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Office of Debt ManagementOffice of Debt Management

Fiscal Year 2012 Q2 ReportFiscal Year 2012 Q2 Report

Table of ContentsTable of ContentsI. Fiscal

A. Tax Receipts p. 4B. Monthly Receipt Levels p. 6C O tl 7C. Outlays p. 7D. Treasury Net Non-Marketable Borrowing p. 9E. Cumulative Budget Deficits p. 10F. Deficit and Borrowing Estimates p. 11G. Budget Surplus/Deficit p. 12

II. FinancingA. OMBs Projections of Borrowing from the Public p. 14B. Net Marketable Borrowing On “Auto Pilot” Versus Borrowing Forecasts p. 15C. Sources of Financing p. 17

III. Portfolio MetricsA. Weighted Average Maturity of Marketable Debt Outstanding with Projections p. 20B. Recent and Projected Portfolio Composition p. 21C. Recent and Projected Maturity Profile p. 23

dIV. DemandA. Summary Statistics of Fiscal Year 2012 Q2 Auctions p. 28B. Bid-to-Cover Ratios p. 29C. Investor Class Auction Awards p. 33D Foreign Awards at Auction p 40

2

D. Foreign Awards at Auction p. 40E. Primary Dealer Awards at Auction p. 44

Section I:Fiscal

3

Quarterly Tax Receipts

100%

150%

50%

100%

Cha

nge

0%

Year

ove

r Yea

r % C

-50%

Y

-100%

Mar

-02

Jun-

02Se

p-02

Dec

-02

Mar

-03

Jun-

03Se

p-03

Dec

-03

Mar

-04

Jun-

04Se

p-04

Dec

-04

Mar

-05

Jun-

05Se

p-05

Dec

-05

Mar

-06

Jun-

06Se

p-06

Dec

-06

Mar

-07

Jun-

07Se

p-07

Dec

-07

Mar

-08

Jun-

08Se

p-08

Dec

-08

Mar

-09

Jun-

09Se

p-09

Dec

-09

Mar

-10

Jun-

10Se

p-10

Dec

-10

Mar

-11

Jun-

11Se

p-11

Dec

-11

Mar

-12

4

M M M M M M M M M M M

Corporate Taxes Non-Withheld Taxes (incl SECA) Withheld Taxes (incl FICA)

Peak Season Non-Withheld/SECA Taxes, 2007-2012

250

300

$245

$38

$27

200

250$230

$170

$10

$10

$19150$

bn

$158

$134

$170

$192$218

$147$125

$151 $153

50

100

% 93%

02007 2008 2009 2010 2011 2012

84% 89% 93% 93% 89%

5

To Date (April 1- 26) Remaining (through end of May)

Monthly Receipt Levels(12-Month Moving Average)

100

120

80

100

60 $ bn

20

40

-

Mar

-02

un-0

2ep

-02

Dec

-02

Mar

-03

un-0

3ep

-03

Dec

-03

Mar

-04

un-0

4ep

-04

Dec

-04

Mar

-05

un-0

5ep

-05

Dec

-05

Mar

-06

un-0

6ep

-06

Dec

-06

Mar

-07

un-0

7ep

-07

Dec

-07

Mar

-08

un-0

8ep

-08

Dec

-08

Mar

-09

un-0

9ep

-09

Dec

-09

Mar

-10

un-1

0ep

-10

Dec

-10

Mar

-11

un-1

1ep

-11

Dec

-11

Mar

-12

6Individual Income Taxes include withheld and non-withheld. Social Insurance Taxes include FICA, SECA, RRTA, UTF Deposits, FUTA and RUIA. Other includes excise taxes, estate and gift taxes, customs duties and miscellaneous receipts.

M Ju S D M Ju S D M Ju S D M Ju S D M Ju S D M Ju S D M Ju S D M Ju S D M Ju S D M Ju S D M

Individual Income Taxes Corporation Income Taxes Social Insurance Taxes Other

Ten Largest Outlays for Fiscal Year 2011

800

900

1000

500

600

700

300

400

500

$ bn

0

100

200

s n y y e r s n l n

Hea

lth a

ndH

uman

Ser

vice

s

Soci

al S

ecur

ityA

dmin

istr

atio

n

Def

ense

-Mili

tary

Trea

sury

Agr

icul

ture

Labo

r

Vet

eran

s Affa

irs

Tran

spor

tatio

n

Offi

ce o

f Per

sonn

elM

anag

emen

t

Educ

atio

n

7

O

Fiscal Year-to-Date Levels of Ten Largest Outlays

400

450

500

250

300

350

400

$ bn

100

150

200

$

0

50

and

ervi

ces

curi

tytr

atio

n

ilita

ry

easu

ry

ultu

re

Labo

r

Affa

irs

rtat

ion

sonn

elen

t

catio

n

Hea

lth a

Hum

an S

e

Soci

al S

ecA

dmin

ist

Def

ense

-M Tre

Agr

icu

Vet

eran

s A

Tran

spor

Offi

ce o

f Per

sM

anag

eme

Educ

8

Q1 and Q2 FY2011 Q1 and Q2 FY2012

Treasury Net Non-Marketable Borrowing

20

30

10

-10

0$ bn

-20

-30

Q3-

02Q

4-02

Q1-

03Q

2-03

Q3-

03Q

4-03

Q1-

04Q

2-04

Q3-

04Q

4-04

Q1-

05Q

2-05

Q3-

05Q

4-05

Q1-

06Q

2-06

Q3-

06Q

4-06

Q1-

07Q

2-07

Q3-

07Q

4-07

Q1-

08Q

2-08

Q3-

08Q

4-08

Q1-

09Q

2-09

Q3-

09Q

4-09

Q1-

10Q

2-10

Q3-

10Q

4-10

Q1-

11Q

2-11

Q3-

11Q

4-11

Q1-

12Q

2-12

Fi l Q t

9

Fiscal Quarter

Foreign Series State and Local Govt. Series (SLGS) Savings Bonds

1,400

Cumulative Budget Deficits by Fiscal Year

1,200

800

1,000

600

$ bn

200

400

0

Oct

ober

ovem

ber

Dec

embe

r

Janu

ary

Febr

uary

Mar

ch

Apr

il

May

June

July

Aug

ust

epte

mbe

r

10

N D F

Se

FY2010 FY2011 FY2012

In $ BillionsFY 2012 2014 Deficit and Net Marketable Borrowing Estimates In $ BillionsPrimary Dealers1 CBO2 OMB3

FY 2012 Deficit Estimate 1,156 1,171 1,327

FY 2012-2014 Deficit and Net Marketable Borrowing Estimates

FY 2013 Deficit Estimate 924 612 901FY 2014 Deficit Estimate 795 385 668

FY 2012 Deficit Range 973-1,300FY 2013 Deficit Range 650-1,200FY 2014 Deficit Range 500-1,100

FY 2012 Net Marketable Borrowing Estimate 1 182 1 450FY 2012 Net Marketable Borrowing Estimate 1,182 1,450FY 2013 Net Marketable Borrowing Estimate 959 1,059

FY 2012 Net Marketable Borrowing Range 1,050-1,281FY 2013 Net Marketable Borrowing Range 728-1,100g gEstimates as of: Apr-12 Mar-12 Feb-12

1Based on primary dealer feedback on April 23, 2012. Deficit estimates are averages. 2CBO's baseline estimate; assumes current law.3 bl S 5 f h F b 13 2012 "F l Y 2013 B d f h S G "

11

3Table S-5 of the February 13, 2012, "Fiscal Year 2013 Budget of the US Government."

Budget Surplus/Deficit

0%

2%

0

500

�4%

�2%

-500

�6%

-1,500

-1,000

�10%

�8%

-2,000

�12%-2,500

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

Fiscal Year

Surplus/Deficit in $ bn-(L) Surplus/Deficit as a % of GDP-(R)

OMB’s Projections

Projections are from Table S-5 of the February 13, 2012, “Fiscal Year 2013 Budget of the US Government.” 12

Section II:Financing

13

OMB’s Projections of Borrowing from the Public

1,450

1 200

1,400

1,600

1,059

809752 783

733 690733

760781

808

800

1,000

1,200

733 690

400

600

$bn

0

200

(200)

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

Fiscal Year

14

OMB’s borrowing from the public projections are from Table S-5 and S-15 of the February 13, 2012, “Fiscal Year 2013 Budget of the US Government.” Data labels represent the change in debt held by the public in $ billions. Other represents borrowing from the public to provide direct and guaranteed loans, in addition to TARP activity.

