increase in direct bidding on
Treasury‘s overall cost of borrowing, including options to promote
transparency and foster competition.
Treasury agreed with GAO‘s findings, conclusions, and recommendations.
View [hyperlink, http://www.gao.gov/products/GAO-10-498] or key
components. For more information, contact Susan J. Irving at (202) 512-
6806 or irvings@gao.gov.
[End of section]
Contents:
Letter:
Background:
The Composition of Treasury's Debt Portfolio Changed Substantially
following the 2008 Financial Market Crisis but Has Begun to Transition
Back to Pre-Market Crisis Structure:
Treasury and Investors Communicate through Both Formal and Informal
Channels; Market Participants Identified Challenges and Suggested
Improvements to Both:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Methodology for the Analysis of the Cash Management Bill
Yield Differential:
Appendix II: Survey Scope and Methodology:
Appendix III: Survey Instrument:
Appendix IV: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Survey Respondents' Reported Treasury Securities Holdings and
Future Purchases:
Table 2: Recipients, Respondents, and Treasury Holdings by Sector:
Figures:
Figure 1: Average Maturity of Treasury Outstanding Marketable
Securities and Percentage Maturing in Next 12 Months (December 31,
2006, to December 31, 2009):
Figure 2: Cash Management Bills Annual Issuance Amounts and Average
Term to Maturity (2005 to 2009):
Figure 3: CBO's Estimate of Debt Held by the Public and Percent of
GDP, Based on the President's Budgetary Proposals, 2009 to 2020:
Figure 4: Net Interest Payments as a Percentage of Total Revenues,
1990 to 2020:
Figure 5: Treasury's Office of Debt Management's (ODM) Market
Information Channels:
Figure 6: Extent to Which Survey Respondents Believe Treasury Receives
Sufficient Information from End-Investors:
Figure 7: Extent to Which Commercial Banks and Mutual-Fund Respondents
Believe Treasury Receives Sufficient Information from End-Investors:
Figure 8: Extent to Which Life Insurance, Property Casualty Insurance,
and State and Local Government Retirement Funds Believe Treasury
Receives Sufficient Information from End-Investors:
Figure 9: Percentage of Total Financial Assets in Treasury Securities
by Sector (1984 to 2009):
Figure 10: Percentage of 5-and 10-year Notes and 30-year Bonds
Purchased by Direct Bidders at Treasury Securities Auctions (May 2003-
February 2010):
Abbreviations:
CBO: Congressional Budget Office:
CMB: cash management bill:
CME: Chicago Mercantile Exchange Group:
Federal Reserve: Board of Governors of the Federal Reserve System:
FRBNY: Federal Reserve Bank of New York:
GDP: gross domestic product:
NTAAPS: New Treasury Automated Auction Processing System:
ODM: Department of the Treasury's Office of Debt Management:
Recovery Act: American Recovery and Reinvestment Act of 2009:
SFP: Supplementary Financing Program:
SIFMA: Securities Industry and Financial Markets Association:
TARP: Troubled Asset Relief Program:
TBAC: Treasury Borrowing Advisory Committee:
TIPS: Treasury Inflation Protected Securities:
Treasury: Department of the Treasury:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
May 18, 2010:
Congressional Committees:
As part of the Emergency Economic Stabilization Act of 2008, GAO is
required to monitor the United States Department of the Treasury's
(Treasury) implementation of the Troubled Asset Relief Program (TARP)
and, under subsection 116, submit special reports as warranted from
oversight findings. This report examines new debt management
challenges that Treasury faces and the efforts that Treasury has
undertaken to borrow more than $3.082 trillion over the 2-year period
beginning December 2007. Treasury's borrowing financed regular
government needs, as well as federal government actions related to
both the financial-market crisis and the recession, including TARP
investments in financial institutions, housing support through
purchases of mortgage-backed securities, support of the Board of
Governors of the Federal Reserve System's (Federal Reserve) actions
taken to stabilize financial markets, and the American Recovery and
Reinvestment Act of 2009 (Recovery Act). The current rapid and
substantial increase in federal debt since 2008 takes place in the
context of the medium-and long-term fiscal outlook that will present
Treasury with continued financing challenges long after the return of
financial-market stability and economic growth.
In this report, we describe Treasury's borrowing actions since the
start of the crisis and the challenges of managing its growing debt
portfolio in the context of the medium-and long-term fiscal outlook by
answering the following questions: (1) What actions did Treasury take
between December 2007 and December 2009 to borrow funds for TARP-
related disbursements, the Supplementary Financing Account Program
(SFP), the Recovery Act, and other cash needs, and (2) What changes
should Treasury make, if any, to better gauge end-investor demand and
increase auction participation?[Footnote 1]
To identify the actions that Treasury has taken to borrow funds for
TARP-related disbursements and other cash needs, we analyzed the
scale, timing, term-to-maturity, and composition of Treasury's
borrowing between December 2007 and December 2009, using data and
information obtained from Treasury and the Federal Reserve. We also
interviewed market experts, primary dealers and end-investors of
Treasury securities, and Treasury and Federal Reserve Bank of New York
(FRBNY) staff and officials on Treasury debt management challenges. To
describe the cost of the use of cash management bills (CMB) during
this time period, we estimated the differential between CMB yields and
the yields on outstanding Treasury bills of similar maturity at the
time of auction using data from Treasury's Bureau of the Public Debt
and the Wall Street Journal. We also replicated the analysis
estimating the differential between CMB yields and the yields on
Treasury auctions that most closely matched the CMB auction in terms
of issue date and maturity using data from Treasury's Bureau of the
Public Debt. See appendix I for a detailed description of the
methodologies that we used to estimate the cost to Treasury of the use
of CMBs.
In order to evaluate what changes Treasury should make, if any, to
better gauge end-investor demand and increase auction participation,
we analyzed Treasury's communication with investors and identified
possible actions. In June 2009, we conducted 12 structured interviews
with the two largest holders of Treasury securities in each of the
following sectors: mutual funds; commercial banks; life insurance
companies; property casualty insurance companies; state and local
government retirement funds; and private pension funds. In addition,
in August 2009 we conducted a Web-based survey that was sent to 66 of
the largest domestic holders of Treasury securities in each of these
sectors except private pension funds[Footnote 2]. The survey addressed
topics similar to those covered in our structured interviews,
including: Treasury auctions and holdings, Treasury Inflation
Protected Securities (TIPS), risk exposure, and Treasury's information
sources. On October 15, 2009, we briefed Treasury on the findings from
the survey, which are discussed and expanded upon in this report. See
appendix II for our detailed survey methodology and appendix III for a
copy of the survey. Because the sample of holders of Treasury
securities was not drawn randomly, the survey is not generalizable to
the broader population of organizations in the sectors we included in
the survey.
To assess the reliability of data used in this study, including
publicly available data from Treasury and the Federal Reserve, we
examined the data to look for outliers and anomalies and addressed
such issues as appropriate. We chose data that are commonly used by
Treasury, researchers, and other market analysts to examine Treasury
markets and auction performance. Where possible and appropriate, we
corroborated the results of our data analysis with other sources, such
as analyses done by other market experts or testimonial evidence. On
the basis of our assessment we believe the data are reliable for the
purpose of this review. We conducted our review from December 2008 to
May 2010 in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit
to obtain sufficient, appropriate evidence to provide a reasonable
basis for our findings and conclusions based on our audit objectives.
We believe that the evidence obtained provides a reasonable basis for
our findings and conclusions based on our audit objectives.
Background:
Congress has assigned to Treasury the responsibility of borrowing the
funds necessary to finance the gap between the money that the
government receives, primarily tax revenues, and the money that the
government spends. Government expenditures include regular withdrawals
for programs such as Medicare and Social Security as well as
extraordinary withdrawals for programs such as TARP. Treasury also
makes interest and principal payments for outstanding debt and debt
that is maturing on a continual basis. Treasury's primary debt
management goal is to finance the government's borrowing needs at the
lowest cost over time, subject to a statutory limit.[Footnote 3] To
meet this objective, Treasury issues debt through auctions across a
wide range of securities mainly in a "regular and predictable" pattern
based on a preannounced auction schedule, which it releases on a
quarterly basis. Treasury does not "time the market"--or take
advantage of low interest rates--when it issues securities. Instead,
Treasury is able to lower its borrowing costs by relying on regularly
scheduled auctions because investors and dealers value transparency,
stability, and certainty of large liquid supply.
Market participants often characterize Treasury securities as the
premium risk-free asset. Investors, traders, banks, and foreign
central banks actively use them for hedging, liquidity, capital
requirements, and reserve purposes. Treasury securities are also a
popular investment for end-investors seeking liquidity and low risk.
Treasury's "regular and predictable" auctions are for nominal
marketable securities that range in maturity from 4 weeks to 30 years
and for TIPS that are issued with 5-, 10-, and 30-year maturities.
[Footnote 4] TIPS offer a variety of benefits to Treasury, and
inflation protection to investors, who are willing to pay a premium
for this protection in the form of an interest rate on TIPS that may
be lower than a comparable nominal issuance over the life of the
instrument.[Footnote 5]
Treasury responds to increases in borrowing needs in a traditional
manner by: (1) increasing the issuance size of existing securities;
(2) increasing the frequency of issuances; and (3) introducing new
securities to its auction calendar as necessary. Treasury announces
upcoming changes during quarterly refundings so that the market is not
surprised. In some instances, Treasury supplements its "regular and
predictable" auction schedule with flexible securities called cash
management bills (CMB). Because of the nature of CMBs, Treasury does
not publish information about CMBs on its quarterly auction schedule
as it does for other securities. Instead, Treasury announces CMB
auctions anywhere from 1 to 4 days ahead of the auction. Treasury also
indicates whether it might issue CMBs over the upcoming quarter in
quarterly refunding statements. The term to maturity--or length of
time the CMB is outstanding--varies according to Treasury's cash
needs. Treasury generally uses CMBs to finance intramonth funding gaps
due to timing differences of large cash inflows and outflows.[Footnote
6] Treasury also uses CMBs to meet sudden and unexpected borrowing
needs, such as those that arose from the government's responses to the
financial market crisis and economic downturn in 2008 and 2009.
The outstanding mix of Treasury securities can have a significant
influence on the federal government's interest payments. Longer-term
nominal securities typically carry higher interest rates (which
translate to increased cost to the government), primarily due to
investor concerns about the uncertainty of future inflation. However,
longer-term securities offer the government the certainty of fixed
interest payments over a longer period and reduce the amount of debt
that Treasury needs to refinance in the short term.[Footnote 7] In
contrast, shorter-term securities generally carry lower interest rates
but add uncertainty to the government's interest costs and require
Treasury to conduct more frequent auctions to refinance maturing debt,
which also poses rollover risk. Among Treasury's short-term
securities, those that are issued on a "regular and predictable"
schedule generally carry the lowest interest rates.
Two groups, (1) the primary dealers and (2) the Treasury Borrowing
Advisory Committee (TBAC) of the Securities Industry and Financial
Markets Association (SIFMA) provide regular input to Treasury debt
management decisions.[Footnote 8] The primary dealers are a group of
banks and securities broker/dealers, selected by the Federal Reserve
Bank of New York (FRBNY), that trade in U.S. government securities
with the FRBNY on behalf of the Federal Reserve in order to implement
monetary policy. They are also required by the FRBNY to participate in
all Treasury auctions. On a quarterly basis, Treasury surveys the
primary dealers and also meets with half of them in person. Treasury
also meets quarterly with TBAC, an advisory committee that is governed
by federal statute and comprised of senior level officials who are
employed by primary dealers, institutional investors, and other major
participants in the Treasury market. Treasury also monitors market
trends via regular contact with the Markets Group at FRBNY,
subscriptions to all major investment houses' fixed income research
publications, attending fixed income conferences, and meeting with
large foreign investors and reserve managers.
The Composition of Treasury's Debt Portfolio Changed Substantially
following the 2008 Financial Market Crisis but Has Begun to Transition
Back to Pre-Market Crisis Structure:
The Size and Composition of Treasury's Debt Portfolio Changed
Substantially Due in Part to Borrowing for TARP, the SFP, and the
Recovery Act:
The borrowing associated with the actions that the federal government
took in response to the financial-market crisis and recession
including TARP, the SFP, and the Recovery Act, substantially altered
the size and composition of Treasury's outstanding debt portfolio.
Since the onset of the recession in December 2007, Treasury's total
outstanding debt has increased by $3.082 trillion, and marketable debt
increased by $2.735 trillion. At the end of December 2009, total
outstanding debt was $12.311 trillion, and total outstanding
marketable securities stood at $7.272 trillion.[Footnote 9] According
to Treasury, in fiscal year 2009, Treasury held a record 291 auctions
in 251 business days and issued nearly $7 trillion in gross marketable
securities, a significant portion of which was used to roll over, or
refinance, existing debt.
