Qwafafew talk 31 jan2013
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Transcript of Qwafafew talk 31 jan2013
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Win Analytics LLC
The National Debt: Myths and Realities
A Presentation to the Denver Chapter of
QWAFAFEW
by Winthrop T. Smith
January 31, 2013
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Win Smith and Win Analytics LLC
1
• Win Smith – President and Founder of Win Analytics LLC
– 30+ Years in Investment Banking and Finance
– Oxford MSc in Mathematical Finance
• Win Analytics LLC – Financial Consulting Firm
– Research
– Transaction Structuring
– Financial Modelling
– Expert Witness
• Websites – www.winanalytics.com
– Blog: welltemperedspreadsheet.wordpress.com
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2
Background: The National Debt
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The National Debt Clock April 2008
3
Jesper Rautell Balle
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Federal Outlays Combined On-Budget and Off-Budget
1990-2011 (Actual), 2012-2017 (Est.)
4
$0
$1
$2
$3
$4
$5
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
$Trillions
Fiscal Year
Net interest National defense Medicare Social Security Other
Data Source: White House
Estimated
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Federal Receipts vs Outlays Combined On-Budget and Off-Budget
1990-2011 (Actual), 2012-2017 (Est.)
5
$0
$1
$2
$3
$4
$5
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
$Trillions
Fiscal Year Data Source: White House
Outlays
Receipts
Deficits
Surpluses
Estimated
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Federal Debt Combined On-Budget and Off-Budget
1990-2011 (Actual), 2012-2017 (Est.)
6
$0
$5
$10
$15
$20
$25
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
$Trillions
Fiscal Year
Held by Public Held by Gov't Accts Held by Federal Reserve
Data Source: White House
Estimated
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U.S. Treasury Marketable Debt Outstanding Debt by Maturity Year
As of May 31, 2012
7
$0
$500
$1,000
$1,500
$2,000
$2,500
2012 '14 '16 '18 '20 '22 '24 '26 '28 '30 '32 '36 '38 '40 '42
$Billions
Maturity (Calendar Year)
Bills Notes Bonds TIPS
Data Source: U.S. Treasury
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U.S. Treasury Marketable Debt Outstanding Securities by Issue Date and Maturity Date
as of May 31, 2012
8
6/1/80
6/1/84
6/1/88
6/1/92
6/1/96
6/1/00
6/1/04
6/1/08
6/1/12
6/1/12 6/1/16 6/1/20 6/1/24 6/1/28 6/1/32 6/1/36 6/1/40
Issue Date
Maturity Date
Bills Notes Bonds TIPS
Data Source: U.S. Treasury
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U.S. Treasury Marketable Debt Outstanding Bills and Notes by Issue Date and Maturity Date
as of May 31, 2012
9
6/1/00
6/1/04
6/1/08
6/1/12
6/1/12 6/1/16 6/1/20 6/1/24
Issue Date
Maturity Date
Bills Notes
Data Source: U.S. Treasury
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U.S. Treasury Marketable Debt Outstanding Bills by Issue Date and Maturity Date
as of May 31, 2012
10
6/1/11
8/31/11
11/30/11
2/29/12
5/30/12
6/1/12 8/31/12 11/30/12 3/1/13 5/31/13
Issue Date
Maturity Date
Bills
Data Source: U.S. Treasury
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U.S. Treasury Marketable Debt Outstanding Securities by Interest Rate and Maturity Date
as of May 31, 2012
11
0%
2%
4%
6%
8%
10%
12%
6/1/12 6/1/16 6/1/20 6/1/24 6/1/28 6/1/32 6/1/36 6/1/40
Interest Rate
Maturity Date
Bills Notes Bonds TIPS
Data Source: U.S. Treasury
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Historic Interest Rates 3-Month and 30-Year Treasury Yields
1975 - 2012
12
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Recent and Historic Yield Curves
13
0%
1%
2%
3%
4%
5%
6%
7%
8%
3 mo 6 mo 1 yr 2 yr 3 yr 5 yr 7 yr 10 yr 20 yr 30 yr
Maturity
Data Source: U.S. Treasury
5/31/2012
10 Years Ago
20 Years Ago
5 Years Ago
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14
Myth #1: The Treasury is “Going Long”
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Nate Silver on January 16, 2013
15
• “Another surprise is how little we are paying in interest on the federal debt, even though the debt is growing larger and larger…. How is this possible? The reason is that although the government is borrowing a lot of money, it is doing so very cheaply because interest rates are low.… Borrowing costs aren’t expected to remain this low forever….Fortunately, much of the debt we have issued has relatively long maturities, meaning that we have locked in low rates.” [emphasis added]
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From the U.S. Treasury website in June 2012:
16
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Average Maturity of Outstanding Debt and New Issuance Fiscal Years 2009-2012
17
4.39
4.88
5.21 5.39
2.87
3.69
4.03 3.94
24
36
48
60
72
2
3
4
5
6
FY 2009 FY 2010 FY 2011 FY 2012
Years
Fiscal Year
All Marketable Debt Outstanding
New Debt Issuance
Months
Data Source: U.S. Treasury
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Marketable U.S. Treasury Securities Securities Issued in FY 2012, as of 9/30/12
18
$0T
$1T
$2T
$3T
0-1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
Principal Issued
Years to Maturity
FY 2012 (3.94 year Avg Maturity)