Primary�Deficit Interest Other Data�Labels:�Change�in�Debt�Held�by�Public

Historical Net Marketable Borrowing and Projected Net Borrowing Assuming Future Issuance Remains Constant

1,500

2,000 g g

1,000

bn

500

$

787 1,787 1,483 1,104 1,152 992 872 756 693 482 554 397 279 217 127(500)

0

08 09 10 11 12 13 14 15 16 17 18 19 20 21 22

200

200

201

201

201

201

201

201

201

201

201

201

202

202

202

End of Fiscal Year

Bills 2/3/5 7/10/30 TIPS OMB's�projection�ofBorrowing�from�the�public

Historical�Net�MarketableBorrowing�and�Projected�Net�Borrowing(data�labels�at�bottom)

15

Portfolio & SOMA holdings as of 3/30/2012. Assumes issuance sizes for Bills, Nominal Coupons and TIPS are unchanged from 3/30/2012 levels, along with SOMA reinvestment. The principal on the TIPS securities were accreted to each projection date based on market ZCIS levels. No attempt was made to match future financing needs. OMB’s borrowing from the public projections are from Table S-5 and S-15 of the February 13, 2012, “Fiscal Year 2013 Budget of the US Government.” Data labels represent historical net marketable borrowing and projected net borrowing capacity. See table on the following page for details.

( )

Historical Net Marketable Borrowing and Projected Net Borrowing Assuming Future Issuance Remains Constant $ BillionAssuming Future Issuance Remains Constant, $ Billion

End of Fiscal Year Bills 2/3/5 7/10/30 TIPS

Historical Net Marketable

Borrowing/Projected OMB’s Projections of Borrowing from the Fiscal Year Net Borrowing

CapacityPublic

2008 532 106 109 40 787 2009 503 732 514 38 1,787 2010 (204) 869 783 35 1,483 ( ) ,2011 (311) 576 751 88 1,104 2012 152 160 748 92 1,152 1,450 2013 4 127 748 113 992 1,059 2014 0 60 722 90 872 809 2015 0 (29) 694 91 756 752 2016 0 101 525 67 693 783 2017 0 62 344 76 482 733 2018 0 84 388 82 554 690 2019 0 60 261 76 397 7332019 0 60 261 76 397 733 2020 0 3 233 43 279 760 2021 0 (18) 215 20 217 781 2022 0 (30) 151 6 127 808

16

Portfolio & SOMA holdings as of 3/30/2012. Assumes issuance sizes for Bills, Nominal Coupons and TIPS are unchanged from 3/30/2012 levels, along with SOMA reinvestment. The principal on the TIPS securities were accreted to each projection date based on market ZCIS levels. No attempt was made to match future financing needs. OMB’s borrowing from the public projections are from Table S-5 and S-15 of February 13, 2012, “Fiscal Year 2013 Budget of the US Government.” Data labels represent historical net marketable borrowing and projected net borrowing capacity.

Sources of Financing in Fiscal Year 2012 Q1October-December 2011 October-December 2011 Fiscal Year to Date

Net Funding Need (282) Bill IssuanceIssuance Gross Maturing Net Gross Maturing Net

Net Bill Issuance 43 4-Week 487 474 13 487 474 13 N t C I 267 13 W k 377 367 10 377 367 10Net Coupon Issuance 267 13-Week 377 367 10 377 367 10

Subtotal: Net Marketable Borrowing 310 26-Week 351 337 14 351 337 14 52-Week 75 69 6 75 69 6

Plus: Beginning Cash Balance 58 CMBs 10 10 0 10 10 0 Less: Ending Cash Balance 86 Bill Subtotal 1,300 1,257 43 1,300 1,257 43

Subtotal: Funding Adding to Build Up of Cash (28)October-December 2011 Fiscal Year to Date

Total: Net Funding 282 Coupon IssuanceIssue Gross Maturing Net Gross Maturing Net2-Year 73 90 (17) 73 90 (17)3-Year 100 58 41 100 58 41 5-Year 73 33 40 73 33 40 7-Year 60 0 60 60 0 60

10-Year 69 0 69 69 0 69 30-Year 44 0 44 44 0 4430 Year 44 0 44 44 0 44

5-Year TIPS 12 0 12 12 0 12 10-Year TIPS 11 0 11 11 0 11 30-Year TIPS 7 0 7 7 0 7

Coupon Subtotal 449 182 267 449 182 267

17

Total 1,749 1,439 310 1,749 1,439 310

Sources of Financing in Fiscal Year 2012 Q2January-March 2012 January-March 2012 Fiscal Year to Date

Net Funding Need (443) Bill IssuanceIssuance Gross Maturing Net Gross Maturing Net

Net Bill Issuance 154 4-Week 523 498 25 1,009 971 38

Net Coupon Issuance 247 13-Week 409 377 32 786 744 42

Subtotal: Net Marketable Borrowing 401 26-Week 383 336 47 734 673 61 52-Week 77 67 10 152 136 16

Plus: Beginning Cash Balance 86 CMBs 40 0 40 50 10 40

Less: Ending Cash Balance 43 Bill Subtotal 1,432 1,278 154 2,731 2,534 197 g , , , ,

Subtotal: Funding Provided by Drawdown of Cash 42 January-March 2012 Fiscal Year to Date

Total: Net Funding 443 Coupon IssuanceIssue Gross Maturing Net Gross Maturing Net2 Y 107 135 (28) 180 226 (45)2-Year 107 135 (28) 180 226 (45)3-Year 104 101 4 204 159 45 5-Year 107 48 60 180 81 99 7-Year 89 0 89 149 0 149

10-Year 72 25 47 140 25 116 30 Year 46 0 46 89 0 8930-Year 46 0 46 89 0 89

5-Year TIPS 0 0 0 12 0 12 10-Year TIPS 28 8 21 40 8 32 30-Year TIPS 9 0 9 16 0 16

Coupon Subtotal 563 316 247 1,012 498 514

18

Total 1,995 1,594 401 3,743 3,032 711

Section III:Portfolio Metrics

19

Weighted Average Maturity of Marketable Debt Outstanding

75

80

85

65

70

75

Mat

urity

(Mon

ths)

58.1 months

62.8 months on 3/30/2012

55

60

ight

ed A

vera

ge M (Historical Average

from 1980 to 2010)

45

50Wei

40

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

Calendar YearHistorical Adjust Nominal Coupons to Match Financing Needs Historical Average from 1980 to 2010

20

Portfolio & SOMA holdings as of 3/30/2012. To match OMB’s projected borrowing from the public for the next 10 years, nominal coupon securities (2-, 3-, 5-, 7-, 10-, and 30-year) were adjusted by the same percentage. OMB’s borrowing from the public projections are from Table S-5 and S-15 of the February 13, 2012, “Fiscal Year 2013 Budget of the US Government.” The principal on the TIPS securities were accreted to each projection date based on market ZCIS levels. This scenario does not represent any particular course of action that Treasury is expected to follow. Instead, it is intended to demonstrate the basic trajectory of average maturity absent changes to the mix of securities issued by Treasury.

Recent and Future Portfolio Composition by Issuance Type, Percent

80%

90%

100%

60%

70%

tfolio

30%

40%

50%

% o

f Por

t

10%

20%

0%

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

End of Fiscal Year

Bills Nominal Coupons TIPS (principal accreted to projection date)

21

p (p p p j )

Portfolio & SOMA holdings as of 3/30/2012. To match OMB’s projected borrowing from the public for the next 10 years, nominal coupon securities (2-, 3-, 5-, 7-, 10-, and 30-year) were adjusted by the same percentage. OMB’s borrowing from the public projections are from Table S-5 and S-15 of the February 13, 2012, “Fiscal Year 2013 Budget of the US Government.” The principal on the TIPS securities were accreted to each projection date based on market ZCIS levels. This scenario does not represent any particular course of action that Treasury is expected to follow. Instead, it is intended to demonstrate the portfolio composition absent changes to the mix of securities issued by Treasury.

Recent and Future Portfolio Composition by Issuance Type, Percent

End of Fiscal Year Bills Nominal Coupons

TIPS (principal accreted to

projection date)

2006 21 3% 69 5% 9 2%2006 21.3% 69.5% 9.2%2007 21.6% 68.1% 10.3%2008 28.5% 61.4% 10.0%2009 28.5% 63.6% 7.9%2010 21 1% 71 9% 7 0%2010 21.1% 71.9% 7.0%2011 15.4% 77.3% 7.3%2012 15.1% 77.2% 7.6%2013 13.8% 78.2% 8.0%2014 12.9% 78.8% 8.3%% % %2015 12.1% 79.2% 8.7%2016 11.5% 79.7% 8.8%2017 10.9% 80.0% 9.1%2018 10.4% 80.2% 9.4%2019 9.9% 80.4% 9.7%2020 9.4% 80.8% 9.7%2021 9.0% 81.3% 9.7%2022 8.6% 81.9% 9.5%

22

Portfolio & SOMA holdings as of 3/30/2012. To match OMB’s projected borrowing from the public for the next 10 years, nominal coupon securities (2-, 3-, 5-, 7-, 10-, and 30-year) were adjusted by the same percentage. OMB’s borrowing from the public projections are from Table S-5 and S-15 the of February 13, 2012, “Fiscal Year 2013 Budget of the US Government.” The principal on the TIPS securities were accreted to each projection date based on market ZCIS levels. This scenario does not represent any particular course of action that Treasury is expected to follow. Instead, it is intended to demonstrate the portfolio composition absent changes to the mix of securities issued by Treasury.