The mix of securities Treasury issued in 2008 and 2009 substantially
shortened the average maturity of its debt portfolio and increased the
debt maturing in the next 12 months. As seen in figure 1, when looking
at Treasury's outstanding marketable securities during the period
December 31, 2006, to December 31, 2009, the percentage of securities
maturing within a year peaked in December 2008. Reflecting the same
trend, the average term to maturity of outstanding marketable
securities reached its lowest point of 49 months in December 2008. As
we reported in September 2009, these changes were in accordance with
what Treasury described to us as its normal operating procedures. Our
September report included specific details about Treasury's debt
issuance between December 2007 and June 2009.[Footnote 10]
Figure 1: Average Maturity of Treasury Outstanding Marketable
Securities and Percentage Maturing in Next 12 Months (December 31,
2006, to December 31, 2009):
[Refer to PDF for image: combined vertical bar and line graph]
Date: December 2006;
Average maturity (in months): 54;
Percentage maturing in 12 months: 36.
Date: March 2007;
Average maturity (in months): 54;
Percentage maturing in 12 months: 36.
Date: June 2007;
Average maturity (in months): 56;
Percentage maturing in 12 months: 34.
Date: September 2007;
Average maturity (in months): 56;
Percentage maturing in 12 months: 36.
Date: December 2007;
Average maturity (in months): 55;
Percentage maturing in 12 months: 36.
Date: March 2008;
Average maturity (in months): 55;
Percentage maturing in 12 months: 38.
Date: June 2008;
Average maturity (in months): 56;
Percentage maturing in 12 months: 36.
Date: September 2008;
Average maturity (in months): 52;
Percentage maturing in 12 months: 41.
Date: December 2008;
Average maturity (in months): 49;
Percentage maturing in 12 months: 44.
Date: March 2009;
Average maturity (in months): 49;
Percentage maturing in 12 months: 43.
Date: June 2009;
Average maturity (in months): 51;
Percentage maturing in 12 months: 41.
Date: September 2009;
Average maturity (in months): 53;
Percentage maturing in 12 months: 39.
Date: December 2009;
Average maturity (in months): 55.
Source: Treasury.
Note: As of March 31, 2010 Treasury had not yet released the
percentage of debt maturing in the next 12 months as of the end of
December 2009.
[End of figure]
Treasury Initially Began to Transition the Composition of Its Debt
Portfolio Back to Pre-Market Crisis Structure by Stabilizing Bill
Issuance and Increasing Coupon Issuance:
The changes to Treasury's debt portfolio, as discussed above, were not
intended to be permanent, and Treasury has already started to
transition back to pre-financial-market crisis levels of average
maturity and composition of the debt portfolio in a manner that,
according to Treasury, was as rapid and as prudent as possible. During
the November 2009 TBAC press conference, Treasury officials announced
that the transition has begun with a shift of bill issuances to
nominal note and bond issuance and TIPS issuance. This shift will
allow Treasury to retain flexibility in meeting uncertain financing
needs in the future. Flexibility is retained by increasing the
borrowing capacity that Treasury has available for shorter-term
securities, which are used when unexpected financing needs arise.
During the February 2010 TBAC press conference Treasury indicated a
shift in the transition with the announcement that nominal note and
bond issuance will stabilize in the next year and perhaps even
decrease. In February, Treasury stated that nominal auctions sizes
were at levels that give Treasury the flexibility to address a broad
range of potential financing scenarios. Market participants we spoke
with anticipated the stabilization of note and bond issuance, but
cautioned that any decrease in the amount of nominal note and bond
issuance would depend on tax receipts.
Treasury has said that it expects the average term to maturity of
outstanding marketable debt to approach the historical average of 5
years (or 60 months) by the end of fiscal year 2010 and could perhaps
exceed it in the next 3-5 years. Treasury officials have indicated the
changes they are making to the overall debt portfolio will bring short-
term bill levels closer to historical averages while stabilizing or
perhaps even decreasing nominal note and bond issuance. Treasury has
emphasized the importance of making these changes in a gradual,
transparent, and incremental manner. Some market participants have
expressed concern about a reduction in bill supply. Investors use
bills to invest their funds temporarily in a safe and highly liquid
asset. Bills are also used by institutional investors that are
required to buy financial assets maturing in a year or less. Treasury
recognizes the importance of adequate bill supply and said that it
will continue to monitor the bills market for any disruptions that the
decrease in bill supply may cause.
Treasury's Issuance of CMBs and the Average Maturity of CMBs Increased
Dramatically in 2008 and 2009:
Shortly after the start of the financial-market crisis in the fall of
2008, Treasury borrowed an unprecedented $1.1 trillion in under 18
weeks largely by issuing CMBs, which are intended for unexpected and
immediate cash needs. Treasury's use of CMBs was substantial and
continued well after the beginning of the financial-market crisis. The
sustained increase was due in part to the Supplementary Financing
Program (SFP), a temporary program created in September 2008 to
provide cash for use in Federal Reserve initiatives intended to
address heightened liquidity pressures in the financial markets.
[Footnote 11]
In 2008 and 2009, Treasury's gross issuance of CMBs was $1.432
trillion and $1.142 trillion respectively (of which $785 billion and
$835 billion were issued for the SFP in 2008 and 2009). This compares
to average issuance of about $254 billion annually from 2005 to 2007.
(See figure 2.) To issue $1.432 trillion worth of CMBs in 2008,
Treasury held 47 auctions (of which 21 were issued for the SFP),
compared to an average of 18 auctions annually from 2005 to 2007.
Figure 2: Cash Management Bills Annual Issuance Amounts and Average
Term to Maturity (2005 to 2009):
[Refer to PDF for image: combined vertical bar and line graph]
Calendar year: 2005;
Amount issued: $263 billion;
Average term to maturity: 10 days.
Calendar year: 2006;
Amount issued: $242 billion;
Average term to maturity: 9 days.
Calendar year: 2007;
Amount issued: $256 billion;
Average term to maturity: 10 days.
Calendar year: 2008;
Amount issued: $1,432 billion;
Average term to maturity: 82 days.
Calendar year: 2009;
Amount issued: $1,142 billion;
Average term to maturity: 102 days.
Source: GAO analysis of Treasury data.
Note: On a fiscal-year basis, Treasury issued the following CMB
amounts and with the following average term to maturity: 2005--$268
billion (10 days); 2006--$252 billion (9 days); 2007--$259 billion (10
days); 2008--$725 billion (35 days); and 2009--$1.82 trillion (119
days).
[End of figure]
CMBs that were issued in 2008 and 2009 also departed from historical
norms in that their terms to maturity increased significantly. Prior
to 2008, Treasury typically used CMBs to fund intramonth funding gaps
and, in certain instances, to provide Treasury borrowing flexibility
when it was approaching the debt limit.[Footnote 12] Between 2002 and
2007, CMBs typically had a term to maturity of less than 2 weeks.
During 2005, 2006, and 2007, the average term to maturity of CMBs was
10 days, 9 days, and 10 days respectively. In contrast, in 2009, the
average term to maturity of CMBs was 109 days or 15.6 weeks. Removing
those CMBs that were used for the SFP (debt issued for the SFP does
not pay for government expenditures), the average term to maturity of
the remaining CMBs was 99 days in 2008 and 198 days in 2009. During
its February 2008 quarterly refunding process, Treasury announced its
plans to issue longer-dated CMBs. This was a change to Treasury's
recent practice of not issuing CMBs with maturities greater than 21
days and according to Treasury was necessary in order to spread the
extraordinary financing needs away from the front end of the bill
market. Treasury stated that longer-dated maturities would be issued
because of seasonal fluctuations in cash balances, volatility
associated with the timing of tax refunds, and the increased use of
electronic payments versus check payments. On February 13, 2008,
Treasury auctioned a 63-day CMB, which had a longer maturity than any
other CMB issued in the previous 3 fiscal years. Treasury issued
additional CMBs with terms to maturity of greater than 300 days during
both fiscal years 2008 and 2009. Longer-dated CMBs were also, in many
instances, reopenings of existing Treasury bills. Twenty of the 37 non-
SFP CMBs issued in 2008 and 2009 were reopenings of outstanding
Treasury bills. Treasury officials told us that they consulted with
market participants and decided that longer-dated CMBs, for example 9-
month bills, were a prudent, short-term mechanism to raise cash and
approximately the length of time that it would take for coupon
issuance to "catch up" and shoulder a bigger share of Treasury's
financing needs.
Treasury Paid a Premium for the Sustained Use of CMBs in 2008 and 2009:
While CMBs provided Treasury with needed borrowing flexibility
immediately following the start of the financial market crisis in
2008, Treasury paid a premium for its sustained use of CMBs in 2008
and 2009. We reported in 2006 that Treasury had paid a premium for its
use of CMBs during the period of 1996 to 2005.[Footnote 13] During
that period, Treasury paid a higher yield on most CMBs than
outstanding Treasury bills of a similar maturity paid in the secondary
market. In the low-interest-rate environment during 2008 and 2009, all
debt, but particularly short-term debt, was relatively inexpensive for
Treasury; however, since the dollar amount of CMBs issued in 2008 was
5.6 times greater than the amount issued in 2007, even a small premium
could be costly.
Our analysis shows that of the 37 CMBs not issued for the SFP in 2008
and 2009, most had a higher yield when compared with outstanding
Treasury bills of a similar maturity in the secondary market. The
difference between these CMB yields and similar maturing outstanding
bills--known as the yield differential--was positive for the second
half of 2008 and all of 2009, averaging 2.7 basis points higher (or
$184 million based on the amount issued) than outstanding bills of a
similar maturity.[Footnote 14] CMBs play an important role in Treasury
debt management, and it is likely that Treasury will always need to
use CMBs, but Treasury could achieve savings by limiting the amount of
CMBs it issues.
Treasury has already begun its transition out of CMBs that are not
linked to the SFP.[Footnote 15] As part of that transition, it has
extended the average term to maturity of outstanding marketable
securities by stabilizing short-term debt issuances and transitioning
to nominal note and bond issuances. In February 2010, Treasury
officials said that they planned to stabilize nominal note and bond
issuance in the first half of 2010 and perhaps reduce nominal note and
bond issuance in the second half of 2010. As of September 2009, 28.5
percent of Treasury's debt portfolio was in bills. If Treasury does
not alter its current pattern of issuance, Treasury projects this
share will decline to 19 percent by September 2010 and to 16 percent
by September 2011. Continuing to transition out of CMBs could reduce
Treasury's borrowing costs, increase Treasury's borrowing capacity on
the short end of the yield curve, and extend the average term to
maturity of the debt portfolio.
The Medium-and Long-Term Fiscal Outlook Will Continue to Present Debt
Management Challenges:
The actions that Treasury has taken to increase borrowing in response
to the recession and financial-market crisis take place within the
context of the already-serious longer-term fiscal condition of the
federal government. As seen in figure 3, the Congressional Budget
Office (CBO) projects that under the President's fiscal year 2011
budget proposals, the debt held by the public will increase from $9.2
trillion in fiscal year 2010 to $20.3 trillion in 2020. Over this same
period, CBO projects that debt held by the public will increase from
63 percent of gross domestic product (GDP) in fiscal year 2010 to 90
percent by the end of fiscal year 2020. Our long-term simulations show
growing deficits and debt, underscoring that the long-term fiscal
outlook is unsustainable.[Footnote 16]
Figure 3: CBO's Estimate of Debt Held by the Public and Percent of
GDP, Based on the President's Budgetary Proposals, 2009 to 2020:
[Refer to PDF for image: combined vertical bar and line graph]
Fiscal year, actual: 2009;
Debt held by the public: $7.5 trillion;
Debt held by the public as a percentage of gross domestic product:
53.0%.
Fiscal year, projected: 2010;
Debt held by the public: $9.2 trillion;
Debt held by the public as a percentage of gross domestic product:
63.2%.
Fiscal year, projected: 2011;
Debt held by the public: $10.5 trillion;
Debt held by the public as a percentage of gross domestic product:
70.1%.
Fiscal year, projected: 2012;
Debt held by the public: $11.6 trillion; Debt held by the public as a
percentage of gross domestic product: 73.6%.
Fiscal year, projected: 2013;
Debt held by the public: $12.5 trillion;
Debt held by the public as a percentage of gross domestic product:
74.8%.
Fiscal year, projected: 2014;
Debt held by the public: $13.3 trillion;
Debt held by the public as a percentage of gross domestic product:
75.7%.
Fiscal year, projected: 2015;
Debt held by the public: $14.3 trillion;
Debt held by the public as a percentage of gross domestic product:
77.4%.
Fiscal year, projected: 2016;
Debt held by the public: $15.3 trillion;
Debt held by the public as a percentage of gross domestic product:
79.6%.
Fiscal year, projected: 2017;
Debt held by the public: $16.4 trillion;
Debt held by the public as a percentage of gross domestic product:
81.8%.
Fiscal year, projected: 2018;
Debt held by the public: $17.6 trillion;
Debt held by the public as a percentage of gross domestic product:
84.3%.
Fiscal year, projected: 2019;
Debt held by the public: $18.9 trillion;
Debt held by the public as a percentage of gross domestic product:
87.1%.
