Download US Treasury Market US Treasury Market

U.S. Treasury Market
David Beker
Presentation prepared by Joseph Shatz and Catherina Wijaya
Refer to important disclosures on page 29
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U.S. Treasury Market
ƒ Primary market:
– U.S. Treasury auctions debt to public
ƒ Secondary market:
– Trading through brokers/ dealers
Refer to important disclosures on page 29.
2
Auction Rules
ƒ Competitive Bids and Non-competitive Bids
– Competitive bids specify a bid price and quantity
– Maximum non-competitive bid is $5M par
ƒ Single Price Auctions
– All securities are allocated at the price implied by the highest
accepted yield
– All non-competitive bids are satisfied first
– The remainder are allocated to competitive bidders starting from
the ones with lowest bid yield
ƒ “35%-rule”
– Net long position in the auction has to be <35% of amount
auctioned
– at any one yield, and incl. futures, forwards, when-issued
Refer to important disclosures on page 29.
3
Auction Schedule
SECURITY
AUCTION FREQUENCY
ISSUE / SETTLEMENT DAY
4-Week
Weekly (usually Tuesdays)
Thursday
13-Week
Weekly (usually Mondays)
Thursday
26-Week
Weekly (usually Mondays)
Thursday
2-Year
Every month
End of month
3-Year
Feb., May, Aug., Nov.
15th of month
5-Year
Every month
End of month
10-Year / Reopening
Feb., May, Aug., Nov. /
Mar., Jun., Sep., Dec.
15th of month
20-Year
Last auctioned 1/8/86
N/A
30-Year / Reopening
February / August
15th of month
5-Year / Reopening
April / October
Last business day of month
10-Year / Reopening
Jan. & Jul. / Apr. and Oct.
15th of month
20-Year / Reopening
January / July
Last business day of month
30-Year
Last auctioned 10/10/01
N/A
Bills
Notes
Bonds
TIPS
Refer to important disclosures on page 29.
4
Auction Result Announcement
Refer to important disclosures on page 29.
5
Special Types of Marketable Treasury Securities
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Inflation-Indexed Securities - Principal adjusts to reflect
inflation
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STRIPS - Principal and interest components trade separately
Refer to important disclosures on page 29.
6
Outstanding Public Debt: Total & Marketable
Debt
9,000
8,000
7,000
Public Debt Outstanding
Marketable Treasury Debt
(US$ Billions)
6,000
5,000
4,000
3,000
2,000
1,000
0
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
Source: Bureau of the Public Debt. Note: ’06 numbers are as of March 31, 2006
Refer to important disclosures on page 29.
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Marketable Treasury Debt Outstanding
5,000
4,500
4,000
(US$ Billions)
3,500
3,000
2,500
2,000
1,500
1,000
500
0
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
Source: Bureau of the Public Debt. Note: ’06 numbers are as of March 31, 2006
Refer to important disclosures on page 29.
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Holdings of Marketable Debt
Federal
Reserve, 16%
Debt Held by the Public
Federal Reserve
Debt Held by
the Public, 84%
Refer to important disclosures on page 29.
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1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
(US$ Billion)
Unified Budget Deficit/Surplus
300
200
100
0
-100
-200
-300
-400
-500
Refer to important disclosures on page 29.
10
Treasury Securities Outstanding
4
3.5
2.5
Bills
Notes
2
1.5
1
0.5
20
06
20
04
20
02
20
00
19
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
0
19
80
(US$ Trillions)
3
Source: Bureau of the Public Debt. Note: ’06 numbers are as of March 31, 2006
Refer to important disclosures on page 29.
11
Ownership of Domestically Held UST
Securities
3000
$ Billions
State & Local
Gov
2500
Mutual Funds
2000
Insurance
Companies
1500
Pension Fund
State & Local
Gov
Pension Fund
Private
1000
U.S. Saving
Bonds
Depository
Institutions
500
Other Investors
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Mar
Mar
Mar
Mar
Mar
Mar
Mar
Mar
Mar
Mar
Mar
Refer to important disclosures on page 29.
12
Ownership of Domestically Held UST
Securities (Sept 2005)
Other Investors
17%
Depository
Institutions
7%
U.S. Saving
Bonds
11%
Pension Fund
Private
9%
State & Local
Gov
26%
Pension Fund
State & Local
Gov
7%
Mutual Funds
14%
Refer to important disclosures on page 29.
Insurance
Companies
9%
13
U.S. Treasurys: Total Marketable Debt and
Foreign Holdings
57%
4,500
3,500
52%
Total Marketable Debt Outstanding
47%
$ Billions
3,000
2,500
Foreign Holdings of Treasurys as a % of
Total Marketable Debt Outstanding (RHS)
42%
2,000
37%
1,500
1,000
Foreign Holdings of US Treasurys
32%
500
0
Mar00
Sep00
Mar01
Sep01
Mar02
Sep02
Mar03
Refer to important disclosures on page 29.