Recent and Future Maturity Profile, $ Billion

16,000

18,000

20,000

12,000

14,000

n

6,000

8,000

10,000 $ bn

2,000

4,000

0

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

End of Fiscal Year

< 1yr [1, 2) [2, 3) [3, 5) [5, 7) [7, 10) >= 10yr

23

Portfolio & SOMA holdings as of 3/30/2012. To match OMB’s projected borrowing from the public for the next 10 years, nominal coupon securities (2-, 3-, 5-, 7-, 10-, and 30-year) were adjusted by the same percentage. OMB’s borrowing from the public projections are from Table S-5 and S-15 of the February 13, 2012, “Fiscal Year 2013 Budget of the US Government.” The principal on the TIPS securities were accreted to each projection date based on market ZCIS levels. This scenario does not represent any particular course of action that Treasury is expected to follow. Instead, it is intended to demonstrate the maturity profile absent changes to the mix of securities issued by Treasury.

y [ , ) [ , ) [ , ) [ , ) [ , ) y

Recent and Future Maturity Profile, $ Billion

End of Fiscal Year < 1yr [1, 2) [2, 3) [3, 5) [5, 7) [7, 10) >= 10yr Total

2007 1 582 664 342 551 276 499 627 4 5412007 1,582 664 342 551 276 499 627 4,5412008 2,151 710 280 657 318 515 690 5,3202009 2,702 775 666 970 540 691 779 7,1242010 2,563 1,143 872 1,310 918 881 952 8,6392011 2,621 1,273 1,004 1,527 1,146 1,086 1,129 9,786, , , , , , , 9,7862012 2,964 1,373 1,109 1,854 1,184 1,112 1,184 10,7822013 3,045 1,552 1,219 2,116 1,378 1,191 1,349 11,8502014 3,186 1,611 1,476 2,229 1,432 1,183 1,558 12,6752015 3,246 1,889 1,483 2,364 1,546 1,215 1,707 13,4502016 3,528 1,950 1,575 2,500 1,622 1,200 1,884 14,2592017 3,586 2,090 1,644 2,679 1,598 1,343 2,081 15,0222018 3,726 2,131 1,787 2,818 1,642 1,399 2,245 15,7482019 3,768 2,283 1,925 2,782 1,811 1,513 2,441 16,5232020 3 924 2 463 1 995 2 878 1 841 1 514 2 718 17 3322020 3,924 2,463 1,995 2,878 1,841 1,514 2,718 17,3322021 4,101 2,598 1,876 3,116 1,918 1,560 2,995 18,1642022 4,236 2,484 2,202 3,271 2,062 1,497 3,269 19,022

24


Recent and Future Maturity Profile, Percent

80%

90%

100%

60%

70%

30%

40%

50%

10%

20%

0%

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

End of Fiscal Year

< 1yr [1, 2) [2, 3) [3, 5) [5, 7) [7, 10) >= 10yr

25


y [ , ) [ , ) [ , ) [ , ) [ , ) y

Recent and Future Maturity Profile, Percent

End of Fiscal Year < 1yr [1, 2) [2, 3) [3, 5) [5, 7) [7, 10) >= 10yr [0,3) [0,5)

2007 34.8% 14.6% 7.5% 12.1% 6.1% 11.0% 13.8% 57.0% 69.1%2008 40.4% 13.3% 5.3% 12.3% 6.0% 9.7% 13.0% 59.1% 71.4%2009 37.9% 10.9% 9.3% 13.6% 7.6% 9.7% 10.9% 58.2% 71.8%2010 29.7% 13.2% 10.1% 15.2% 10.6% 10.2% 11.0% 53.0% 68.2%2011 26 8% 13 0% 10 3% 15 6% 11 7% 11 1% 11 5% 50 1% 65 7%2011 26.8% 13.0% 10.3% 15.6% 11.7% 11.1% 11.5% 50.1% 65.7%2012 27.5% 12.7% 10.3% 17.2% 11.0% 10.3% 11.0% 50.5% 67.7%2013 25.7% 13.1% 10.3% 17.9% 11.6% 10.1% 11.4% 49.1% 66.9%2014 25.1% 12.7% 11.6% 17.6% 11.3% 9.3% 12.3% 49.5% 67.1%2015 24.1% 14.0% 11.0% 17.6% 11.5% 9.0% 12.7% 49.2% 66.8%20162016 24.7% 13.7% 11.0% 17.5% 11.4% 8.4% 13.2% 49.5% 67.0%2017 23.9% 13.9% 10.9% 17.8% 10.6% 8.9% 13.9% 48.7% 66.6%2018 23.7% 13.5% 11.3% 17.9% 10.4% 8.9% 14.3% 48.5% 66.4%2019 22.8% 13.8% 11.6% 16.8% 11.0% 9.2% 14.8% 48.3% 65.1%2020 22.6% 14.2% 11.5% 16.6% 10.6% 8.7% 15.7% 48.4% 65.0%2021 22.6% 14.3% 10.3% 17.2% 10.6% 8.6% 16.5% 47.2% 64.4%2022 22.3% 13.1% 11.6% 17.2% 10.8% 7.9% 17.2% 46.9% 64.1%

26


Section IV:Demand

27

Summary Statistics for Fiscal Year 2012 Q2 Auctions

Security�Type Term

Stop�Out�Rate (%)

Bid�to�Cover�Ratio

Competitive�Awards ($ bn)

%�Primary�Dealer % Direct % Indirect

Non�Competitive�Awards ($ bn)

SOMA�Add�Ons ($ bn)

10�Yr�Equivalent�($ bn)Type Term Rate�(%) Ratio Awards�($�bn) Dealer %�Direct %�Indirect Awards�($�bn) Ons�($�bn) ($�bn)

Bill 4-Week 0.059 4.4 460.9 64.8% 10.0% 25.2% 3.1 57.7 3.99Bill 13-Week 0.069 4.6 395.5 68.7% 7.3% 24.0% 9.7 0.0 11.32Bill 26-Week 0.109 4.7 366.5 64.2% 7.7% 28.2% 8.6 0.0 20.97Bill 52-Week 0.139 4.7 76.4 61.6% 10.0% 28.5% 0.5 0.0 8.57

Coupon 2-Year 0.300 3.7 104.4 52.6% 13.1% 34.3% 0.6 2.0 23.40Coupon 3-Year 0.391 3.5 95.9 58.8% 7.6% 33.6% 0.1 8.4 31.92Coupon 5-Year 0.946 3.0 104.9 44.5% 13.1% 42.4% 0.1 2.0 57.48Coupon 7-Year 1.456 2.9 86.9 46.4% 14.8% 38.8% 0.1 1.6 64.65Coupon 10-Year 2.000 3.2 65.8 43.2% 18.2% 38.6% 0.1 5.9 65.92Coupon 30-Year 3.205 2.6 41.9 57.7% 12.4% 30.0% 0.1 3.8 90.75

TIPS 10 Y (0 066) 2 9 27 8 44 8% 17 0% 38 2% 0 2 0 3 31 12TIPS 10-Year (0.066) 2.9 27.8 44.8% 17.0% 38.2% 0.2 0.3 31.12TIPS 30-Year 0.770 2.5 9.0 45.8% 13.6% 40.6% 0.0 0.1 26.15

Total�Bills 0.081 4.6 1,299.4 65.6% 8.5% 25.9% 21.9 57.7 44.85Total�Coupons 1.122 3.2 500.0 50.2% 12.9% 36.9% 1.0 23.7 334.12p 3 500 0 50 % 9% 36 9% 0 3 33

Total�TIPS 0.138 2.8 36.7 45.0% 16.2% 38.8% 0.2 0.4 57.27

28Stop Out Rate, Bid-to-Cover Ratio, % Primary Dealer, % Direct and % Indirect are weighted averages of Competitive Awards. 10-Yr equivalent is approximated using prices at settlement and includes both Competitive and Non-Competitive Awards. For TIPS 10-Yr equivalent, a constant auction BEI is used as the inflation assumption.