Fiscal year, projected: 2020;
Debt held by the public: $20.3 trillion;
Debt held by the public as a percentage of gross domestic product:
90.0%.
Source: CBO data.
[End of figure]
According to CBO, interest rates and the size of debt held by the
public will increase in the medium term, leading to higher interest
costs for the government. One way to measure the affordability of debt
held by the public is to compare interest payments with expected
revenues. As seen in figure 4, according to CBO, net interest payments
as a percentage of total revenues will increase from 9.9 percent in
fiscal year 2010 to 20.7 percent in fiscal year 2020.[Footnote 17]
Figure 4: Net Interest Payments as a Percentage of Total Revenues,
1990 to 2020:
[Refer to PDF for image: line graph]
Actual:
Fiscal year: 1990;
Net Interest Payments: 17.9%.
Fiscal year: 1991;
Net Interest Payments: 18.4%.
Fiscal year: 1992;
Net Interest Payments: 18.3%.
Fiscal year: 1993;
Net Interest Payments: 17.2%.
Fiscal year: 1994;
Net Interest Payments: 16.1%.
Fiscal year: 1995;
Net Interest Payments: 17.2%.
Fiscal year: 1996;
Net Interest Payments: 16.6%.
Fiscal year: 1997;
Net Interest Payments: 15.5%.
Fiscal year: 1998;
Net Interest Payments: 14%.
Fiscal year: 1999;
Net Interest Payments: 12.6%.
Fiscal year: 2000;
Net Interest Payments: 11%.
Fiscal year: 2001;
Net Interest Payments: 10.4%.
Fiscal year: 2002;
Net Interest Payments: 9.2%.
Fiscal year: 2003;
Net Interest Payments: 8.6%.
Fiscal year: 2004;
Net Interest Payments: 8.5%.
Fiscal year: 2005;
Net Interest Payments: 8.5%.
Fiscal year: 2006;
Net Interest Payments: 9.4%.
Fiscal year: 2007;
Net Interest Payments: 9.2%.
Fiscal year: 2008;
Net Interest Payments: 10%.
Fiscal year: 2009;
Net Interest Payments: 8.9%.
Projections:
Fiscal year: 2010;
Net Interest Payments: 9.9%.
Fiscal year: 2011;
Net Interest Payments: 9.9%.
Fiscal year: 2012;
Net Interest Payments: 10.6%.
Fiscal year: 2013;
Net Interest Payments: 11.8%.
Fiscal year: 2014;
Net Interest Payments: 13.2%.
Fiscal year: 2015;
Net Interest Payments: 14.8%.
Fiscal year: 2016;
Net Interest Payments: 16.1%.
Fiscal year: 2017;
Net Interest Payments: 17.4%.
Fiscal year: 2018;
Net Interest Payments: 18.7%.
Fiscal year: 2019;
Net Interest Payments: 19.8v
Fiscal year: 2020;
Net Interest Payments: 20.7%.
Source: GAO analysis of CBO data.
[End of figure]
Treasury says its existing suite of securities will leave Treasury
well-positioned to meet federal government borrowing needs in fiscal
year 2010. Looking beyond 2010, sustained increases in debt in the
medium and long term mean that communication with all types of
investors to accurately gauge market demand will become increasingly
important for Treasury.
Treasury and Investors Communicate through Both Formal and Informal
Channels; Market Participants Identified Challenges and Suggested
Improvements to Both:
Treasury and Investors Communicate through Both Formal and Informal
Channels:
Sufficient information from market participants, including their
likely demand for Treasury securities, is critical for debt management
decisions. Treasury receives market information through multiple
formal and informal channels. (See figure 5.) Formal communication
channels are quarterly meetings with TBAC and with the primary dealers
held as part of Treasury's quarterly refunding process. TBAC is
currently comprised of primary dealers, investment managers, hedge
funds, and a small broker dealer. According to Treasury officials,
TBAC was once more weighted towards primary dealers than it is now.
Buy-and-hold investors of Treasury securities are currently
underrepresented. TBAC quarterly meetings serve as a forum for
Treasury officials to discuss economic forecasts and the federal
government's borrowing needs with knowledgeable market participants.
Treasury officials pose questions on specific debt management issues
in advance and TBAC members present their observations to Treasury on
these issues and economic conditions. While TBAC meetings are closed
due to the sensitivity of the matters under discussion, Treasury
releases TBAC meeting minutes at a press conference 1 day after each
meeting and announces the details of its quarterly refunding and any
changes to its auction calendar or to debt management policies.
Treasury officials told us that Treasury seeks to promote market
stability by reserving the release of any new information for the
formal quarterly announcements.
Figure 5: Treasury's Office of Debt Management's (ODM) Market
Information Channels:
[Refer to PDF for image: illustration]
Treasury‘s Office of Debt Management:
Public announcements:
Domestic and foreign Treasury market investors.
Conferences/informal phone and e-mail communication:
Domestic and foreign Treasury market investors.
Quarterly meetings:
Securities Industry and Financial Markets Association (468 members).
Quarterly meetings:
Primary dealers (18 members[A]);
Treasury Borrowing Advisory Committee (14 members[A]);
These two groups function as communication intermediaries between
Treasury and investors and are generally members of SIFMA.
Source: GAO.
[A] There are five common members among TBAC and the primary dealers.
[End of figure]
Treasury also surveys all 18 primary dealers quarterly and meets with
half of them one quarter and the other half the following quarter.
Primary dealers are those banks and securities broker-dealers that are
designated by FRBNY and maintain active trading relationships with
FRBNY. Primary dealers are also required by FRBNY to participate in
all Treasury auctions. Primary dealers account for a majority of
purchases at auction, some of which they purchase for themselves and
some of which they purchase for their customers. Treasury meets with
half of the primary dealers before each quarterly refunding to obtain
estimates on borrowing, issuance, and the federal budget deficit, as
well as input on a variety of debt management discussion topics, posed
in advance. The only information about these meetings that is released
to the public is the agenda.
Treasury officials also receive information from FRBNY's Markets
Group, which has approximately 400 staff engaged in market
surveillance. FRBNY provides morning and afternoon briefings, hosts a
daily afternoon conference call, and provides a daily report on
delivery fails in the secondary market for Treasury securities.
[Footnote 18] FRBNY will also conduct specific market research at the
request of Treasury. According to Treasury officials, the Office of
Debt Management (ODM) relies on FRBNY for some of its market
information.[Footnote 19] FRBNY is able to carry out large data-
collection operations because of its greater resources, which
supplements market data Treasury already collects.
In addition to its formal communication with the market, Treasury
continually collects information through informal channels, but this
communication is not conducted or logged in a systematic manner. ODM's
informal communication includes both ad hoc and regular telephone and
e-mail contact between six ODM officials and staff and approximately
500 foreign and domestic financial organizations. Treasury also has
seven market-room staff who maintain continuous contact with market
participants. Treasury also maintains regular informal contact with
representatives of foreign central banks. In addition, Treasury
regularly contacts primary dealers to discuss operational issues in
the Treasury debt market as well to gather information about what they
expect to occur in the Treasury debt market on a given day. Treasury
staff and officials also reach out to investors by speaking at and
attending conferences sponsored by market participants and meeting
with large investors globally.
Investors Reported Mixed Satisfaction with Treasury's Receipt of
Information from End-Investors:
Responses to our survey of the largest domestic holders of Treasury
securities indicate that their views vary on the extent to which
Treasury receives sufficient information and input from end-investors.
Overall, survey responses suggested room for improvement in Treasury's
practices for gathering market information.
Our survey asked respondents the extent to which they believed
Treasury receives sufficient information and input from end-investors.
They were presented with five response categories that included very
great extent, great extent, moderate extent, some extent, and little
or no extent, as well as a no basis to judge response choice.[Footnote
20] Seventeen of the 38 respondents who answered this question on our
survey (see figure 6), answered either some extent or little or no
extent. This compares with only 10 respondents who answered very great
extent or great extent.
Figure 6: Extent to Which Survey Respondents Believe Treasury Receives
Sufficient Information from End-Investors:
[Refer to PDF for image: vertical bar graph]
Scale: Great or very great extent;
Number of survey responses: 10.
Scale: Moderate extent;
Number of survey responses: 11.
Scale: Some, little or no extent;
Number of survey responses: 17.
Source: GAO.
[End of figure]
Survey responses varied by market sector. Commercial banks and mutual
funds expressed a greater belief that Treasury receives sufficient
information and input from end-investors than did other sectors we
surveyed. (See figure 7.) At the time of our survey, the mutual-funds
sector, the sector with the largest amount of Treasury holdings in our
survey, held over $201 billion in Treasury securities. The commercial-
banking sector held $125 billion.[Footnote 21]
Figure 7: Extent to Which Commercial Banks and Mutual-Fund Respondents
Believe Treasury Receives Sufficient Information from End-Investors:
[Refer to PDF for image: stacked vertical bar graph]
Number of survey responses:
Scale: Very great extent;
Mutual funds: 1;
Commercial banking: 0.
Scale: Great extent;
Mutual funds: 1;
Commercial banking: 5.
Scale: Moderate extent;
Mutual funds: 0;
Commercial banking: 6.
Scale: some extent;
Mutual funds: 2;
Commercial banking: 2.
Scale: Little or no extent;
Mutual funds: 0;
Commercial banking: 1.
Source: GAO.
[End of figure]
In contrast to the mostly positive responses of mutual funds and
commercial banks, respondents from the remaining sectors--life
insurance companies, property casualty insurance companies, and state
and local government retirement funds--were more likely to respond
negatively.[Footnote 22] As shown in figure 8, 12 of 20 respondents
from life insurance companies, property casualty insurance companies,
and state and local government retirement funds answered some or
little or no extent when asked whether they believe Treasury currently
receives sufficient information from end-investors. Both of the life
insurance companies that completed our survey chose little or no
extent. Treasury officials have agreed that they could receive better
input from end-investors and have made it a priority to improve
investor outreach.
Figure 8: Extent to Which Life Insurance, Property Casualty Insurance,
and State and Local Government Retirement Funds Believe Treasury
Receives Sufficient Information from End-Investors:
[Refer to PDF for image: stacked vertical bar graph]
Number of survey responses:
Scale: Very great extent;
Life insurance companies: 0;
State and local government retirement funds: 0;
Property casualty insurance companies: 0.
Scale: Great extent;
Life insurance companies: 0;
State and local government retirement funds: 3;
Property casualty insurance companies: 0.
Scale: Moderate extent;
Life insurance companies: 0;
State and local government retirement funds: 3;
Property casualty insurance companies: 2.
Scale: some extent;
Life insurance companies: 0;
State and local government retirement funds: 6;
Property casualty insurance companies: 2.
Scale: Little or no extent;
Life insurance companies: 2;
State and local government retirement funds: 0;
Property casualty insurance companies: 2.
Source: GAO.
[End of figure]
The survey findings were consistent with information we received
during interviews with investors conducted in June 2009 that indicated
that many investors in liability-driven sectors, such as life
insurance and pension funds, both lack formalized means of
communication with Treasury and believe such contact would be
beneficial. These investors may have a different demand portfolio than
those in other market sectors with whom Treasury maintains closer
contact. For example, there may be greater interest in these sectors
in buy-and-hold securities like TIPS. With debt levels predicted to
continue to rise in the medium and long term, the importance of good
information from a range of investors in all sectors increases in
importance.
Market Participants and Experts Suggested Ways for Treasury to Improve
Its Collection of Information from End-Investors:
Respondents to our survey of the largest domestic holders of Treasury
securities suggested ideas for improving Treasury's collection of
information from end-investors. The most frequently suggested ideas
involved increasing the range of investors from whom Treasury obtains
information. Survey respondents told us that they thought Treasury
could better gauge market demand for securities if a broader range of
investors were represented on TBAC. Survey respondents suggested
changes such as broadening membership or rotating membership more
frequently. Multiple survey respondents told us that some types of end-
investors, particularly liability-driven investors such as insurance
companies and pensions funds, have limited formal means of
communicating their views to Treasury.
Survey respondents also suggested that Treasury could better gauge
market demand through a periodic collection of market data from a
broad range of end-investors. They suggested that the periodic data
collection could be in the form of a survey, interviews, focus groups,
or additional data reporting by market participants. These responses
echoed what market experts told us, that Treasury could benefit from
periodic "temperature-taking" of the market through surveys or
interviews and from changes to the organization or composition of the
groups from which Treasury routinely receives market information and
advice. Several survey respondents told us that a good model for a
future Treasury survey might resemble the survey we conducted. While
Treasury has not conducted a survey of end-investors in the past,
similar surveys have been conducted by organizations like SIFMA.
Treasury staff and officials agree that more inclusive representation
on TBAC would be desirable, but they also said that increasing the
number of members (to even the TBAC charter limit of 20 members) could
impede optimal committee functioning. Treasury staff told us that if
the committee were to become too large, it might be difficult to allow
enough time for members to provide feedback and contribute to
discussions. Treasury staff and officials told us that they could
broaden TBAC membership to include one or more representatives of buy-
and-hold investors such as insurance companies or endowments. Treasury
staff and officials also told us that one of Treasury's priorities is
to improve investor outreach and to collect information more
systematically. Treasury officials told us that improvements to how
Treasury communicates with investors are likely to be a priority for
ODM in 2010 and beyond.