Sep03
Mar04
14
Sep04
Mar05
Sep05
27%
Mar06
% of Total Marketable Debt Outstanding
4,000
U.S. Treasurys: Total Marketable Debt and
Foreign Official Holdings
4,500
Total Marketable Debt Outstanding
31.0%
3,500
$ Billions
3,000
2,500
30.0%
29.0%
Foreign Official Holdings of Treasurys as
a % of Total Marketable Debt Outstanding
28.0%
2,000
27.0%
1,500
26.0%
1,000
25.0%
500
Foreign Official Holdings of US
24.0%
0
23.0%
Jun- Sep- Dec- Mar- Jun- Sep- Dec- Mar- Jun- Sep- Dec- Mar- Jun- Sep- Dec- Mar02 02 02 03 03 03 03 04 04 04 04 05 05 05 05 06
Refer to important disclosures on page 29.
15
% of Total Marketable Debt Outstanding
4,000
32.0%
U.S. Treasury Secondary Market
ƒ 24-hours trading
ƒ Electronic Trading System increasingly being used
ƒ High trading volume (liquidity), Narrow bid-offer spreads
(efficiency)
ƒ On-the-run and Off-the-run
Refer to important disclosures on page 29.
16
Primary Dealers
ƒ Designated by Federal Reserve Bank of New York
ƒ Bid competitively in Treasury auctions
ƒ Participate in coupon passes
ƒ Financing commitment to Federal Reserve Bank of New York
ƒ Provide market color
ƒ Merrill Lynch is one of primary dealers. Others: ABN Amro,
Banc of America Securities, etc.
Refer to important disclosures on page 29.
17
Inter-Dealer Brokers (IDB)
ƒ Intermediaries
ƒ Post aggregated bids and offers from various dealers
ƒ Execute trades between dealers
ƒ Provide anonymity and price transparency
ƒ Two largest: ICAP PLC and Cantor Fitzgerald (60% and 28%
market share, 2005)*
* Source: Mizrach and Neely, 2006, http://research.stlouisfed.org/wp/2006/2006-012.pdf
Refer to important disclosures on page 29.
18
Primary Dealer Transactions – U.S. Treasurys
Average Daily Volume
600
500
with Inter-Dealer Brokers
with Others
US$ Billions
400
300
200
100
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
0
Source: Federal Reserve Bank of New York primary dealer data. Note: 2006 number is as of April 19, 2006
Refer to important disclosures on page 29.
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Daily Trading Volume of U.S. Treasurys
Note: Daily inter-dealer trading volume for the indicated on-the-run securities in
billions of U.S. dollars. Sample period is Dec 30, 1996 to Mar 31, 2000.
Source: Michael Fleming, “Measuring Treasury Market Liquidity”, 2003
Refer to important disclosures on page 29.
20
Daily Trading Frequency of U.S. Treasurys
Notes: Daily number of inter-dealer trades for the indicated on-the-run securities.
Sample period is Dec 30, 1996, to Mar 31, 2000.
Source: Michael Fleming, “Measuring Treasury Market Liquidity”, 2003
Refer to important disclosures on page 29.
21
Daily Trading Frequency of U.S. Treasury
Notes
Notes: Mean daily number of inter-dealer trades by week for the on-the-run notes.
Source: Michael Fleming, “Measuring Treasury Market Liquidity”, 2003
Refer to important disclosures on page 29.
22
Bid-Ask Spreads of U.S. Treasurys
Notes: Mean daily inter-dealer bid-ask spreads for on-the-run securities.
Sample period is Dec 30, 1996, to Mar 31, 2000. 32nds is 32nds of a point
Source: Michael Fleming, “Measuring Treasury Market Liquidity”, 2003
Refer to important disclosures on page 29.
23
Bid-Ask Spreads of U.S. Treasury Notes
Notes: Mean inter-dealer bid-ask spreads by week for on-the-run notes.
Source: Michael Fleming, “Measuring Treasury Market Liquidity”, 2003
Refer to important disclosures on page 29.
24
Trade Sizes of U.S. Treasury Securities
Notes: Mean daily inter-dealer trade sizes for on-the-run securities in millions US$.
Sample period is Dec 30, 1996, to Mar 31, 2000.
Source: Michael Fleming, “Measuring Treasury Market Liquidity”, 2003
Refer to important disclosures on page 29.
25
Trade Sizes of U.S. Treasury Notes
Notes: Mean inter-dealer trade sizes by week for on-the-run notes.
Source: Michael Fleming, “Measuring Treasury Market Liquidity”, 2003
Refer to important disclosures on page 29.
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Regulations
ƒ Largely self-regulated
ƒ U.S. Treasury
– Set rules for issuance and sale of U.S. Treasurys
– Enforcement of the rules
ƒ Federal Reserve (Fed)
– Market surveillance
– Agent of Treasury in auctions, spot-checks customer bids
ƒ Improved market transparency – GovPX in 1990
Refer to important disclosures on page 29.
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The Role of GovPx
ƒ
Founded in 1990 by Primary Dealers & interdealer
brokers to enhance price transparency in Treasury
market
ƒ
24-hour source for real-time & historic price information
ƒ
Available through all major market data vendors, & on
the Internet
Refer to important disclosures on page 29.
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Disclosures
ƒ
Important Disclosures
The analyst(s) responsible for covering the securities in this report receive compensation based upon, among other factors, the overall profitability of Merrill Lynch, including profits derived from
investment banking revenues.
ICAP PLC: The company is a corporate broking client of Merrill Lynch International in the United Kingdom.
ƒ
Other Important Disclosures
Merrill Lynch fixed income analysts regularly interact with Merrill Lynch sales and trading desk personnel in connection with their research, including to ascertain pricing and liquidity in the fixed income
markets.
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