Bid-to-Cover Ratios for Treasury Bills

5.5

6

4

4.5

5Ra

tio

3

3.5

4

Bid-

to-C

over

R

2

2.5

1.5

Mar

-02

Mar

-03

Mar

-04

Mar

-05

Mar

-06

Mar

-07

Mar

-08

Mar

-09

Mar

-10

Mar

-11

Mar

-12

29

4-Week (13-week moving average) 13-Week (13-week moving average)

26-Week (13-week moving average) 52-Week (6-month moving average)

Bid-to-Cover Ratios for 2-, 3-, and 5-Year Nominal Securities(6-Month Moving Average)

3.6

3.8

3.2

3.4

atio

2.8

3

Bid-

to-C

over

Ra

2.4

2.6

2

2.2

Mar

-09

un-0

9

Sep-

09

Dec

-09

Mar

-10

un-1

0

Sep-

10

Dec

-10

Mar

-11

un-1

1

Sep-

11

Dec

-11

Mar

-12

30

M Ju S D M Ju S D M Ju S D M

2-Year 3-Year 5-Year

Bid-to-Cover Ratios for 7-, 10-, and 30-Year Nominal Securities(6-Month Moving Average)

3.2

3.4

3

atio

2.8

Bid-

to-C

over

Ra

2.4

2.6

2.2

Jul-0

9

Oct

-09

Jan-

10

Apr

-10

Jul-1

0

Sep-

10

Dec

-10

Mar

-11

un-1

1

Sep-

11

Dec

-11

Mar

-12

31

J O J A J S D M Ju S D M

7-Year 10-Year 30-Year

Bid-to-Cover Ratios for TIPS

3

3.5

2.5

3

atio

2Bid-

to-C

over

Ra

1.5

1

Mar

-00

Mar

-01

Mar

-02

Mar

-03

Mar

-04

Mar

-05

Mar

-06

Mar

-07

Mar

-08

Mar

-09

Mar

-10

Mar

-11

Mar

-12

32

M M M M M M M M M M M M M

5-Year 10-Year (6-month moving average) 20-Year 30-Year

Investor Class Auction Awards: BillsFiscal Year 2012 Q2

Foreign &

Other4.5%

Foreign & International

8.1%

InvestmentFunds14.5%

PrimaryDealers

Other Dealers & Brokers

8.4%

64.5%

33Excludes SOMA add-ons. The “Other” category includes categories that are each less than 2%, which include Depository Institutions, Individuals, Pension and Insurance.

Change in Demand Over the Last Year in Bills, Auction Awards by Investor Class

5%

6%

y

2%

3%

4%

Qua

rter

s

0%

1%

2%

ge fr

om th

e Pa

st 4

3%

-2%

-1%

Cha

ng

-4%

-3%

Prim

ary

Dea

lers

r Dea

lers

Br

oker

s

vest

men

tFu

nds

reig

n &

na

tiona

l

Oth

er


Oth

er&

B Inv

For

Inte

r

Investor Class Auction Awards: Investor Class Auction Awards:

Other1.1%

2-, 3-, and 5-Year Nominal SecuritiesFiscal Year 2012 Q2

Other0 9%

7-, 10-, and 30-Year Nominal SecuritiesFiscal Year 2012 Q2

Foreign & I t ti l

Foreign & I t ti l

0.9%

PrimaryD l

International 23.7%

PrimaryDealers47.7%

International 22.6%

Dealers51.7%

InvestmentFunds16.0%

47.7%

InvestmentFunds

Other Dealers

& Brokers7.5%

Other Dealers

& Brokers6.4%

22.4%


Change in Demand Over the Last Year in 2-, 3-, 5-Year Nominal Securities, Auction Awards by Investor Class

1.0%

1.5%

, y

-0.5%

0.0%

0.5%

Qua

rter

s

-2.0%

-1.5%

-1.0%

ge fr

om th

e Pa

st 4

3 5%

-3.0%

-2.5%Cha

ng

-4.0%

-3.5%

Prim

ary

Dea

lers

er D

eale

rs

Brok

ers

nves

tmen

tFu

nds

reig

n &

rn

atio

nal

Oth

er


Oth

e&

B In Fo Inte

r

Change in Demand Over the Last Year in 7-, 10-, 30-Year Nominal Securities, Auction Awards by Investor Class

2.0%

2.5%

, y

1.0%

1.5%

4 Q

uart

ers

0 5%

0.0%

0.5%

nge

from

the

Past

4

-1.5%

-1.0%

-0.5%

Cha

n

-2.0%

Prim

ary

Dea

lers

her D

eale

rs

& B

roke

rs

Inve

stm

ent

Fund

s

Fore

ign

&

tern

atio

nal

Oth

er


Oth & I F Int

Investor Class Auction Awards: TIPSFiscal Year 2012 Q2

Foreign &

Other1.2%

Foreign & International

12.8%

PrimaryDealers44.7%

InvestmentFunds39 5%39.5%

38

Other Dealers & Brokers

1.9%

Excludes SOMA add-ons. The “Other” category includes categories that are each less than 2%, which include Depository Institutions, Individuals, Pension and Insurance.

Change in Demand Over the Last Year in TIPS, Auction Awards by Investor Class

3%

4%

y

2%

3%Q

uart

ers

0%

1%

e fr

om th

e Pa

st 4

Q

-2%

-1%Cha

ng

-3%

Prim

ary

Dea

lers

r Dea

lers

ro

kers

vest

men

tFu

nds

eign

&

natio

nal

Oth

er


Oth

er&

B Inv F

Fore

Inte

rn

Total Foreign Awards of Treasuries at Auction, $ Billion

160

180

200

120

140

160

war

d ($

bn)

80

100

onth

ly P

riva

te A

w

40

60Mo

0

20

Jun-

09

Sep-

09

Dec

-09

Mar

-10

Jun-

10

Sep-

10

Dec

-10

Mar

-11

Jun-

11

Sep-

11

Dec

-11

Mar

-12

40Foreign includes both private sector and official institutions.

D M D M D M

Bills 2/3/5 7/10/30 TIPS

Foreign Awards of Bills at Auction, Percent

20%

25%

15%

20%In

vest

ors

10%

war

ded

to F

orei

gn

5%

% A

w

0%

n-09

p-09

c-09

ar-1

0

n-10

p-10

c-10

ar-1

1

n-11

p-11

c-11

ar-1

2

41Excludes SOMA add-ons. Foreign includes both private sector and official institutions.

Jun

Sep

De

Ma Jun

Sep

De

Ma Jun

Sep

De

Ma

Foreign Awards of Nominal Coupons at Auction, Percent

40%

45%

50%

30%

35%

40%

n In

vest

ors

20%

25%

war

ded

to F

orei

gn

10%

15%% A

w

0%

5%

un-0

9

ep-0

9

Dec

-09

Mar

-10

un-1

0

ep-1

0

Dec

-10

Mar

-11

un-1

1

ep-1

1

Dec

-11

Mar

-12


Ju Se D M Ju Se D M Ju Se D M

2/3/5 7/10/30

Foreign Awards of TIPS at Auction, Percent

20%

25%

15%

20%n

Inve

stor

s

10%

war

ded

to F

orei

gn

5%

% A

w

0%

un-0

9

ep-0

9

Dec

-09

Mar

-10

un-1

0

ep-1

0

Dec

-10

Mar

-11

un-1

1

ep-1

1

Dec

-11

Mar

-12


Ju Se D M Ju Se D M Ju Se D M

5-Year 10-Year 20-Year 30-Year

Primary Dealer Awards at Auction, Percent

65%

70%

d

55%

60%

Am

ount

Aw

arde

d

45%

50%

otal

Com

petit

ive

A

35%

40%

% o

f To

30%

Jun-

09

Sep-

09

Dec

-09

Mar

-10

Jun-

10

Sep-

10

Dec

-10

Mar

-11

Jun-

11

Sep-

11

Dec

-11

Mar

-12

4/13/26-Week (13-week moving average) 52-Week (6-month moving average)

44

/ / ( g g ) ( g g )

2/3/5 (6-month moving average) 7/10/30 (6-month moving average)

TIPS (6-month moving average)

AppendixAppendix

45

Issue Settle�DateStop�Out�Rate�(%)


Competitive�Awards�($�bn)

%�Primary�Dealer %�Direct %�Indirect

Non�Competitive�Awards�($�bn)

SOMA�Add�Ons�($�bn)

10�Yr�Equivalent�($�bn)

4-Week 01/04/12 0.000 5.34 29.42 75.8% 4.2% 19.9% 0.20 2.42 0.254-Week 01/10/12 0.000 5.09 29.72 78.4% 5.4% 16.2% 0.28 5.94 0.264-Week 01/18/12 0 015 4 66 29 78 56 2% 4 3% 39 5% 0 22 3 78 0 26

Bill�Issues

4-Week 01/18/12 0.015 4.66 29.78 56.2% 4.3% 39.5% 0.22 3.78 0.264-Week 01/24/12 0.020 4.77 29.19 72.7% 9.5% 17.8% 0.24 6.29 0.254-Week 01/31/12 0.050 4.94 32.82 59.1% 7.4% 33.5% 0.18 2.42 0.284-Week 02/07/12 0.060 4.37 36.75 60.3% 11.6% 28.0% 0.25 5.94 0.324-Week 02/14/12 0.110 3.97 39.80 52.6% 7.0% 40.4% 0.20 3.78 0.344-Week 02/22/12 0.060 4.11 39.76 68.2% 11.5% 20.3% 0.24 6.29 0.344-Week 02/28/12 0.100 4.20 39.75 62.1% 14.8% 23.1% 0.25 2.42 0.344-Week 03/06/12 0.060 4.50 39.71 49.2% 12.9% 38.0% 0.29 5.94 0.344-Week 03/13/12 0.070 4.05 39.79 69.5% 14.5% 16.0% 0.21 3.78 0.354-Week 03/20/12 0.100 3.99 39.77 73.2% 10.9% 15.9% 0.23 6.29 0.354-Week 03/27/12 0.065 4.15 34.59 70.2% 11.5% 18.2% 0.25 2.42 0.30