Data Source: U.S. Treasury
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Marketable U.S. Treasury Securities Outstanding at 2011 Fiscal Year End (9/30/2011)
19
$0T
$1T
$2T
$3TPrincipal
Maturity (Fiscal Year)
0-1 Years to Maturity1-30 Years to Maturity
Average Maturity Principal (date) (years) 0-1 Years to Maturity $2.67T Feb-2012 0.39 1-30 Years to Maturity 6.94T Oct-2018 7.06 Combined $9.62T Dec-2016 5.21
Data Source: U.S. Treasury
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Marketable U.S. Treasury Securities Outstanding at 2012 Fiscal Year End (9/30/2012)
20
$0T
$1T
$2T
$3T
Principal
Maturity (Fiscal Year)
FY 2012 IssuesOlder Issues
Average Maturity Principal (date) (years) FY 2012 Issues $3.67T Sep-2015 3.94 Older Issues/Original 6.94T Oct-2018 6.06 Older Issues/Adjustments 0.08T Jan-2026 13.34 Combined $10.69T Feb-2017 5.39
Data Source: U.S. Treasury
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Explaining Changes in Weighted Average Life
21
Group FY 2011 FY 2012 Change
FY13-41, Issued by FY11 7.06 6.06 -1.00
FY12, Issued by FY11 -1.85 1.85
FY12 New Issues -0.73 -0.73
FY12 Adjustments 0.06 0.06
Totals 5.21 5.39 0.18
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U.S. Treasury Marketable Securities All Outstanding Securities as of September 30, 2012
22
$0
$25
$50
$75
$100
$125
9/30/12 9/30/16 9/30/20 9/30/24 9/30/28 9/30/32 9/30/36 9/30/40
Principal ($Billions)
Maturity
65 Month Weighted Average
36 Month Median
Maturity
Data Source: U.S. Treasury
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U.S. Treasury Marketable Securities Securities Issued in Fiscal Year 2012
as of September 30, 2012
23
$0
$25
$50
$75
$100
$125
9/30/12 9/30/16 9/30/20 9/30/24 9/30/28 9/30/32 9/30/36 9/30/40
Principal ($Billions)
Maturity
47 Month Weighted Average
19 Month Median
Maturity
Data Source: U.S. Treasury
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Two Ways to Measure the Length of Treasury Debt All Marketable Debt and New Issuance
Fiscal Years 2009-2012
24
0
12
24
36
48
60
72
0
1
2
3
4
5
6
FY 2009 FY 2010 FY 2011 FY 2012
Years
WAM: All Debt
WAM: New Debt Weighted Average Maturity
Median: All Debt Median: New Debt
Median Maturity
Month
Data Source: U.S. Treasury
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25
Myth #2: The Debt Doesn’t Matter
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The Debt Doesn’t Matter Because:
26
A. We Can Always Refinance
B. We Managed Similar Debt After WWII
C. Low Rates Mean Investors Aren’t Worried
D. We Owe it to Ourselves
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We Can Always Refinance, Part I
27
Pop Quiz:
Suppose we always refinance and never repay the principal. If we pay interest forever, what is the present value of $11 trillion in marketable debt? Assume the interest rate on each security is the appropriate discount rate.
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We Can Always Refinance, Part II
28
Fiscal Year 2012 Debt Summary
Gross Issuance $7.6 trillion
Maturing Debt $6.5 trillion
Net Issuance $1.1 trillion
We needed more than $7 trillion in funding last year, almost 7x the new borrowing for the deficit.
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We Managed Similar Debt After World War II
29
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Debt Structure: 2012 vs 1946
30
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
<1y 1-5 5-10 >10
% o
f To
tal M
atu
riti
es
1946
2012
Post
Today
Chart Provided by: Center for Financial Stability, Inc.
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Low Rates Mean Investors Aren’t Worried
31
• There is high demand for “safe” assets
• Rates have fallen around the world
• Expectations for growth and inflation are low
But What About the Fed?
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What is the Fed Doing?
32
• Quantitative Easing and Operation Twist
• Reduce Duration Held by Private Investors: By reducing the supply of duration in the market, this action should put downward pressure on longer-term interest rates relative to levels that would otherwise prevail.
• Fed measures impact in terms of “10-Year Equivalents”
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The Fed’s Impact on the Treasury Market in “Ten-Year Equivalents”
33
Chart Source: Stone & McCarthy Research Associates
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Marketable U.S. Treasury Securities Annual Changes in Principal
Fed Holdings Compared to All Outstanding
34
-$200
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
FY 2010 FY 2011 FY 2012
$Billions
Fed Holdings Outstanding
Data Sources: U.S. Treasury, Federal Reserve
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Marketable U.S. Treasury Securities Annual Changes in Ten-Year Equivalents
Fed Holdings Compared to All Outstanding
35
-$200
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
FY 2010 FY 2011 FY 2012
$Billions
Fed Holdings Outstanding
Data Sources: U.S. Treasury, Federal Reserve
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We Owe it to Ourselves
Ownership of Marketable Debt December 2011
36
Federal
Reserve
16%
U.S.
Private
36% Foreign
Private
13%
Foreign
Central Banks
35%
Data Source: U.S. Treasury