Investors Reported Increased Demand for TIPS and Suggested Actions for
Treasury to Take That Could Improve the TIPS Market:
Investors and Market Experts Reported an Increased Demand for TIPS:
As previously noted, one challenge for Treasury will be to gauge
investor demand for Treasury securities in order to finance
historically large deficits expected in the medium and long term.
Faced with this challenge, communication with investors becomes
essential. When we surveyed major domestic holders of Treasury
securities in August 2009, many survey participants indicated that
their demand could increase for TIPS. As seen in table 1, as of July
31, 2009, survey respondents reported holding $143 billion in TIPS--
which represented approximately 26 percent of the total marketable
TIPS outstanding. This amount also constituted approximately 21
percent of the survey respondents' total portfolio of Treasury
securities. This share allocated to TIPS may indicate that our survey
respondents already viewed TIPS favorably. According to Treasury data,
TIPS generally represent a much smaller percentage of total
outstanding Treasury securities. At the time of our survey in August
2009, TIPS constituted only 8 percent of all Treasury marketable
securities outstanding.
Table 1: Survey Respondents' Reported Treasury Securities Holdings and
Future Purchases:
Dollars in billions:
Bills:
Treasury securities (as of Dec. 31, 2008): $280;
Treasury securities (as of July 31, 2009): $247;
Anticipated purchases (Aug. 1, 2009-Dec. 31, 2010): $26.
Notes:
Treasury securities (as of Dec. 31, 2008): $153;
Treasury securities (as of July 31, 2009): $189;
Anticipated purchases (Aug. 1, 2009-Dec. 31, 2010): $50.
Bonds:
Treasury securities (as of Dec. 31, 2008): $73;
Treasury securities (as of July 31, 2009): $62;
Anticipated purchases (Aug. 1, 2009-Dec. 31, 2010): $6.
TIPS:
Treasury securities (as of Dec. 31, 2008): $139;
Treasury securities (as of July 31, 2009): $143;
Anticipated purchases (Aug. 1, 2009-Dec. 31, 2010): $29.
STRIPS:
Treasury securities (as of Dec. 31, 2008): $25;
Treasury securities (as of July 31, 2009): $27;
Anticipated purchases (Aug. 1, 2009-Dec. 31, 2010): $1.
Total:
Treasury securities (as of Dec. 31, 2008): $670;
Treasury securities (as of July 31, 2009): $668;
Anticipated purchases (Aug. 1, 2009-Dec. 31, 2010): $112.
Source: GAO.
Note: Not all survey respondents were able to provide figures for
anticipated purchases of Treasury securities due to constant changes
in the value of Treasury securities relative to other investment
options.
[End of table]
Even though the survey respondents were already heavily invested in
TIPS, they indicated that they planned to greatly increase their TIPS
purchases over the next 17 months. From August 2009 through the end of
December 2010, our survey respondents said that they planned to
purchase an additional $29 billion in TIPS.
The increased investor interest in TIPS, as reported through our
survey, corroborates information we received from individual
interviews we conducted earlier with large domestic holders of
Treasury securities. The investment managers we interviewed at public
and private pension funds, mutual funds, insurance companies, and
commercial banks expressed continued or growing interest in TIPS
during 2009.
At the start of 2009, financial-market experts were recommending that
investors purchase TIPS and other inflation-protected investments.
Over the course of the year, mutual funds began reporting large
inflows into inflation-protected funds, which consist mostly of TIPS.
During 2009, the five largest inflation-protected bond mutual funds
increased their total net assets by almost 70 percent.[Footnote 23]
The largest of these funds saw its net assets increase by an average
of almost $1 billion per month in 2009. Also during 2009, one of the
largest fixed income managers introduced three new mutual funds
designed to protect investors against inflation.[Footnote 24] One of
those new funds is intended to provide a hedge against inflation but
also provide tax-efficient income by allocating at least half of its
investments to municipal bonds.[Footnote 25] The other two new funds
are intended to produce monthly income payments that consist of both
inflation-adjusted interest and principal. These two funds consist
primarily of investments in TIPS and have initial target maturity
dates of 2019 and 2029.
Recent Changes to TIPS Suggest That Treasury Is Responding to Investor
Concerns about the Liquidity of TIPS:
GAO and others have recommended that Treasury take action to improve
the liquidity of TIPS, which could lower Treasury's cost of borrowing.
[Footnote 26] Prior to 2009, holdings of Treasury securities by
sectors that we surveyed had been in decline for nearly two decades.
(As seen in figure 9.) By the onset of the financial crisis in 2008,
the share of Treasury securities relative to each sector's total
assets was less than half their historical averages for the preceding
two decades. By the end of 2007, no sector reported holding more than
5-½ percent of its total assets in Treasury securities.
Figure 9: Percentage of Total Financial Assets in Treasury Securities
by Sector (1984 to 2009):
[Refer to PDF for image: multiple line graph]
Calendar year: 1984;
Commercial banking: 8.53%;
Property-casualty insurance companies: 9.27%;
Mutual funds: 5.91%;
State and local government retirement funds: 19.6%;
Life insurance companies: 4.87%.
Calendar year: 1985;
Commercial banking: 7.97%;
Property-casualty insurance companies: 9.64%;
Mutual funds: 6.49%;
State and local government retirement funds: 21.25%;
Life insurance companies: 15.78%.
Calendar year: 1986;
Commercial banking: 7.54%;
Property-casualty insurance companies: 12.04%;
Mutual funds: 6.52%;
State and local government retirement funds: 24.2%;
Life insurance companies: 16.7%.
Calendar year: 1987;
Commercial banking: 7.01%;
Property-casualty insurance companies: 12.59%;
Mutual funds: 5.68%;
State and local government retirement funds: 26.11%;
Life insurance companies: 17.5%.
Calendar year: 1988;
Commercial banking: 6.28%;
Property-casualty insurance companies: 13.22%;
Mutual funds: 5.21%;
State and local government retirement funds: 25.25%;
Life insurance companies: 16.04%.
Calendar year: 1989;
Commercial banking: 5.11%;
Property-casualty insurance companies: 14.11%;
Mutual funds: 4.25%;
State and local government retirement funds: 21.83%;
Life insurance companies: 13.81%.
Calendar year: 1990;
Commercial banking: 5.16%;
Property-casualty insurance companies: 14.81%;
Mutual funds: 4.38%;
State and local government retirement funds: 23.05%;
Life insurance companies: 14.32%.
Calendar year: 1991;
Commercial banking: 6.75%;
Property-casualty insurance companies: 18.07%;
Mutual funds: 5.26%;
State and local government retirement funds: 19.43%;
Life insurance companies: 13.5%.
Calendar year: 1992;
Commercial banking: 8.05%;
Property-casualty insurance companies: 18.19%;
Mutual funds: 5.59%;
State and local government retirement funds: 21.7%2;
Life insurance companies: 11.13%.
Calendar year: 1993;
Commercial banking: 8.27%;
Property-casualty insurance companies: 19.38%;
Mutual funds: 6.27%;
State and local government retirement funds: 20.87%;
Life insurance companies: 9.74%.
Calendar year: 1994;
Commercial banking: 6.98%;
Property-casualty insurance companies: 19.61%;
Mutual funds: 5.75%;
State and local government retirement funds: 19.74%;
Life insurance companies: 8.83%.
Calendar year: 1995;
Commercial banking: 6.19%;
Property-casualty insurance companies: 18.02%;
Mutual funds: 5.24%;
State and local government retirement funds: 15.69%;
Life insurance companies: 7.76%.
Calendar year: 1996;
Commercial banking: 5.55%;
Property-casualty insurance companies: 15.7%;
Mutual funds: 4.15v;
State and local government retirement funds: 14.1%;
Life insurance companies: 5.37%.
Calendar year: 1997;
Commercial banking: 5.21%;
Property-casualty insurance companies: 10.8%;
Mutual funds: 3.4%;
State and local government retirement funds: 12.2%;
Life insurance companies: 4.56%.
Calendar year: 1998;
Commercial banking: 3.8%;
Property-casualty insurance companies: 8.03%;
Mutual funds: 2.58%;
State and local government retirement funds: 10.47%;
Life insurance companies: 3.9%.
Calendar year: 1999;
Commercial banking: 3.82%;
Property-casualty insurance companies: 6.97%;
Mutual funds: 2.05%;
State and local government retirement funds: 8.55%;
Life insurance companies: 2.58%.
Calendar year: 2000;
Commercial banking: 2.75v;
Property-casualty insurance companies: 6.07%;
Mutual funds: 1.85%;
State and local government retirement funds: 7.81%;
Life insurance companies: 2.87%.
Calendar year: 2001;
Commercial banking: 2.28%;
Property-casualty insurance companies: 6.09%;
Mutual funds: 1.66%;
State and local government retirement funds: 7.03%;
Life insurance companies: 2.84%.
Calendar year: 2002;
Commercial banking: 2.68%;
Property-casualty insurance companies: 6.55%;
Mutual funds: 2.35%;
State and local government retirement funds: 8.23%;
Life insurance companies: 3.71%.
Calendar year: 2003;
Commercial banking: 1.6%;
Property-casualty insurance companies: 6.11%;
Mutual funds: 1.9%;
State and local government retirement funds: 6.33%;
Life insurance companies: 3.1%.
Calendar year: 2004;
Commercial banking: 1.19%;
Property-casualty insurance companies: 6.15%;
Mutual funds: 1.9%;
State and local government retirement funds: 5.86%;
Life insurance companies: 2.74%.
Calendar year: 2005;
Commercial banking: 0.99%;
Property-casualty insurance companies: 5.55%;
Mutual funds: 2.1%;
State and local government retirement funds: 5.65%;
Life insurance companies: 2.57%.
Calendar year: 2006;
Commercial banking: 0.88%;
Property-casualty insurance companies: 5.67%;
Mutual funds: 1.78%;
State and local government retirement funds: 5.05%;
Life insurance companies: 2.27%.
Calendar year: 2007;
Commercial banking: 0.95%;
Property-casualty insurance companies: 3.99%;
Mutual funds: 1.38%;
State and local government retirement funds: 5.25%;
Life insurance companies: 2.29%.
Calendar year: 2008;
Commercial banking: 0.67%;
Property-casualty insurance companies: 4.2%;
Mutual funds: 2.34%;
State and local government retirement funds: 7.5%;
Life insurance companies: 3.46%.
Calendar year: Q1-2009;
Commercial banking: 0.81%;
Property-casualty insurance companies: 4.3%;
Mutual funds: 2.83%;
State and local government retirement funds: 7.97%;
Life insurance companies: 3.78%.
Calendar year: Q2-2009;
Commercial banking: 0.87%;
Property-casualty insurance companies: 4.23%;
Mutual funds: 2.95%;
State and local government retirement funds: 7.29%;
Life insurance companies: 3.45%.
Calendar year: Q3-2009;
Commercial banking: 1.26%;
Property-casualty insurance companies: 4.15%;
Mutual funds: 2.96%;
State and local government retirement funds: 6.81%;
Life insurance companies: 3.19%.
Source: GAO analysis of Federal Reserve data .
[End of figure]
In 2009, Treasury decided to increase TIPS issuance, reversing the
trend of the past few years. As we previously reported, Treasury
reduced the annual gross amount of TIPS issuance by 19 percent from
2006 to 2008. Treasury then gradually increased total TIPS issuance in
2009 by 4 percent to $58 billion. During the August 2009 TBAC press
conference, Treasury officials stated that they are committed to the
TIPS program and to issuing TIPS in a regular and predictable manner
across the yield curve. Further, during the November 2009 and February
2010 TBAC meetings, Treasury officials announced that they planned to
gradually increase TIPS issuance and would consider making changes to
the TIPS auction calendar by increasing the number of TIPS auctions.
These changes, which are meant to improve TIPS liquidity, are based on
Treasury's own analysis and on input that Treasury received from
market participants and GAO. At the time of this report, Treasury had
already begun to increase TIPS issuance. The size of the 10-year TIPS
auction held in January 2010 was $10 billion--an increase of 25
percent over the previous 10-year TIPS auctions that held in July 2009.
If investors continue to express and demonstrate interest in TIPS,
Treasury may be able to issue a greater amount of TIPS at a lower cost
than in past years. Survey respondents who anticipated a change in
their demand for TIPS said that any reallocation into TIPS would most
likely be drawn from holdings of nominal Treasury securities or non-
Treasury assets. Investments into TIPS were less likely to come from
an overall increase in total assets. As previously reported, if
Treasury has to increase the supply of nominal securities
substantially to fund larger deficits, yields may have to rise in
order to attract enough buyers due to the saturation of the nominal
Treasury market.[Footnote 27] Therefore, issuing TIPS may make sense
since a substantial shift in the composition of Treasury issuance into
TIPS from nominal Treasuries could also lead to lower interest rates
paid on the remaining nominal Treasury issuance. The most common
reasons cited by our survey respondents for this specific anticipated
shift into TIPS were inflation protection and TIPS' valuation relative
to other investments--the same reasons most often cited for a general
interest in TIPS. Compared to other sectors that we surveyed, mutual
fund companies and state and local government retirement funds also
responded that some of their investments in TIPS were dedicated based
upon active allocation decisions made by clients.