13-Week 01/03/12 0.015 4.93 27.38 77.4% 9.1% 13.4% 0.76 0.00 0.7813-Week 01/09/12 0.010 5.03 28.11 66.3% 3.8% 29.9% 0.74 0.00 0.8013-Week 01/17/12 0.025 4.41 28.22 69.4% 7.4% 23.2% 0.77 0.00 0.8113-Week 01/23/12 0.040 4.98 27.56 75.0% 6.5% 18.5% 0.81 0.00 0.7913 W k 01/30/12 0 050 4 56 30 29 70 1% 6 6% 23 3% 0 71 0 00 0 8613-Week 01/30/12 0.050 4.56 30.29 70.1% 6.6% 23.3% 0.71 0.00 0.8613-Week 02/06/12 0.080 4.63 32.05 74.4% 6.7% 19.0% 0.76 0.00 0.9213-Week 02/13/12 0.095 4.31 32.03 77.1% 8.1% 14.7% 0.77 0.00 0.9013-Week 02/21/12 0.085 4.33 32.28 74.5% 10.1% 15.3% 0.72 0.00 0.9113-Week 02/27/12 0.115 4.24 31.76 79.8% 5.7% 14.6% 0.71 0.00 0.9013-Week 03/05/12 0.080 4.41 31.97 67.1% 8.2% 24.7% 0.73 0.00 0.9113-Week 03/12/12 0.095 4.83 32.24 42.4% 5.8% 51.8% 0.76 0.00 0.9413-Week 03/19/12 0 095 4 30 32 15 61 4% 9 7% 28 9% 0 75 0 00 0 9413 Week 03/19/12 0.095 4.30 32.15 61.4% 9.7% 28.9% 0.75 0.00 0.9413-Week 03/26/12 0.085 4.62 29.51 59.4% 7.1% 33.5% 0.74 0.00 0.8626-Week 01/03/12 0.055 5.23 25.43 66.6% 9.6% 23.8% 0.57 0.00 1.4526-Week 01/09/12 0.050 4.84 25.59 62.4% 7.2% 30.5% 0.70 0.00 1.4626-Week 01/17/12 0.060 4.67 25.81 56.5% 9.4% 34.0% 0.69 0.00 1.4826-Week 01/23/12 0.070 5.01 25.55 57.5% 7.6% 34.9% 0.73 0.00 1.4626-Week 01/30/12 0.075 4.78 27.59 58.3% 7.0% 34.7% 0.61 0.00 1.5626-Week 02/06/12 0.100 4.76 29.72 67.3% 6.5% 26.2% 0.68 0.00 1.7126-Week 02/13/12 0.130 4.36 29.84 71.6% 8.6% 19.8% 0.76 0.00 1.6826-Week 02/21/12 0.125 4.43 29.90 62.3% 8.2% 29.4% 0.72 0.00 1.6926-Week 02/27/12 0.145 4.32 29.63 67.8% 6.8% 25.4% 0.70 0.00 1.6826-Week 03/05/12 0.130 4.54 29.90 69.3% 7.3% 23.4% 0.60 0.00 1.6926-Week 03/12/12 0.145 5.10 30.07 68.8% 5.3% 25.9% 0.63 0.00 1.7626-Week 03/19/12 0.150 4.42 30.11 67.1% 8.5% 24.4% 0.59 0.00 1.7526-Week 03/26/12 0.150 4.79 27.39 55.5% 8.1% 36.4% 0.65 0.00 1.5952 W k 01/10/12 0 105 4 82 24 76 59 2% 12 2% 28 6% 0 14 0 00 2 76

46

52-Week 01/10/12 0.105 4.82 24.76 59.2% 12.2% 28.6% 0.14 0.00 2.7652-Week 02/07/12 0.140 4.61 25.83 65.8% 9.7% 24.5% 0.17 0.00 2.9252-Week 03/06/12 0.170 4.74 25.85 59.5% 8.1% 32.4% 0.15 0.00 2.89

Stop Out Rate, Bid-to-Cover Ratio, % Primary Dealer, % Direct and % Indirect are weighted averages of Competitive Awards. 10-Yr equivalent is approximated using prices at settlement and includes both Competitive and Non-Competitive Awards.

I S ttl D tStop�Out�R t (%)

Bid�to�Cover�R ti

Competitive�A d ($ b )

%�Primary�D l % Di t % I di t

Non�Competitive�A d ($ b )

SOMA�Add�O ($ b )

10�Yr�Equivalent�($ b )

Nominal�Coupon�Securities

Issue Settle�Date Rate�(%) Ratio Awards�($�bn) Dealer %�Direct %�Indirect Awards�($�bn) Ons�($�bn) ($�bn)2-Year 01/24/12 0.250 3.75 34.80 58.8% 8.3% 32.9% 0.20 0.66 7.742-Year 02/21/12 0.310 3.54 34.83 54.7% 9.5% 35.8% 0.17 0.50 7.732-Year 03/27/12 0.340 3.69 34.81 44.3% 21.4% 34.3% 0.19 0.83 7.933-Year 01/10/12 0.370 3.73 31.97 56.1% 5.3% 38.5% 0.03 2.27 10.563-Year 02/07/12 0 347 3 30 31 96 63 8% 8 5% 27 7% 0 04 3 90 10 473-Year 02/07/12 0.347 3.30 31.96 63.8% 8.5% 27.7% 0.04 3.90 10.473-Year 03/12/12 0.456 3.44 31.97 56.5% 8.9% 34.6% 0.03 2.22 10.885-Year 01/25/12 0.899 3.17 34.96 41.5% 15.1% 43.4% 0.04 0.66 19.105-Year 02/22/12 0.900 2.89 34.97 45.3% 12.9% 41.8% 0.03 0.50 18.975-Year 03/28/12 1.040 2.85 34.97 46.8% 11.3% 41.9% 0.03 0.83 19.427-Year 01/26/12 1.359 2.73 28.97 56.6% 11.6% 31.8% 0.03 0.55 21.487-Year 02/23/12 1.418 3.11 28.98 38.9% 19.3% 41.8% 0.02 0.41 21.387-Year 03/29/12 1.590 2.72 28.99 43.8% 13.4% 42.8% 0.01 0.69 21.79

10-Year 01/11/12 1.900 3.29 20.98 44.3% 17.4% 38.3% 0.02 1.49 21.0010-Year 02/08/12 2.020 3.05 23.87 43.3% 17.9% 38.9% 0.05 2.93 23.9210-Year 03/13/12 2.076 3.24 20.98 42.0% 19.4% 38.6% 0.02 1.46 21.0030-Year 01/12/12 2.985 2.60 12.99 60.9% 7.2% 31.9% 0.01 0.92 29.5130-Year 02/09/12 3.240 2.47 15.96 56.1% 14.7% 29.2% 0.04 1.95 34.4230-Year 03/14/12 3.383 2.70 12.99 56.3% 14.7% 29.0% 0.01 0.90 26.82

S O id C C i i % i C i i SO dd 0 i lTIPS

Issue Settle�DateStop�Out�Rate�(%)


Competitive�Awards�($�bn)

%�Primary�Dealer %�Direct %�Indirect

Non�Competitive�Awards�($�bn)

SOMA�Add�Ons�($�bn)

10�Yr�Equivalent�($�bn)

10-Year 01/19/12 (0.046) 2.91 14.83 50.3% 13.4% 36.3% 0.14 0.28 16.5010-Year 03/22/12 (0.089) 2.81 12.95 38.5% 21.1% 40.4% 0.05 0.00 14.6230-Year 02/16/12 0.770 2.46 8.96 45.8% 13.6% 40.6% 0.04 0.13 26.15

47Stop Out Rate, Bid-to-Cover Ratio, % Primary Dealer, % Direct and % Indirect are weighted averages of Competitive Awards. 10-Yr equivalent is approximated using prices at settlement and includes both Competitive and Non-Competitive Awards. For TIPS 10-Yr equivalent, a constant auction BEI is used as the inflation assumption.

Presentation for:

The Treasury Borrowing Advisory Committee

May 1, 2012

The Charge

Treasury regularly studies the evolution of fixed income markets, particularly with d h h i l f fi i l i i i h l i l d b h i

g

regard to the changing roles of financial institutions, technological advances, behavior of market participants and regulation.

We would like the Committee’s views on how fixed income markets have changed over the last few years and how they may evolve in the future. Please comment on both positive and negative developments. Are there any specific market structure concerns h dthat warrant discussion?

