Financial Implications of the Shrinking Supply of U.S. Treasury Securities

March 20, 2001

Contents

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1. Introduction and Summary
    
2. Historical Development of Government Securities Markets
   1. The Major Government Securities Markets
   2. The Evolution of the U.S. Treasury Market
   3. The Actual and Projected Decline in the Supply of U.S. Treasury Securities
   
   
3. Key Characteristics and Roles of Government Securities and Government Securities Markets
   
1. Key Characteristics
   
2. Roles of Government Securities in National and International Markets
      Benchmark interest rates
      Hedging interest rate risk
      Position funding and liquidity management
      Investment and position taking
      Government securities as near-monies and safe havens
4. Recent Market Developments and Private and Official Reactions to the Shrinking Supply of U.S. Treasuries
1. Recent Financial Market Impact
      Rising interest-rate spreads
      Reduced liquidity and greater volatility
      Less reliable U.S. treasury yield curve
      Diminished reliability of U.S. treasuries
   
2. Private Efforts to Become Benchmark Issuers
   
3. Changes in U.S. Federal Reserve Balance Sheet
5. Private and Public Policy Questions Raised by the Shrinking Supply of Treasury Securities
   
   1. Are There Private Substitutes for Government Benchmarks?
      
   2. What Are the Possible Consequences for Day-to-Day Liquidity Management and Longer-Term Portfolio Management?
      
   3. How Might the Ability to Hedge Interest-Rate Risk be Affected?
      
   4. Are There Natural Substitutes for U.S. Treasuries as a Universally Accepted Collateral?
      
   5. How Might Market Dynamics be Altered by the Absence of a Credit-Risk Free Safe Haven?
      
   6. Is the International Role of the Dollar Likely to be Affected?

6. Conclusions

Tables

1. Global Bond Markets
   
2. Relative Size of Repo Markets
   
3. Assets of U.S. Federal Reserve Board
   
4. U.S. Federal Reserve Holdings of U.S. Treasury Securities

Figures

1. Public Debt, 1940-2004
   
2. Composition of the U.S. Public Debt
   
3. Maturity Distribution of Interest-bearing Publicly Held Treasury Debt, 2000-2030
   
4. Ownership of U.S. Treasury Securities
   
5. Ownership of U.S. Treasury Securities Outside of U.S. Federal, State, and Local Government Accounts
   
6. Projected Treasury Debt
   
7. Projected Path of Publicly Held Treasury Debt
   
8. U.S. Corporate Bonds: Yields and Spreads
   
9. Ten-Year Swap and Treasury Rates
   
10. Bid-Ask Spreads of U.S. Treasury Bills
    
11. Bid-Ask Spreads of U.S. Treasury Notes
    
12. Off-the-Run On-the Run Yield Spread of One-Year U.S. Treasury Bills
    
13. Volatility of 10-Year Swap Spread
    
14. U.S. Treasury Yield Curve