Treasury has also responded to investor concern about the maturity of
TIPS issued across the yield curve by reintroducing the 30-year TIPS.
At the November 2009 TBAC meeting, there was general consensus to
eliminate the 20-year TIPS and replace it with the 30-year TIPS. TBAC
members thought this change may allow Treasury to lower its cost of
borrowing while it would create a TIPS issue that could be better
compared to the 30-year nominal issuance point. Following the TBAC
meeting, Treasury announced that it would discontinue the auctions of
the 20-year TIPS and reintroduce the 30-year TIPS starting in February
2010.[Footnote 28]
Options Exist to Improve TIPS Auction Participation, Which Could
Improve TIPS Liquidity:
As we reported previously, investors demand a premium for less-liquid
TIPS, which increases Treasury's borrowing costs.[Footnote 29] Through
our survey, market participants identified a number of options to
improve participation at TIPS auctions, which could improve TIPS
liquidity. Most respondents to our survey were more likely to purchase
TIPS in the secondary market rather than at auction. The most common
reasons listed for this were infrequency of TIPS auctions, portfolio
needs, relative valuation, and liquidity. On average, survey
respondents planned to purchase almost 80 percent of their TIPS in the
secondary market. Over half of survey respondents said that although
they never participate in Treasury auctions, they were active in the
secondary market at least monthly.
Survey respondents said that increasing the dollar amount of TIPS
issued per auction and increasing the frequency of TIPS auctions could
help improve participation during TIPS auctions. Survey respondents
also pointed out that a clearer commitment from Treasury to the TIPS
program would improve TIPS liquidity. In interviews with us in
February 2010, some primary dealers said that Treasury should modify
its current TIPS auction schedule to decrease the amount of time
between TIPS auctions, thereby staggering the supply of TIPS so that
issuance is not as concentrated. Since 2005, Treasury has held eight
TIPS auctions every calendar year--two auctions each in January,
April, July and October. At the May 2010 TBAC press conference, the
Assistant Secretary for Financial Markets, Mary Miller, said that
Treasury will be adding a second reopening of the 10-year TIPS, which
would lead to six 10-year TIPS auctions a year. According to Treasury,
these changes would help improve TIPS liquidity while diversifying its
funding sources.
A More Liquid TIPS Market Could Support a TIPS Futures Market, Which
in Turn Could Further Enhance the TIPS Market:
The combination of increased TIPS issuance, Treasury's statements of
commitment to TIPS, and the reintroduction of the longer-dated 30-year
TIPS, could help sustain a viable TIPS futures market.[Footnote 30] In
interviews and in published material, some financial-market experts
have noted the lack of a viable futures trading market for TIPS. Some
of these experts have speculated that a successful futures contract
could bolster the liquidity of TIPS. In a public discussion with the
Chicago Mercantile Exchange Group (CME) in March 2009, Acting
Assistant Secretary for Financial Markets Karthik Ramanathan explained
that futures products help increase the liquidity, depth, and price
transparency of the U.S. Treasury market.
According to market experts, however, the lack of liquidity in the
current TIPS market would make it difficult to sustain a viable TIPS
futures product. In interviews with GAO in February 2010, primary
dealers expressed different opinions on the structure of a potential
inflation futures contract. We heard preferences for both a cash-
settled index as the basis for an inflation futures contract and also
an inflation futures contract with a basket of deliverables similar to
how futures contracts for nominal securities are structured. Primary
dealers told us that if TIPS were to become more liquid, then a TIPS
futures contract might succeed, and that this in turn could further
increase the liquidity of TIPS.
One of the Most Important Groups through Which Treasury Receives
Market Information Has Expressed Concerns about the Increase in Direct
Bidding in Treasury Auctions:
One of Treasury's important channels of communication is with primary
dealers. Primary dealers that we interviewed told us that they are
satisfied with their communication with Treasury. They told us they
had recently raised concerns about what they see as consequences of
the recent increase in direct bidding in Treasury auctions.
Direct bidders are financial institutions that, like primary dealers,
can bid for and buy Treasury securities competitively at auction
directly from Treasury instead of in the secondary market. Unlike
primary dealers, direct bidders are not required to participate in all
Treasury auctions. Most Treasury securities are bought at auction by
primary dealers. A much smaller, but growing volume of securities is
purchased by direct bidders.[Footnote 31]
In April 2004, Treasury stated that there were 825 "investors" making
use of the auction system that allows direct bidding. Three months
later, a Treasury press release announcing the new version of
TAAPSLink, the communications system through which auction market
participants are provided Internet-based access to Treasury auctions,
said that over 600 "firms" used the on-line bidding system.[Footnote
32] This is the most recent information that Treasury has disclosed to
the market on the potential number of direct bidders at an auction.
Direct bidding has grown in size and volatility since 2008. Figure 10
illustrates both the overall increase in participation and the
volatility of that participation. Direct bidder purchase share in
auctions for 5-and 10-year notes and 30-year bonds began to trend
upward and show greater variation starting on October 30, 2008, and
then hit a 5-year high of almost 30 percent at the March 11, 2010,
auction of 30-year bonds. During this period, the average direct-
bidder purchase share of 5-and 10-year notes and 30-year bonds was 5.8
percent with a standard deviation of 5.3 percentage points. This
contrasts with the period between May 5, 2003, and October 30, 2008,
when direct bidders purchased an average of only 1.6 percent of 5-and
10-year notes and 30-year bonds. The standard deviation during this
time period was 3.9 percentage points.
Figure 10: Percentage of 5-and 10-year Notes and 30-year Bonds
Purchased by Direct Bidders at Treasury Securities Auctions (May 2003-
February 2010):
[Refer to PDF for image: line graph]
Date: May 2003;
Percent of auction purchased by direct bidders: 0;
Percent of auction purchased by direct bidders: 0;
Percent of auction purchased by direct bidders: 0;
Percent of auction purchased by direct bidders: 0;
Percent of auction purchased by direct bidders: 0;
Percent of auction purchased by direct bidders: 0.
Date: September 2003;
Percent of auction purchased by direct bidders: 0;
Percent of auction purchased by direct bidders: 0;
Percent of auction purchased by direct bidders: 0;
Percent of auction purchased by direct bidders: 1;
Percent of auction purchased by direct bidders: 2;
Percent of auction purchased by direct bidders: 1.
Date: January 2004;
Percent of auction purchased by direct bidders: 0;
Percent of auction purchased by direct bidders: 0;
Percent of auction purchased by direct bidders: 0;
Percent of auction purchased by direct bidders: 2;
Percent of auction purchased by direct bidders: 0;
Percent of auction purchased by direct bidders: 0.
Date: May 2004;
Percent of auction purchased by direct bidders: 1;
Percent of auction purchased by direct bidders: 1;
Percent of auction purchased by direct bidders: 0;
Percent of auction purchased by direct bidders: 0;
Percent of auction purchased by direct bidders: 4;
Percent of auction purchased by direct bidders: 0;
Percent of auction purchased by direct bidders: 0.
Date: September 2004;
Percent of auction purchased by direct bidders: 32;
Percent of auction purchased by direct bidders: 1;
Percent of auction purchased by direct bidders: 1;
Percent of auction purchased by direct bidders: 0;
Percent of auction purchased by direct bidders: 0;
Percent of auction purchased by direct bidders: 0;
Percent of auction purchased by direct bidders: 0.
Date: January 2005;
Percent of auction purchased by direct bidders: 0;
Percent of auction purchased by direct bidders: 0;
Percent of auction purchased by direct bidders: 1;
Percent of auction purchased by direct bidders: 7;
Percent of auction purchased by direct bidders: 6;
Percent of auction purchased by direct bidders: 0.
Date: May 2005;
Percent of auction purchased by direct bidders: 1;
Percent of auction purchased by direct bidders: 19;
Percent of auction purchased by direct bidders: 1;
Percent of auction purchased by direct bidders: 0;
Percent of auction purchased by direct bidders: 2;
Percent of auction purchased by direct bidders: 3;
Percent of auction purchased by direct bidders: 1.
Date: September 2005;
Percent of auction purchased by direct bidders: 1;
Percent of auction purchased by direct bidders: 2;
Percent of auction purchased by direct bidders: 15;
Percent of auction purchased by direct bidders: 9;
Percent of auction purchased by direct bidders: 1;
Percent of auction purchased by direct bidders: 1;
Percent of auction purchased by direct bidders: 2.
Date: January 2006;
Percent of auction purchased by direct bidders: 1;
Percent of auction purchased by direct bidders: 2;
Percent of auction purchased by direct bidders: 0;
Percent of auction purchased by direct bidders: 1;
Percent of auction purchased by direct bidders: 1;
Percent of auction purchased by direct bidders: 1;
Percent of auction purchased by direct bidders: 8.
Date: May 2006;
Percent of auction purchased by direct bidders: 1;
Percent of auction purchased by direct bidders: 2;
Percent of auction purchased by direct bidders: 1;
Percent of auction purchased by direct bidders: 2;
Percent of auction purchased by direct bidders: 1;
Percent of auction purchased by direct bidders: 1;
Percent of auction purchased by direct bidders: 1;
Percent of auction purchased by direct bidders: 1.
Date: September 2006;
Percent of auction purchased by direct bidders: 0;
Percent of auction purchased by direct bidders: 0;
Percent of auction purchased by direct bidders: 1;
Percent of auction purchased by direct bidders: 1;
Percent of auction purchased by direct bidders: 1;
Percent of auction purchased by direct bidders: 0;
Percent of auction purchased by direct bidders: 1.
Date: January 2007;
Percent of auction purchased by direct bidders: 0;
Percent of auction purchased by direct bidders: 1;
Percent of auction purchased by direct bidders: 12;
Percent of auction purchased by direct bidders: 1;
Percent of auction purchased by direct bidders: 0;
Percent of auction purchased by direct bidders: 2;
Percent of auction purchased by direct bidders: 0.
Date: May 2007;
Percent of auction purchased by direct bidders: 1;
Percent of auction purchased by direct bidders: 1;
Percent of auction purchased by direct bidders: 1;
Percent of auction purchased by direct bidders: 2;
Percent of auction purchased by direct bidders: 0;
Percent of auction purchased by direct bidders: 0;
Percent of auction purchased by direct bidders: 0;
Percent of auction purchased by direct bidders: 0;
Percent of auction purchased by direct bidders: 0.
Date: September 2007;
Percent of auction purchased by direct bidders: 0;
Percent of auction purchased by direct bidders: 0;
Percent of auction purchased by direct bidders: 1;
Percent of auction purchased by direct bidders: 0;
Percent of auction purchased by direct bidders: 1;
Percent of auction purchased by direct bidders: 0;
Percent of auction purchased by direct bidders: 1;
Percent of auction purchased by direct bidders: 1.
Date: January 2008;
Percent of auction purchased by direct bidders: 1;
Percent of auction purchased by direct bidders: 1;
Percent of auction purchased by direct bidders: 0;
Percent of auction purchased by direct bidders: 1;
Percent of auction purchased by direct bidders: 5;
Percent of auction purchased by direct bidders: 1;
Percent of auction purchased by direct bidders: 0.
Date: May 2008;
Percent of auction purchased by direct bidders: 1;
Percent of auction purchased by direct bidders: 1;
Percent of auction purchased by direct bidders: 1;
Percent of auction purchased by direct bidders: 0;
Percent of auction purchased by direct bidders: 0;
Percent of auction purchased by direct bidders: 1;
Percent of auction purchased by direct bidders: 1;
Percent of auction purchased by direct bidders: 0;
Percent of auction purchased by direct bidders: 1.
Date: September 2008;
Percent of auction purchased by direct bidders: 1;
Percent of auction purchased by direct bidders: 0;
Percent of auction purchased by direct bidders: 0;
Percent of auction purchased by direct bidders: 0;
Percent of auction purchased by direct bidders: 1;
Percent of auction purchased by direct bidders: 0;
Percent of auction purchased by direct bidders: 14;
Percent of auction purchased by direct bidders: 5;
Percent of auction purchased by direct bidders: 5;
Percent of auction purchased by direct bidders: 2;
Percent of auction purchased by direct bidders: 0;
Percent of auction purchased by direct bidders: 8.
Date: January 2009;
Percent of auction purchased by direct bidders: 0;
Percent of auction purchased by direct bidders: 1;
Percent of auction purchased by direct bidders: 2;
Percent of auction purchased by direct bidders: 16;
Percent of auction purchased by direct bidders: 2;
Percent of auction purchased by direct bidders: 3;
Percent of auction purchased by direct bidders: 10;
Percent of auction purchased by direct bidders: 2;
Percent of auction purchased by direct bidders: 4;
Percent of auction purchased by direct bidders: 2.