1

Changes to the Fixed Income Markets over the Past Few Yearsg

1. Reduced liquidity of spread productL k l f k d l f T l d• Likely a consequence of investor risk aversion and regulatory reform. Treasuries remain liquid

2. Prevalence of “risk on / risk off” mentality• Extreme valuations correlations rising excess returns becoming more volatile• Extreme valuations, correlations rising, excess returns becoming more volatile

3. Role of government • Extraordinary monetary policy (ZIRP, balance sheet growth, communication/transparency)Extraordinary monetary policy (ZIRP, balance sheet growth, communication/transparency)• Regulatory reform

4. Changes in market participant behaviorg p p• Cyclical (risk tolerance) and secular (demographics / LDI strategies), customized solutions

5. Growing role of electronic trading• Driven by increased efficiency and regulatory reform

2

Reduced Corporate Bond LiquidityDealer inventories of corporate bonds have declined by morethan 70% since 2007, while the credit market has grown Investment grade corporate bid-offer spreads have increased

p q y

300

350

5 000

5,500

30

35

100

150

200

250

300B

illio

ns o

f dol

lars

3,000

3,500

4,000

4,500

5,000

Bill

ions

of d

olla

rs

10

15

20

25

30

0

50

Dec

-01

Dec

-02

Dec

-03

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

Dec

-11

B

2,000

2,500

B

Primary Dealer Corporate Bond Inventory (LHS)

Si f C dit M k t (IG HY RHS)

0

5

Dec

-03

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

A bid ff d (4 k b )

Trading is concentrated in a limited number of issuers Relative to 2006, turnover is better for on-the-run IG corporate37 credits account for 50% of IG corporate trading volume bonds but significantly worse for off-the-run bonds

Size of Credit Market (IG+HY, RHS) Average bid-offer spread (4 w eek average, bps)

3

Source: Barclays, JP Morgan. The bottom charts are for the 9 months ending September 2011.

Years since issuance

Implications of Reduced Corporate Bond Liquidityp p q y

• A reduction in liquidity / wider bid-offer spreads has both an upfront cost to existing investors (who have to mark their existing holdings at wider levels) as well as an ongoing cost for issuers and investors

$o Per a recent study*, a strict implementation of the Volcker Rule for the corporate bond market may cost $90-315bn upfront plus $12-43bn/yr for issuers and $1-4bn/yr for investors in future transactions

o Analysis by Barclays** indicates that the liquidity premium has risen from ~20bps in Jan ’07 to ~40bps in Mar ’12

• Policy makers should carefully consider the impact on market liquidity when introducing new financialPolicy makers should carefully consider the impact on market liquidity when introducing new financial regulations, such as the Volcker Rule

o SIFMA, the Credit Roundtable (a group of large fixed income money managers), and other market participants have submitted comments on this topic

o Given the size of the bond markets, it would be difficult, if not impossible, for the banking sector to re-intermediate the capital markets (replacing bonds with loans) in response to a prolonged market dislocation

Decomposition of Investment Grade Corporate Bond Spreads

4

* Study conducted by Oliver Wyman at the request of SIFMA** Barclays analysis regresses corporate bond spreads on bid-offer spreads and CDS spreads Source: Oliver Wyman, Barclays

Fixed Income Market Dynamics – Risk On / Risk Off

160 50%

y /

G ld +100%

Recently, US Treasuries have been volatile when compared tothe low level of yields (1sd move = 97bps vs. 10yr yield of ~2%)

Performance of “Safe” and “Risky” Securities: Dec ’07 – Mar ‘12

406080

100120140

15%20%25%30%35%40%45%Gold +100%

Japanese Yen +35%10-Year US Treasury +34%Swiss Franc +26%

S&P 500 +5%

-2040

Dec

-90

Dec

-92

Dec

-94

Dec

-96

Dec

-98

Dec

-00

Dec

-02

Dec

-04

Dec

-06

Dec

-08

Dec

-10

0%5%10%

Rolling 52 Week Realized Annualized Vol of 10yr Tsy Yields (in bps LHS)

S&P 500 +5%Euro Stoxx 50 -32%

Note: All returns are measured in dollars, except for Euro Stoxx 50 which is measured in Euros. Gold, Swiss Franc,and Japanese Yen returns are calculated based on

h ll h i l d i f Rolling 52-Week Realized Annualized Vol of 10yr Tsy Yields (in bps, LHS)

Rolling 52-Week Realized Annualized Vol of 10yr Tsy Yields (as % of yield, RHS)

Corporate excess returns have become more volatileHSBC Risk On - Risk Off IndexBased on movements of 34 asset classes . Higher = more co-movement

spot rate changes; all other returns include reinvestment of interest/dividends.

250221 bps

150

200

250

thly

Exc

ess

Ret

urn

redi

t Ind

ex (b

ps)

+217%

0 3

0.35

0.4

0.45

0.5

70 bps

0

50

100

Una

nnua

lized

Mon

tof

Bar

clay

s U

S C

0.1

0.15

0.2

0.25

0.3

Risk On / Risk Off Becomes More

Prominent

5

Dec 1997 - Dec 2007 Dec 2007 - Dec 2011

Source: Bloomberg, Barclays, HSBC Dec

-90

Dec

-92

Dec

-94

Dec

-96

Dec

-98

Dec

-00

Dec

-02

Dec

-04

Dec

-06

Dec

-08

Dec

-10

Role of Government – Changes in Monetary Policy

• Global central banks have taken extraordinary actions in response to the financial crisis

o Monetar polic rates c t to near ero

g y y

o Monetary policy rates cut to near zeroo Balance sheet expansion and compositiono Federal Reserve’s communication strategy / level of transparencyo Interest on Excess Reserves

• Anticipation of central bank behavior has become a significant driver of market sentiment

• Exit strategy uncertain

Central bank balance sheets have expanded significantly Policy rates have been cut to near zero

6%

7%

3.5

4.0

4.5

of d

olla

rs

2%

3%

4%

5%

1 0

1.5

2.0

2.5

3.0

Trill

ions

o

0%

1%

Dec

-99

Dec

-00

Dec

-01

Dec

-02

Dec

-03

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

Dec

-11

-

0.5

1.0

Dec

-99

Dec

-00

Dec

-01

Dec

-02

Dec

-03

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

Dec

-11

6

Source: Bloomberg

Fed ECB BOJ BOEFed ECB BOJ

Role of Government – Regulatory Reform Overviewg y

• A significant amount of regulatory reform has occurred and rules continue to be written

o Movement toward Basel III in the United States� Higher capital requirements� Liquidity requirements

D dd F k bill d M l ki ill io Dodd-Frank bill enacted. Many rulemakings still in progress� Volcker Rule� Derivatives Reform� Risk Retention – “skin in the game” for securitizations� Orderly Liquidation Authorityy q y� Consumer Financial Protection Bureau� Financial Stability Oversight Council

o Money market reform� New holdings restrictions enacted in 2010� Additional reforms (floating NAV, holdback requirement, capital buffer) currently being analyzed

• While these reforms are well-intentioned and will likely increase the soundness of large US financial i i i h b fi f d i f l bili i i hinstitutions, these benefits are not cost-free and may, in fact, create new vulnerabilities in the financial system

o Lower market liquidity, decreased credit availabilityo Central clearing may create entities that are “too big to fail” and suffer from moral hazardo Banks may engage in higher risk (higher ROA) activities to compensate for higher capital requirements

7

o Banks may engage in higher risk (higher ROA) activities to compensate for higher capital requirements

Impact of Regulatory Reform on Investment Banking

• Investment banks are being pressured by a number of forces B l 2 5 d 3

p g y g

o Basel 2.5 and 3o Volcker Ruleo Electronic Tradingo Centralized Clearingo Centralized Clearing

• In order to earn their cost of capital, investment banks increasingly need to differentiate themselveso Services offered to investors

� Willingness to commit balance sheet to facilitate trades� Research, analytics, and technology� Access to issuers, companies, and market experts� Collateral management services

o Services offered to issuers� Balance sheet commitments (e g revolvers)� Balance sheet commitments (e.g. revolvers)� Breadth of distribution network� Transaction banking� Risk managementg

8

Reforming the OTC Derivative Marketsg• In recent years, several reforms to reduce risk / improve disclosure have been implemented

o At the end of 2010, ~50% of interest rate swaps and <10% of CDS were centrally cleared o Trillions of dollars of partially offsetting trades (both CDS & interest rate swaps) have been compressed

O t t di CDS ti l + t di l bli h d kl b th DTCCo Outstanding CDS notional + trading volume published weekly by the DTCC

• In September 2009, G-20 leaders committed to reforming the OTC marketo“All standardized OTC derivative contracts should be traded on exchanges or electronic trading platforms,

where appropriate, and cleared through central counterparties by end-2012 at the latest. OTC derivative h ld b d d N ll l d h ld b b h hcontracts should be reported to trade repositories. Non-centrally cleared contracts should be subject to higher

capital requirements.”

• Dodd-Frank + subsequent rulemakings by regulators will implement these reformsGross notional outstanding exceeds $700trn, but is a

25

30

35

40

ns o

f dol

lars

500

600

700

800

ns o

f dol

lars

poor measure of risk posed to the financial system Gross credit exposure, a more accurate assessment of risk, is ~$3trn

5

10

15

20

5

Trill

ion

100

200

300

400

500

Trill

ion

0

Jun.

1998

Jun.

1999

Jun.

2000

Jun.

2001

Jun.

2002

Jun.

2003

Jun.

2004

Jun.

2005

Jun.

2006

Jun.

2007

Jun.

2008

Jun.

2009

Jun.

2010

Jun.

2011

Gross Market Value

Gross Credit Exposure (Gross Market Value adjusted for netting)

0

Jun.

1998

Jun.

1999

Jun.

2000

Jun.

2001

Jun.

2002

Jun.

2003

Jun.

2004

Jun.

2005

Jun.

2006

Jun.

2007

Jun.

2008

Jun.

2009

Jun.

2010

Jun.

2011

Interest Rate Contracts FX ContractsCredit Default Sw aps Other Gross Credit Exposure (Gross Market Value, adjusted for netting)

9

p

Source: Bank for International Settlements (BIS)Gross market value = Cost of replacing all existing contractsGross credit exposure = Gross market value adjusted for netting agreements

Implications of OTC Derivative Reformp

“As Mark Twain’s character Pudd’nhead Wilson once opined, if you put all your eggs in one basket, you better watch that basket.” – Chairman Ben Bernanke speaking about clearinghouses, April 2011

• Implications of central clearingo Clearinghouses are likely too-big-to-failo Moral hazard could be substantial, depending on structure

�P fit t h h ld hil l b b l i g b�Profits accrue to shareholders, while losses are borne by clearing members�Competition among clearinghouses could lead to degradation of standards�Regulators should consider setting minimum margin and shareholder equity requirements to ensure

incentives are alignedo Collateral posting requirements could trigger a liquidity squeeze during a market panicp g q gg q y q g p

�A recent BIS study found that although major derivatives dealers likely have sufficient unencumbered assets to meet initial margin requirements, dealers could face large variation margin calls (a 1-in-200 day event could require ~$60bn in collateral posting by the 14 largest dealers)

• Implications of exchange trading• Implications of exchange trading o Volumes likely to increaseo Growth of electronic and algorithmic tradingo Reduced liquidity / higher cost of non-standard contracts?

10

Source: Federal Reserve, JP Morgan, BIS

Impact of Regulation on Securitization Marketsp g• Depending on the final rules, regulatory reform may adversely affect issuance volumes, investor

demand, and pricing of securitizationso Risk retention

� 5% risk retention might be too large / make securitization uneconomical for certain asset classes� If final rules mandate a “horizontal slice,” then trusts would likely be consolidated on balance sheet�Premium capture rules (securitization proceeds worth more than par are retained and become a first loss

piece) seriously harm the economics of issuing CMBS and non-agency RMBS

P d RWA l l ti i li lo Proposed RWA calculation is pro-cyclical�Under the Simplified Supervisory Formula Approach, capital charges on securitizations increase as a

function of realized losses (with sharp cliff effects at certain thresholds)

o Reg AB II requires more disclosure, increasing costs for 144A deals (currently >40% of ABS issuance)

V l k R l l k l d d k l do Volcker Rule likely to reduce secondary market liquidity

• On a positive note, the Basel III Liquidity Coverage Ratio requirement may encourage banks to replace short-term funding with securitizations

ABS, Non-Agency MBS, and CMBS issuance have declined sharply The amount outstanding has dropped by ~40% since 2007

2,5003,0003,5004,0004,500

dolla

rs

800

1,000

1,200

1,400

f dol

lars

ABS, Non Agency MBS, and CMBS issuance have declined sharply The amount outstanding has dropped by 40% since 2007

0500

1,0001,5002,0002,500

96 97 98 99 00 01 02 03 04 05 06 07 08 09 0 1

billi

ons

of

0

200

400

600

996

997

998

999

000

001

002

003

004

005

006

007

008

009

010

011

billi

ons

o

199

199

199

199

200

200

200

200

200

200

200

200

200

200

201

201

ABS Non-Agency MBS CMBS

19 19 19 19 20 20 20 20 20 20 20 20 20 20 20 20

ABS Non-Agency MBS CMBS

11

Source: JP Morgan, Merrill Lynch, Federal Reserve, Commercial Mortgage Alert, Loan Performance

Fixed Income Market Dynamics – Supply & Demandy pp y• Supply

o Positive net new issuance (new issuance > redemptions) from US govt. and corporationso Negative net new issuance of securitized products (especially non-agency MBS)

2,000

2,500

3,000

dolla

rs)

Treasuries

Agency Debt (negative '07 - '12)

Agency MBS (negative '10 - '12)

CLOs (negative '09 - '12)

$239

$1,113

500

1,000

1,500

uanc

e (b

illio

ns o

f ABS (negative '08 - '12)

CMBS (negative '08 - '12)

Non-agency MBS (negative '08 - '12)

Build America Bonds

EM Corporates$239

-1,000

-500

0

2004 2005 2006 2007 2008 2009 2010 2011 F2012

Net I

ssu p

HY corporates

IG corporates

Total Net Issuance

Total Net Issuance (ex Tsy & AgencyDebt)

• Demando Mutual Funds and ETFs – Significant inflows into fixed income fundso Money Market Funds – Assets stabilizing, prime funds continue to move up in quality

C D fi d B fi Pl Shif i i fi d i i l l l d i

2004 2005 2006 2007 2008 2009 2010 2011 F2012 Debt)

o Corporate Defined Benefit Plans – Shifting into fixed income, particularly long-duration assetso Rest of World – Buying treasuries, GSE holdings decliningo Federal Reserve – Acquired treasuries, agency bonds, and agency MBS via QEo Growth of customized and non-traditional solutions – Global, credit-focused, unconstrained

M f i i i i

12

o Movement from active to passive equity strategies

Source: JP Morgan

Fixed Income Mutual Funds

3 0

3.5

ars) 25%

30%

Fixed income mutual funds are experiencing strong inflows Fixed income flows have been correlated with performance

1.5

2.0

2.5

3.0ts

(Tr

illio

ns o

f dol

la

0%

5%

10%

15%

20%

0.0

0.5

1.0

-90

-91

-92

-93

-94

-95

-96

-97

-98

-99

-00

-01

-02

-03

-04

-05

-06

-07

-08

-09

-10

-11

Ass

et

-15%

-10%

-5%

Dec

-90

Dec

-92

Dec

-94

Dec

-96

Dec

-98

Dec

-00

Dec

-02

Dec

-04

Dec

-06

Dec

-08

Dec

-10

Dec

Dec

Dec

Dec

Dec

Dec

Dec

Dec

Dec

Dec

Dec

Dec

Dec

Dec

Dec

Dec

Dec

Dec

Dec

Dec

Dec

Dec

Last 12-Month Return of Barclays US Aggregate Bond Index

Next 12-Month Flow s (as % of AUM)

The share of mutual fund assets that are passively managed has risen Global and world bond funds have been growing quickly

16%

6%

8%

10%

12%

14%

16%

150

200

250

300

illio

ns o

f dol

lars

)0%

2%

4%

6%

1993

1995

1997

1999

2001

2003

2005

2007

2009 0

50

100

-90

-91

-92

-93

-94

-95

-96

-97

-98

-99

-00

-01

-02

-03

-04

-05

-06

-07

-08

-09

-10

-11

Ass

ets

(B

13

Bond and Hybrid Funds Equity Funds

Source: Investment Company Institute (ICI), Barclays

Dec

-D

ec-

Dec

-D

ec-

Dec

-D

ec-

Dec

-D

ec-

Dec

-D

ec-

Dec

-D

ec-

Dec

-D

ec-

Dec

-D

ec-

Dec

-D

ec-

Dec

-D

ec-

Dec

-D

ec-

Growing Popularity of Fixed Income ETFsg p y

• While still small relative to fixed income mutual funds, fixed income ETFs have grown quickly over the past few years

o ~$4bn AUM as of 12/31/2002, ~$21bn as of 12/31/2005, and ~$184bn as of 12/31/2011

• High Yield ETFs have grown especially fast and now hold over 3% of outstanding HY bonds, while High Grade ETFs hold ~1% of outstanding bonds

• High Yield ETF fund flows have begun to exert technical forces on the bond market, with benchmark-eligible bonds outperforming non-benchmark bonds during periods of HY ETF inflows (and vice versa)

AUM f Fi d I M l F d d ETF B h k li ibl b d d f h HY ETF h i flAUM of Fixed Income Mutual Funds and ETFs Benchmark-eligible bonds tend to outperform when HY ETFs have inflows

2 5

3.0

3.5

ns o

f Dol

lars

1 0

1.5

2.0

2.5

Trill

ion

0.0

0.5

1.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

14

Long-Term Bond Mutual Funds Bond ETFs

Source: ICI, BarclaysCumulative Return = Cumulative return on bonds in the Barclays U.S. High Yield Very Liquid Index minus return on HY bonds that are outside of the index but have comparable liquidity

Demand from the Rest of World and the Federal Reserve

• Demand from international investors (primarily foreign central banks)o Following the conservatorship of Fannie Mae and Freddie Mac, international investors have

become net sellers of GSE securitieso International investors continue to accumulate Treasuries