Date: May 2009;
Percent of auction purchased by direct bidders: 4;
Percent of auction purchased by direct bidders: 4;
Percent of auction purchased by direct bidders: 3;
Percent of auction purchased by direct bidders: 9;
Percent of auction purchased by direct bidders: 6;
Percent of auction purchased by direct bidders: 3;
Percent of auction purchased by direct bidders: 13;
Percent of auction purchased by direct bidders: 2;
Percent of auction purchased by direct bidders: 2;
Percent of auction purchased by direct bidders: 2;
Percent of auction purchased by direct bidders: 9;
Percent of auction purchased by direct bidders: 3.
Date: September 2009;
Percent of auction purchased by direct bidders: 2;
Percent of auction purchased by direct bidders: 3;
Percent of auction purchased by direct bidders: 11;
Percent of auction purchased by direct bidders: 5;
Percent of auction purchased by direct bidders: 9;
Percent of auction purchased by direct bidders: 3;
Percent of auction purchased by direct bidders: 5;
Percent of auction purchased by direct bidders: 12;
Percent of auction purchased by direct bidders: 3;
Percent of auction purchased by direct bidders: 9;
Percent of auction purchased by direct bidders: 7;
Percent of auction purchased by direct bidders: 13.
Date: January 2010
Percent of auction purchased by direct bidders: 17.
Source: GAO analysis of Treasury data.
Note: The frequency of issuance of the 5-and 10-year notes and 30-year
bond varied between May 2003 and January 2010.
[End of figure]
Primary dealers have made public statements expressing concerns about
both the increase and the unpredictable role of direct bidders in
Treasury auctions. Through interviews, we learned that they had
expressed their concerns to both Treasury and the FRBNY. Primary
dealers said they believe both more direct bidding and the increase in
the volatility of direct bidding "dis-incentivizes" primary dealers
because it means they have less certainty of information surrounding a
particular Treasury auction. For example, if an investor purchases
Treasury securities directly at auction instead of going through a
primary dealer, a primary dealer could have less information available
about the auction. Volatility in direct bidding also increases
uncertainty. Increased uncertainty could lead to primary dealers
making less aggressive bids, which could lead to increased borrowing
costs for Treasury. Some primary dealers also told us that an overall
lack of transparency regarding direct bidding potentially contributes
to "sloppy auctions." A sloppy auction typically means poor reception
or demand for a Treasury auction relative to what was expected and
leads to higher yields at the auction. Treasury officials told us that
they have not seen any evidence of this and have also stated publicly
that Treasury supports broad access to the auction process and that
direct bidding fosters competition, therefore helping achieve its goal
of the lowest cost of borrowing over time.
According to primary dealers that we interviewed, part of the lack of
transparency surrounding direct bidding comes from not knowing the
exact number of direct bidders that could potentially bid at each
auction and what sectors of the market they represent. One source of
information that provides a breakdown of auction results by sector is
Treasury's data on Investor Class Auction Allotments, which is
released on the 7th business day of each month.[Footnote 33] Primary
dealers that we spoke with said that if Treasury were to provide this
data on a more frequent basis it might alleviate some of the
uncertainty that currently exists in the market.
Conclusions:
In 2008 and 2009, Treasury successfully raised unprecedented amounts
of cash in a very short period of time. However, absent policy
changes, the medium-and long-term fiscal outlook means that Treasury
will have to continue to raise significant amounts of cash, while
achieving its goal of the lowest cost of borrowing over time. Raising
significant amounts of cash at the lowest cost of borrowing over time
requires sufficient and competitive participation at auctions.
Information from market participants on their demand for Treasury
securities, including the type of information that we received from
our survey of the largest domestic holders of Treasury securities, is
critical to this effort.
Treasury initially raised cash to meet TARP and Recovery Act needs by
issuing primarily short-term debt, including CMBs, dramatically
changing the composition of its debt portfolio. In 2009, Treasury
began to take steps to return the composition of its debt portfolio to
its pre-market crisis structure. In September 2009 we reported that a
more robust TIPS program could benefit Treasury by diversifying and
expanding its funding sources and reducing the cost of nominal
securities. Treasury reaffirmed its commitment to TIPS and announced
plans to gradually increase issuance of TIPS.[Footnote 34] Through our
survey of the largest domestic holders of Treasury securities in
August 2009, we found that Treasury can improve the extent to which it
receives sufficient information from end-investors. We also found that
options exist for Treasury to increase investor participation in TIPS
auctions and further improve TIPS liquidity. We briefed Treasury on
the findings contained in this report in October 2009, December 2009,
and March 2010.
Recommendations for Executive Action:
The Secretary of the Treasury should continually review methods for
collecting market information and consider the following actions to
help gauge investor demand in the context of projected sustained
increases in federal debt:
* conducting a systematic and periodic survey of the largest holders
of Treasury securities in all sectors, and:
* increasing the number of representatives on TBAC and ensuring
diverse representation by including members that represent end-
investors.
The Secretary of the Treasury should continue to reduce the amount and
term to maturity of CMBs, when appropriate.
The Secretary of the Treasury should consider increasing the number of
TIPS auctions and distributing them more evenly throughout the year in
order to improve participation in TIPS auctions.
The Secretary of the Treasury should study whether the recent increase
in direct bidding at Treasury auctions has changed Treasury's overall
cost of borrowing. As part of this study, Treasury should consider
options to promote transparency surrounding direct bidding that would
not discourage participation or affect Treasury's goal of fostering
competition at auctions, including releasing its data on Investor
Class Auction Allotments more frequently.
Agency Comments and Our Evaluation:
We requested comments on a draft of this report from the Secretary of
the Treasury and received e-mailed comments on behalf of the Treasury
from its Deputy Assistant Secretary of Federal Finance. Treasury
agreed with our findings, conclusions, and recommendations, and said
that the report captured Treasury's actions clearly and succinctly.
Treasury officials also pointed out that at the May 2010 quarterly
refunding, they announced that (1) they are increasing the frequency
of investor class data releases, and (2) they decided to increase the
frequency of 10-year TIPS auctions, both of which are consistent with
our recommendations. Treasury also provided technical comments, which
are incorporated into the report where appropriate.
We are sending copies of this report to interested congressional
committees, the Secretary of the Treasury, and other interested
parties. In addition, the report is available at no charge on the GAO
Web site at [hyperlink, http://www.gao.gov].
If you or your staff have any questions concerning this report, please
contact Susan J. Irving at (202) 512-6806 or irvings@gao.gov. Contact
points for our Offices of Congressional Relations and Public Affairs
may be found on the last page of this report. GAO staff making key
contributions to this report are listed in appendix IV.
Signed by:
Susan J. Irving:
Director for Federal Budget Analysis Strategic Issues:
List of Committees:
The Honorable Daniel K. Inouye:
Chairman:
The Honorable Thad Cochran:
Vice Chairman:
Committee on Appropriations:
United States Senate:
The Honorable Christopher J. Dodd:
Chairman:
The Honorable Richard C. Shelby:
Ranking Member:
Committee on Banking, Housing, and Urban Affairs:
United States Senate:
The Honorable Kent Conrad:
Chairman:
The Honorable Judd Gregg:
Ranking Member:
Committee on the Budget:
United States Senate:
The Honorable Max Baucus:
Chairman:
The Honorable Charles E. Grassley:
Ranking Member:
Committee on Finance:
United States Senate:
The Honorable David R. Obey:
Chairman:
The Honorable Jerry Lewis:
Ranking Member:
Committee on Appropriations:
House of Representatives:
The Honorable John M. Spratt, Jr.
Chairman:
The Honorable Paul Ryan:
Ranking Member:
Committee on the Budget:
House of Representatives:
The Honorable Barney Frank:
Chairman:
The Honorable Spencer Bachus:
Ranking Member:
Committee on Financial Services:
House of Representatives:
The Honorable Sander M. Levin:
Acting Chairman:
The Honorable Dave Camp:
Ranking Member:
Committee on Ways and Means:
House of Representatives:
[End of section]
Appendix I: Methodology for the Analysis of the Cash Management Bill
Yield Differential:
We analyzed the yield differential for all cash management bills (CMB)
issued over a 2-year period beginning on January 1, 2008, and ending
on December 31, 2009, removing from our analysis any cash management
bills that were used for the Supplementary Financing Program (SFP). We
used two methods to analyze the yield differential between CMBs and
equivalent regular 4-, 13-, 26-, or 52-week Department of the Treasury
(Treasury) bills. First, we compared CMB yields to recently auctioned
Treasury bills of similar maturity. Second, we compared CMB yields to
average secondary market yields on Treasury bills of similar maturity.
There are limitations to both of these yield differential estimates.
Neither captures any effect from the announcement of CMBs on yields
for similar maturing bills. If the announcement of a CMB increased the
yield on similar maturing bills, then our estimate may be understated.
Also, in some cases, the surrounding Treasury bills we used could
include CMBs that were reopenings of regular Treasury bills. This
would also lead to an understatement of the yield differential because
the yield on the outstanding securities including CMBs would be higher
than outstanding securities that did not include CMBs.
CMB Yields Compared to Recently Auctioned Treasury Bills of Similar
Maturity:
We compared CMB yields with the yields of similar Treasury bills that
were auctioned the same day, or immediately before and after the date
of the CMB auction. Once we identified two Treasury bills (one
auctioned before and one after each CMB) with a maturity closest to
the CMB, we derived a weighted average yield for the two bills. The
weights were based on the relative difference in each bill's auction
date from that of the CMB, with the Treasury bill having a closer
auction date receiving a greater weight and the weights summing to 1.
Then, the weighted average Treasury bill yield was subtracted from the
CMB auction yield to obtain the yield differential. In the final step,
the yield differential was applied to the dollar amount of the CMB to
obtain an estimate of the cost of issuing a CMB instead of a regular
Treasury bill.
CMB Yields Compared to Average Secondary Market Yields on Treasury
Bills of Similar Maturity:
Taking a second approach, we also calculated the difference between a
CMB's yield and the average secondary market yield on other Treasury
bills that are most similar (in terms of maturity) to the CMB on the
day of auction.[Footnote 35] That is, we compared CMB yields with
yields on the nearest-maturing Treasury bills--either same day
maturity, or one maturing before the CMB and one after. The CMB yields
were obtained from the Bureau of the Public Debt while rates on
similar-maturity outstanding Treasury bills were obtained from the
Wall Street Journal. Due to the availability of Wall Street Journal
data at the time of our analysis, the secondary market yield
differential could only be calculated for the second half of 2008, but
was calculated for all of 2009. For each Treasury bill, the asked
yield was identified. Next, the weighted average yield for the two
bills nearest in maturity to the CMB was derived. The weights were
based on the relative difference in each bill's maturity date from
that of the CMB, with the Treasury bill having a closer maturity date
receiving a greater weight and the weights summing to 1. Then, the
weighted average Treasury bill yield was subtracted from the CMB
auction yield to obtain the yield differential. In the final step, the
yield differential was applied to the dollar amount of the CMB to
obtain an estimate of the cost of issuing a CMB instead of a regular
Treasury bill.
[End of section]
Appendix II: Survey Scope and Methodology:
To help achieve our objective of determining what changes the
Department of the Treasury (Treasury) could make to better gauge end-
investor demand and increase auction participation, we conducted a Web-
based survey of domestic institutional investors in Treasury
securities.
Population and Sample Design:
In June 2009, we conducted 12 structured interviews with the two
largest holders of Treasury securities in each of the following
sectors: mutual funds; commercial banks; life insurance companies;
property casualty insurance companies; state and local government
retirement funds; and private pension funds. Based on what we learned
in these interviews, in August 2009 we conducted a more comprehensive
Web-based survey that was sent to the 12 holders of Treasury
securities that we interviewed in June, as well as to additional
holders of Treasury securities in each sector, with the exception of
private pension funds. Private pension funds were excluded from the
Web-based survey because our initial interviews revealed that their
funds are managed primarily by external investment management
companies represented in other sectors. Neither the structured
interviews nor the Web-based survey are generalizible.
We established two criteria for inclusion of a sector in the
nonprobability sample for our 12 structured interviews. First, the
sector had to have Treasury holdings in the top 20 of all sectors as
of the third quarter of 2008, according to table L.209 of the Flow of
Funds Account of the United States. Second, the sector had to be
identified by market experts that we interviewed in February 2009 as
having the potential to purchase large quantities of Treasury
securities in the future. Both criteria were used to ensure that the
sectors have a relevant financial stake in Treasury markets.
The household sector and federal-government retirement funds sector
were identified by the criteria, but not included in our sample. The
household sector was not included due to the difficulty of
identifying, ranking, and contacting individual household investors.
In addition, it would have been beyond our ability to survey a
sufficient number of households to reach the 50 percent market-share
criterion that we later applied to the other sectors. The federal-
government retirement funds sector was not included because the Thrift
Savings Plan does not invest in nominal Treasury securities and
Treasury Inflation Protected Securities (TIPS), and therefore, it was
outside the scope of our survey.