• Demand from the Federal ReserveA f l f QE1 QE2 d O T h F d l R h l d lo As of result of QE1, QE2, and Operation Twist, the Federal Reserve has accumulated a large portfolio of Treasury and GSE MBS securities

C l i fl f i i l i i 12/31/06 C l i fl f h F d l R i 12/31/06Cumulative flows of international investors since 12/31/06 Cumulative flows of the Federal Reserve since 12/31/06

2,000

2,500

e 12

/31/

06

ars)

2,000

2,500

e 12

/31/

06

ars)

500

1,000

1,500

mul

ativ

e flo

ws

sinc

e(b

illio

ns o

f dol

la

500

1,000

1,500

mul

ativ

e flo

ws

sinc

e(b

illio

ns o

f dol

la

-500

0

2007

Q1

2007

Q3

2008

Q1

2008

Q3

2009

Q1

2009

Q3

2010

Q1

2010

Q3

2011

Q1

2011

Q3

Cum

-500

0

2007

Q1

2007

Q3

2008

Q1

2008

Q3

2009

Q1

2009

Q3

2010

Q1

2010

Q3

2011

Q1

2011

Q3

Cum

15

Agency and GSE-Backed Securities US TreasuriesAgency and GSE-Backed Securities US Treasuries

Source: Federal Reserve

Corporate Defined Benefit Plansp

• In contrast to retail investors, who are more focused on preservation of capital, corporate DB plans are more concerned with matching their assets and liabilities

oAs a result of the financial crisis, corporate DB plans have both increased their allocation to fixed income and lengthened their duration

• There is a supply-demand mismatch for long-dated corporate bondso Issuance of >10yr investment grade corporate bonds has dropped from ~$220bn in 2007 to ~$100bn in 2011o Issuance of >10yr investment grade corporate bonds has dropped from ~$220bn in 2007 to ~$100bn in 2011

Asset Allocation of Corporate DB Plans Asset Allocation of Corporate DB Plans over Next 1 – 2 Years

8% 12%19%

70%

80%

90%

100%

21%

20%

4%

3%

75%

70%

61%

56%

5%

9%

35%

42%

High Yield

Global Equity

US Small Cap Equity

US Large Cap Equity

40%61%64%

30%

40%

50%

60%

32%

29%

27%

21%

67%

62%

59%

75%

1%

9%

14%

5%

TIPS

Emerging Markets Equity

Non-US Equity

High Yield

39%

26%26%

0%

10%

20%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

41%

41%

35%

57%

50%

63%

2%

9%

1%

0% 20% 40% 60% 80% 100%

Long Corporate Bonds

US Investment Grade Fixed Income

Long Government Bonds

Cash Fixed Income Equity Alternatives & Other

16

0% 20% 40% 60% 80% 100%

% planning to increase % planning no change % planning to decreaseSource: Barclays, Pensions & Investments, Pyramis

Money Market Fundsy

• In September 2008, prime funds experienced their worst-ever month of outflows (-$391bn) after a prominent fund “broke the buck”

o Many of these assets appear to have been transferred into government MMFs (+$347bn in Sep 2008)o Assets in money market funds subsequently peaked in January 2009 at ~$3.9trn

• Prime money market fund managers have become increasingly conservativeE E b k h d d f 52% f M 2011 31% f F b 2012o Exposure to European banks has dropped from 52% as of May 2011 to 31% as of Feb 2012

� This decrease has been accomplished entirely via reducing exposure to unsecured debt

Money Market Fund AUM European Bank Exposure in Prime Money Market Funds

3%9%4%

40%

50%

60%

2.5

3.0

3.5

4.0

llion

s of

Dol

lars

45% 42% 42%

22%

10%

10%

20%

30%

0 5

1.0

1.5

2.0

Tril

22%

0%

10%

H2

2006

H1

2007

H2

2007

H1

2008

H2

2008

H1

2009

H2

2009

H1

2010

H2

2010

2/28

/11

5/31

/11

6/30

/11

7/31

/11

8/31

/11

9/30

/11

10/3

1/11

11/3

0/11

12/3

1/11

1/31

/12

2/28

/12

0.0

0.5

Dec

-90

Dec

-92

Dec

-94

Dec

-96

Dec

-98

Dec

-00

Dec

-02

Dec

-04

Dec

-06

Dec

-08

Dec

-10

Taxable: Government Taxable: PrimeCDs, CP, and Other Repo

17

Tax-Exempt Total

Source: ICI, Fitch

Electronic Trading in the Treasury Market

•The treasury market is characterized by high turnover and strong liquidity$140 ll f d l d b d l 2011

g y

o ~$140 trillion of trading volume reported by primary dealers in 2011o This equates to turnover of over 14x the outstanding volume

• Dealer-Dealer Tradeso Interdealer trades are the largest segment of the marketo The vast majority of interdealer trades of on-the-run treasuries occur electronically, while off-

the-run treasuries generally trade via voiced l d d h h l h h h b ko Many interdealer trades are executed with the assistance of computer algorithms, which break

large orders into smaller pieces or automatically execute trades to hedge trading-book risks� ICAP Plc, the largest interdealer broker and whose electronic platform accounts for ~25%

of all Treasury trading volume, reported that ~45% of their 2009 trading volume in y g p gTreasuries was executed via algorithms

• Customer-Dealer Tradeso Electronic trading continues to increase in prevalenceo Electronic trading continues to increase in prevalenceo Customers can trade electronically with a variety of banks via Tradeweb and Bloombergo Prices for smaller-sized electronic trades can be automatically quoted via dealer algorithmso Voice trading remains the only option for large tradesg y p g

18

Source: SIFMA, ICAP, conversations with market participants, Federal Reserve Bank of St Louis

Electronic Trading in the Corporate Bond Marketg p

•Electronic trading plays a small, but growing, role in the corporate bond market

• MarketAxess reports market share of ~11% in investment grade corporate bond trading and ~2% in the high yield corporate market

M k tA i b li d t t 90% f l t i t di l i th k to MarketAxess is believed to represent over 90% of electronic trading volume in those marketso These trades are primarily between dealers and customerso While these trades are executed electronically, the dealer manually determines a price

10%

12%

MarketAxess Estimated Market Share of U.S. Investment Grade Corporate Trading Volume

6%

8%

0%

2%

4%

19

Source: MarketAxess

2007 2008 2009 2010 2011

Electronic Trading in the Derivatives Market

• The mandated shift of derivatives from the OTC market to exchanges or Swap Execution Facilities represents a significant change to market structure

g

• It is possible that trading dynamics of derivatives in the future will begin to resemble the equity or FX markets of today

o Higher volumes and lower bid-offer spreadso Significant shift toward electronic tradingo Increased use of computer algorithms by (1) banks and high-frequency traders to automatically

quote prices and (2) investors to source liquidity / seek best execution

• This change is not without riskso Shifting from voice to electronic trading introduces “fat finger” risk

� For instance, in 2002, the Dow dropped 100 points when a Bear Stearns trader accidentally entered a sell order for $4bn, rather than $4mm.sell order for $4bn, rather than $4mm.

o The use of algorithms to implement trades can have adverse consequences� The CFTC-SEC study of the 2010 “Flash Crash” concluded that a mutual fund who tried to sell ~$4bn

of E-Mini S&P 500 futures contracts via an algorithm was a contributor to the crash. The sell algorithm was set to target 9% of trading volume over the previous minute (without regard to price or time).was set to target 9% of trading volume over the previous minute (without regard to price or time).

o High frequency trading may become more prevalent� Analyses of the impact of high frequency traders (HFTs) reach mixed conclusions� HFTs generally enhance market liquidity. However, it has been observed that some (but not all) HFTs

withdraw liquidity from the market during periods of stress possibly leading to price volatilitywithdraw liquidity from the market during periods of stress, possibly leading to price volatility

20

Source: Federal Reserve Bank of Chicago, CFTC, SEC, BIS, Risk.net

For Further Consideration

• There are several market structure developments that we believe warrant further analysis

1. Impact of pending regulations on credit availability / liquidityo Is secondary market liquidity (outside of the treasury sector) permanently impaired?o Will the securitization market (particularly non-agency MBS , CMBS, and ABS) be a viable

source of term funding going forward?o Will the flow of credit to “Main Street” be adversely affected?

2. Clearinghouseso Are we putting all of our eggs in too few baskets?o Are incentive structures aligned to promote market stability?

3. Movement of derivatives trading from OTC to exchanges / Swap Execution Facilitieso What will the new derivatives market look like? How will the mix of investors change?o Will appropriate safeguards (i.e. pre, during, and post trade controls) be in place?o Will the likely rise in cost / decrease in liquidity of non-standardized derivatives adversely affect

end users with legitimate hedging needs?

4. Systemic threats posed by reduced banking sector profitabilityo If regulatory reform reduces the ability of banks to cover their cost of capital, what new activities

will they undertake? What will be the consequences?

21

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