To identify the organizations within each sector that would receive
our Web-based survey, we used rankings of the largest organizations in
each sector based on total assets (or an equivalent financial
indicator).[Footnote 36] From these ranked lists, we determined
Treasury holdings for each organization, and selected as many
organizations as needed to represent at least 50 percent of the total
amount of Treasury holdings for that sector (based on table L.209 of
the Flow of Funds Account of the United States, as of the third
quarter 2008).[Footnote 36]
Survey Administration and Response Rates:
Table 2: Recipients, Respondents, and Treasury Holdings by Sector:
Sector: Mutual fund;
Total recipients of survey: 27;
Total completed surveys: 18;
Response rate (percent): 67;
Treasury holdings reported in survey (as of July 31, 2009): $473
billion.
Sector: Commercial banking;
Total recipients of survey: 7;
Total completed surveys: 4;
Response rate (percent): 57;
Treasury holdings reported in survey (as of July 31, 2009): $32
billion.
Sector: Property casualty insurance;
Total recipients of survey: 10;
Total completed surveys: 9;
Response rate (percent): 90;
Treasury holdings reported in survey (as of July 31, 2009): $41
billion.
Sector: Life insurance;
Total recipients of survey: 3;
Total completed surveys: 2;
Response rate (percent): 67;
Treasury holdings reported in survey (as of July 31, 2009): $36
billion.
Sector: State and local government retirement fund;
Total recipients of survey: 19;
Total completed surveys: 16;
Response rate (percent): 84;
Treasury holdings reported in survey (as of July 31, 2009): $86
billion.
Source: GAO.
[End of table]
Analysis of Open-Ended Responses:
Several survey questions solicited open-ended responses from
respondents. To analyze the responses to these questions, two GAO
analysts separately reviewed the responses and identified themes for
each item. They then developed a mutual list, which was used to
independently code survey responses. Independently coded responses
were then compared and successfully coded at 80 percent agreement or
higher, with any remaining disagreements reconciled through
discussion. At least 80 percent agreement was obtained in all cases.
The coded responses were then used in two ways: (1) to obtain a sense
of the range of perspectives on a given point, and (2) to obtain an
idea of the frequency or extent to which a particular viewpoint or
perspective was held by our survey respondents.
[End of section]
Appendix III: Survey Instrument:
Survey Respondent:
1. Please provide the following information for the organization and
the person primarily responsible for completing this survey in case we
need to contact you to clarify a response.
Organization name:
Contact name (first and last):
Telephone (Include area code):
E-mail address:
Treasury Auctions and Holdings:
2. For the following types of Treasury securities that your
organization may purchase at auction, at what frequency does it
usually do so? (Select one answer in each row.)
a. Bills:
Daily:
Weekly:
Monthly
At every auction:
Other (Specify below):
b. Notes:
Daily:
Weekly:
Monthly
At every auction:
Other (Specify below):
c. Bonds:
Daily:
Weekly:
Monthly
At every auction:
Other (Specify below):
d. TIPS:
Daily:
Weekly:
Monthly
At every auction:
Other (Specify below):
If you answered "Other" above, please enter the frequency of purchase
at auction below.
a. Bills:
b. Notes:
c. Bonds:
d. TIPS:
3. For the following types of Treasury securities that your
organization may purchase in the secondary market, at what frequency
does it usually do so? (Select one answer in each row.)
Weekly Monthly Other
(Specify below)
a. Bills:
Daily:
Weekly:
Monthly
At every auction:
Other (Specify below):
b. Notes:
Daily:
Weekly:
Monthly
At every auction:
Other (Specify below):
c. Bonds:
Daily:
Weekly:
Monthly
At every auction:
Other (Specify below):
d. TIPS:
Daily:
Weekly:
Monthly
At every auction:
Other (Specify below):
e. STRIPS:
Daily:
Weekly:
Monthly
At every auction:
Other (Specify below):
If you answered "Other" above, please enter the frequency of purchase
in the secondary market below.
a. Bills:
b. Notes:
c. Bonds:
d. TIPS:
e. STRIPS:
4. What factors influence your organization's choice to purchase
Treasury securities at auction rather than in the secondary market?
(Check all answers that apply in each row.)
a. Nominals:
Relative valuation:
Amount:
Timing of auction:
Liquidity:
Portfolio needs:
Other (Specify below):
b. TIPS:
Relative valuation:
Amount:
Timing of auction:
Liquidity:
Portfolio needs:
Other (Specify below):
a. Nominals:
b. TIPS:
5. What factors influence your organization's choice to purchase
Treasury securities in the secondary market rather than at auction?
(Check all answers that apply in each row.)
a. Nominals:
Relative valuation:
Amount:
Timing of auction:
Liquidity:
Portfolio needs:
Other (Specify below):
b. TIPS:
Relative valuation:
Amount:
Timing of auction:
Liquidity:
Portfolio needs:
Other (Specify below):
If you answered "Other" above, please enter the factor(s) influencing
your purchase in the secondary market.
a. Nominals:
b. TIPS:
6. What amounts of the following types of Treasury securities did your
organization hold as of the following dates and what would you
estimate to be the change in the amount of Treasury securities held by
your organization between August 1, 2009 and the end of 2010?
(Enter dollars in billions. Use a decimal to show the portion of a
billion; for example, 500 million would be entered as 0.5 billion; one-
and-a-half billion would be entered as 1.5 billion, etc. For the
anticipated changes, please include a minus sign preceding the dollar
amount to indicate a decrease.)
Treasury Bills:
Amount held as of December 31, 2008:
Amount held as of July 31, 2009:
Anticipated change between August 1, 2009 and the end of 2010 (Please
include a minus sign to indicate a decrease.)
Treasury Notes:
Amount held as of December 31, 2008:
Amount held as of July 31, 2009:
Anticipated change between August 1, 2009 and the end of 2010 (Please
include a minus sign to indicate a decrease.)
Treasury Bonds:
Amount held as of December 31, 2008:
Amount held as of July 31, 2009:
Anticipated change between August 1, 2009 and the end of 2010 (Please
include a minus sign to indicate a decrease.)
TIPS:
Amount held as of December 31, 2008:
Amount held as of July 31, 2009:
Anticipated change between August 1, 2009 and the end of 2010 (Please
include a minus sign to indicate a decrease.)
STRIPS:
Amount held as of December 31, 2008:
Amount held as of July 31, 2009:
Anticipated change between August 1, 2009 and the end of 2010 (Please
include a minus sign to indicate a decrease.)
7. To what extent, if at all, do you consider each of the following to
be masons why Treasury securities are an attractive investment option
for your organization or clients? (Select one answer in each row.)
a. Liquidity (Ability to buy and sell with little effect on prices):
Very great extent:
Great extent:
Moderate extent:
Some extent:
Little or no extent:
No basis to judge:
b. Depth of the Treasury market (Ability to purchase large amounts):
Very great extent:
Great extent:
Moderate extent:
Some extent:
Little or no extent:
No basis to judge:
c. Treasuries am used for hedging:
Very great extent:
Great extent:
Moderate extent:
Some extent:
Little or no extent:
No basis to judge:
d. Treasuries have the backing of the U.S. Government:
Very great extent:
Great extent:
Moderate extent:
Some extent:
Little or no extent:
No basis to judge:
e. Ability to purchase Treasury securities across the yield curve:
Very great extent:
Great extent:
Moderate extent:
Some extent:
Little or no extent:
No basis to judge:
f. Treasuries am used to meet investment guidelines:
Very great extent:
Great extent:
Moderate extent:
Some extent:
Little or no extent:
No basis to judge:
g. Low charge against risk-based capital:
Very great extent:
Great extent:
Moderate extent:
Some extent:
Little or no extent:
No basis to judge:
h. Stability of terms and conditions:
Very great extent:
Great extent:
Moderate extent:
Some extent:
Little or no extent:
No basis to judge:
i. Inflation protection:
Very great extent:
Great extent:
Moderate extent:
Some extent:
Little or no extent:
No basis to judge:
j. Macroeconomic outlook:
Very great extent:
Great extent:
Moderate extent:
Some extent:
Little or no extent:
No basis to judge:
k. Relative valuation:
Very great extent:
Great extent:
Moderate extent:
Some extent:
Little or no extent:
No basis to judge:
1. Cash management:
Very great extent:
Great extent:
Moderate extent:
Some extent:
Little or no extent:
No basis to judge:
m. Asset liability matching:
Very great extent:
Great extent:
Moderate extent:
Some extent:
Little or no extent:
No basis to judge:
n. Other - Please select an answer and specify below:
Very great extent:
Great extent:
Moderate extent:
Some extent:
Little or no extent:
No basis to judge:
o. Other - Please select an answer and specify below:
Very great extent:
Great extent:
Moderate extent:
Some extent:
Little or no extent:
No basis to judge:
p. Other - Please select an answer and specify below:
Very great extent:
Great extent:
Moderate extent:
Some extent:
Little or no extent:
No basis to judge:
Treasury Inflation-Protected Securities (TIPS):
8. If your organization currently invests in TIPS, what percentage of
your organization's TIPS purchases is dedicated based on active
allocation decisions made by clients? (Enter percentage below.)
Percentage dedicated based on active allocation decisions made by
clients:
Please enter any comments you may have relating to your answer to
question 8 above.
9. How interested, if at all, would your organization be in purchasing
TIPS with the following maturities? (Select one answer in each row.)
a. 5-year TIPS:
Extremely interested:
Very interested:
Moderately interested:
Slightly interested:
Not interested:
No basis to judge:
b. 10-year TIPS:
Extremely interested:
Very interested:
Moderately interested:
Slightly interested:
Not interested:
No basis to judge:
C. 20-year TIPS:
Extremely interested:
Very interested:
Moderately interested:
Slightly interested:
Not interested:
No basis to judge:
d. 30-year TIPS (if introduced):
Extremely interested:
Very interested:
Moderately interested:
Slightly interested:
Not interested:
No basis to judge:
10. What are the primary reasons your organization purchases TIPS or
plans to purchase TIPS in the future? (Please list up to five reasons
in order of importance.)
Reason #1:
Reason #2:
Reason #3:
Reason #4:
Reason #5:
11. In your opinion, what effect, if any, would a 30-year TIPS have on
demand for TIPS securities with other maturities?
Would increase demand:
Would have no effect on demand:
Would decrease demand:
No basis to judge:
12. Do you anticipate any change in your organization's demand for
TIPS from this year to next year?
Yes - Continue with question 13.
No (Click here to skip to question 15).
No basis to judge (Click here to skip to question 15).
13. If you anticipate change in your organization's demand, what do
you anticipate the change(s) will be? (Check all answers that apply.)
A reallocation into TIPS from nominal Treasury securities:
A reallocation out of TIPS into nominal Treasury securities:
A reallocation into TIPS from an increase in total assets:
A reallocation out of TIPS from a decrease in total assets:
A reallocation into TIPS from non-Treasury assets:
A reallocation out of TIPS into non-Treasury assets:
Other change(s) - Please specify below:
No basis to judge:
If you answered "Other change(s)" above, please specify below.
14. What are the primary reasons behind the change in demand for TIPS
from this year to next year? (Please list up to five reasons in order
of importance.)
Reason #1:
Reason #2:
Reason #3:
Reason #4:
Reason #5:
15. In your estimation, about what percent of your organization's TIPS
purchases in the next year will be made through the following means?
a. Auctions: percent;
b. Secondary market: percent.
Please enter any comments you may have relating to your answer to
question 15 above.
16. Would the following actions by Treasury increase the likelihood
that your organization would: 1) participate in a TIPS auction, and 2)
buy more securities at each auction? (Select one answer in each row.)
a. Increase the frequency of TIPS auctions and reopenings:
Would increase our participation:
Would increase the amount of securities purchased:
Would increase both participation and amount purchased:
Would do neither:
No basis to judge:
b. Increase TIPS issuance amounts per auction:
Would increase our participation:
Would increase the amount of securities purchased:
Would increase both participation and amount purchased:
Would do neither:
No basis to judge:
c. Purchase off-the-run TIPS securities:
Would increase our participation:
Would increase the amount of securities purchased:
Would increase both participation and amount purchased:
Would do neither:
No basis to judge:
d. Other - Please answer and specify below:
Would increase our participation:
Would increase the amount of securities purchased:
Would increase both participation and amount purchased:
Would do neither:
No basis to judge:
e. Other - Please answer and specify below:
Would increase our participation:
Would increase the amount of securities purchased:
Would increase both participation and amount purchased:
Would do neither:
No basis to judge:
f. Other - Please answer and specify below:
Would increase our participation:
Would increase the amount of securities purchased:
Would increase both participation and amount purchased:
Would do neither:
No basis to judge:
If you answered "Other" above, please specify other ways to increase
participation or amount of securities bought.
Specify entry in d. above:
Specify entry in e. above:
Specify entry in f. above:
17. The liquidity of TIPS has been found to be less than nominal
Treasury securities. In your opinion, what actions could Treasury take
to enhance the liquidity of TIPS? (Please list up to five actions in
order of importance.)
Action #1:
Action #2:
Action #3:
Action #4:
Action #5:
Risk Exposure:
18. In your opinion, what are the risks that your organization faces
as an investor in Treasury markets? (Please list up to five risks in
order of importance.)
Risk #1:
Risk #2:
Risk #3:
Risk #4:
Risk #5:
19. In your opinion, what actions could be taken to address and
mitigate the risks identified in question 18 above? (Please list up to
five actions corresponding to the risks identified in question 18
above.)
Action #1:
Action #2:
Action #3:
Action #4:
Action #5:
Treasury Information Sources:
20. In your opinion, to what extent, if at all, does Treasury
currently receive sufficient information and input from end-investors?
Very great extent:
Great extent:
Moderate extent:
Some extent:
Little or no extent:
No basis to judge:
21. How effective, if at all, do you consider each of the following
communication channels between your organization and Treasury to be at
providing Treasury with sufficient information and input from end-
investors? (Select one answer in each row.)
a. Direct contact with Treasury debt management officials and staff:
Extremely effective:
Very effective:
Moderately effective:
Slightly effective:
Not effective:
No basis to judge:
b. Direct contact with Federal Reserve officials and staff:
Extremely effective:
Very effective:
Moderately effective:
Slightly effective:
Not effective:
No basis to judge:
c. Direct contact with Treasury Borrowing Advisory Committee (TBAC)
members:
Extremely effective:
Very effective:
Moderately effective:
Slightly effective:
Not effective:
No basis to judge:
d. Direct contact with Primary Dealers:
Extremely effective:
Very effective:
Moderately effective:
Slightly effective:
Not effective:
No basis to judge:
e. Direct participation in TBAC or Primary Dealer quarterly meetings:
Extremely effective:
Very effective:
Moderately effective:
Slightly effective:
Not effective:
No basis to judge:
f. Other - Please select an answer and specify below:
Extremely effective:
Very effective:
Moderately effective:
Slightly effective:
Not effective:
No basis to judge:
g. Other - Please select an answer and specify below:
Extremely effective:
Very effective:
Moderately effective:
Slightly effective:
Not effective:
No basis to judge:
h. Other - Please select an answer and specify below:
Extremely effective:
Very effective:
Moderately effective:
Slightly effective:
Not effective:
No basis to judge:
If you answered "Other" in rows f through h above, please specify.
Specify entry in "f' above:
Specify entry in "g" above:
Specify entry in "h" above:
22. What actions could Treasury take to ensure that it receives
sufficient information and input from end-investors? (Please list up
to five actions in order of importance.)
Action #1:
Action #2:
Action #3:
Action #4:
Action #5:
Submit Your Responses to GAO:
23. Are you ready to submit your final completed questionnaire to GAO?
(This is equivalent to mailing a completed paper questionnaire to us.
It tells us that your answers are official and final.)
Yes, my questionnaire is complete - Click on the "Exit" button below
to submit your answers.
No, my questionnaire is not yet complete
You may view and print your completed questionnaire by clicking on the
Summary link in the menu to the left.
Print this Page:
Exit:
[End of section]
Appendix IV: GAO Contact and Staff Acknowledgments:
GAO Contact:
Susan J. Irving, (202) 512-6806, or irvings@gao.gov:
Staff Acknowledgments:
In addition to the contact named above, Jose Oyola (Assistant
Director), Tara Carter (AIC), Richard Cambosos, Stuart Kaufman, Mark
Kehoe, Erik Kjeldgaard, Richard Krashevski, Margaret McKenna, Donna
Miller, Dawn Simpson, Jeff Tessin, Jason Vassilicos, Gregory Wilmoth,
and Melissa Wolf all made contributions to this report.
[End of section]
Footnotes:
[1] There is no one-to-one relationship between Treasury securities
issued and TARP expenditures and, therefore, our objectives were not
to look into this specific relationship. For more information on
Treasury debt issuance between December 2007 and July 2009 see GAO,
Debt Management: Treasury Inflation Protected Securities Should Play a
Heightened Role in Addressing Debt Management Challenges, [hyperlink,
http://www.gao.gov/products/GAO-09-932] (Washington, D.C.: Sept. 29,
2009).
[2] Private pension funds were excluded from the survey because during
our structured interviews we were told that many large private pension
funds hired external investment managers and therefore did not manage
the funds in-house.
[3] Gross debt of the federal government (excluding some minor
adjustments) is subject to a statutory ceiling--known as the debt
limit. The current limit--$14,294 billion--was enacted in February
2010. Treasury's authorities are codified in chapter 31 of title 31 of
the United States Code.
[4] In November 2009, Treasury announced that it was replacing the 20-
year TIPS with the 30-year TIPS. The reinstituted 30-year TIPS auction
was held in February 2010.
[5] For additional information on TIPS, see [hyperlink,
http://www.gao.gov/products/GAO-09-932].
[6] For additional information on securities that are not issued as
part of Treasury's "regular and predictable" schedule, see GAO, Debt
Management: Treasury Has Refined Its Use of Cash Management Bills but
Should Explore Options That May Reduce Cost Further, [hyperlink,
http://www.gao.gov/products/GAO-06-269] (Washington, D.C.: Mar. 30,
2006).
[7] In this report we use the term refinance to mean rolling over
maturing debt into a new issuance of Treasury securities. In times of
federal budget deficits, all maturing debt must be rolled over into a
new issuance.
[8] SIFMA is a group that represents the shared interests of
participants in the global financial markets. SIFMA was formed by a
merger of the Bond Markets Association and the Securities Industry
Association in 2006. Membership in SIFMA is open to firms rather than
individuals. Broker-dealer firms can be full members while other firms
with interest in the financial markets can be associate members. While
SIFMA provides limited financial support to TBAC, SIFMA does not
participate in TBAC deliberations.
[9] Federal debt includes both debt held by the public as well as debt
held by government accounts, which is federal debt held by the federal
government itself, or intragovernmental debt. Treasury issues two
major types of debt securities to the public: marketable and
nonmarketable securities. Marketable securities, which consist of
Treasury bills, notes, bonds, and TIPS and can be resold by whoever
owns them while nonmarketable securities, such as savings securities
and special securities for state and local governments, cannot be
resold. Intragovernmental debt is primarily held by trust funds, such
as Social Security and Medicare. Most trust funds invest in special
U.S. Treasury nonmarketable securities, with a small amount in
marketable securities. For the purpose of analyzing the market for
U.S. Treasuries, we primarily focus on marketable securities in this
report.
[10] See [hyperlink, http://www.gao.gov/products/GAO-09-932].
[11] Under the SFP, Treasury issued new securities and left the
proceeds from the sale of these securities on deposit at the Federal
Reserve, increasing its liabilities. For additional information see,
Todd Keister and James J. McAndrews, "Why are Banks Holding So Many
Excess Reserves?" Federal Reserve Bank of New York, Current Issues in
Economics and Finance, vol. 15, no. 8 (December 2009).
[12] The debt limit is a legal ceiling on the amount of gross federal
debt (excluding some minor adjustments), which must be raised
periodically to accommodate additional federal borrowing.
[13] See [hyperlink, http://www.gao.gov/products/GAO-06-269].
[14] One basis point is equal to 1/100th of 1 percent. Thus, 2.7 basis
points is 0.027 percent. A similar analysis, which compared the
auction yields of CMBs with the auction yields of similar maturity
Treasury bills that were auctioned before and after the CMBs, found
that the yield differential was also positive. During 2008 and 2009,
the auction yield differential averaged 2.1 basis points. Our analysis
only covers half of 2008 and all of 2009 due to availability of
Treasury quote data from the Wall Street Journal.
[15] At its height in October 2008, the SFP reached a cash value of
$559 billion, funded entirely with CMBs. In September 2009, Treasury
announced that it anticipated that the balance in the SFP would
decrease to $15 billion, as outstanding SFP bills mature and were not
rolled over. In February 2010, Treasury announced that it would
increase the balance of the SFP to $200 billion.
[16] See GAO, The Federal Government's Long-Term Fiscal Outlook:
January 2010 Update, [hyperlink,
http://www.gao.gov/products/GAO-10-468SP] (Washington, D.C.: March
2010). See [hyperlink, http://www.gao.gov/special.pubs/longterm/].
[17] See Congressional Budget Office, An Analysis of the President's
Budgetary Proposals for Fiscal Year 2011 (Washington, D.C.: March
2010).
[18] A delivery failure occurs when one party fails to deliver
Treasuries to another party by the date previously agreed by the
parties.
[19] ODM is responsible for providing the Assistant Secretary for
Financial Markets with advice and analysis on matters related to the
Treasury's debt management policy, the issuance of Treasury and
federal-related securities, and financial markets.
[20] "No basis to judge" responses have generally been excluded from
our totals except in cases where large numbers of respondents gave
this response.
[21] This figure is the total sector holdings derived from Flow of
Funds Accounts of the United States, a statistical release compiled by
the Federal Reserve. These figures differ from the reported holdings
of our survey respondents reported in appendix II. The figures in
appendix II represent only a subset of the sector.
[22] At the time of our survey, life insurance companies had Treasury
holdings of $106.2 billion, property casualty insurance companies held
$56.0 billion, and state and local government retirement funds held
$177.7 billion.
[23] As of December 31, 2009, the five largest inflation-protected
bond mutual funds (with their respective total net assets) were:
Vanguard Inflation-Protected Securities Fund ($27.4 billion); PIMCO
Real Return Fund ($16.8 billion); Barclays TIPS Bond Fund ($18.5
billion); American Century Inflation-Adjusted Bond Fund ($3.1
billion); and Fidelity Inflation-Protected Bond Fund ($2.2 billion).
[24] PIMCO introduced the Real Income Funds on September 8, 2009, and
the Tax Managed Real Return Fund on November 9, 2009. The Real Income
Funds are designed to provide retirees a steady stream of monthly
income that is hedged against inflation, and the Tax Managed Real
Return Fund is designed to provide tax-efficient income and a hedge
against inflation.
[25] Interest income from municipal bonds is exempt from federal, and
in some cases state, taxes.
[26] For additional information on TIPS, see [hyperlink,
http://www.gao.gov/products/GAO-09-932].
[27] For additional information on TIPS, see [hyperlink,
http://www.gao.gov/products/GAO-09-932].
[28] The first auction of the reintroduced 30-year TIPS was held on
February 22, 2010, and the total issuance amount was $8 billion.
[29] For additional information on TIPS, see [hyperlink,
http://www.gao.gov/products/GAO-09-932].
[30] In 1997, after Treasury introduced TIPS, the Chicago Board of
Trade developed a related futures product but ultimately terminated
the contract due to a lack of trading and demand. In 2004, the Chicago
Board of Trade introduced a CPI futures contract but again terminated
the product for similar reasons.
[31] The Treasury Auction Results statement also defines a third
category of competitive bidders in Treasury auctions. Indirect Bidders
are defined as customers placing competitive bids through a direct
submitter, including foreign and international monetary authorities
placing bids through the FRBNY. Auction participants may also bid
noncompetitively but will pay whatever price is paid by successful
competitive bidders.
[32] TAAPSLink is no longer used as Treasury introduced its New
Treasury Automated Auction Processing System (NTAAPS), now called
TAAPS, in April 2008.
[33] The Investor Class categories listed in the Auction Allotment
Data are: Federal Reserve System, Depository Institutions,
Individuals, Dealers and Brokers, Pension and Retirement Funds and
Insurance Companies, Investment Funds, Foreign and International, and
Other. See [hyperlink, http://www.ustreas.gov/offices/domestic-
finance/debt-management/investor_class_auction.shtml] (downloaded on
Mar. 31, 2010).
[34] See [hyperlink, http://www.gao.gov/products/GAO-09-932].
[35] This method was used in our previous report on cash management
bills issued in 2006. See GAO, Debt Management: Treasury Has Refined
Its Use of Cash Management Bills but Should Explore Options That May
Reduce Cost Further, [hyperlink,
http://www.gao.gov/products/GAO-06-269] (Washington, D.C.: Mar. 30,
2006).
[36] We used the following listings of organizations for each of the
following sectors: (1) Mutual fund sector: Organizations were
identified and selected based on a listing provided by the Investment
Company Institute of the largest intermediate-and long-term government
funds and inflation-protected funds in terms of total assets; (2)
Commercial bank sector: Organizations were identified and selected
based on a listing made available by the American Bankers Association
of the largest bank and thrift holding companies in terms of total
assets; (3) Property casualty insurance sector: Organizations were
identified and selected based on a listing made available by the
National Association of Insurance Commissioners of the largest
property casualty insurance organizations in terms of total direct
premiums; (4) Life insurance sector: Organizations were identified and
selected based on a listing made available by the National Association
of Insurance Commissioners of the largest life insurance organizations
in terms of total direct premiums; and (5) State and local government
retirement fund sector: Organizations were identified and selected
based on a listing made available by the National Association of State
Retirement Administrators of the largest funds in terms of total
assets.
[37] This methodology was the same for the structured interviews
mentioned above, except that for the structured interviews we selected
and interviewed the two largest organizations in each sector.
[End of section]
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