U.S. Treasury Market

Transcription

1 U.S. Treasury Market David Beker Presentation prepared by Joseph Shatz and Catherina Wijaya Refer to important disclosures on page 29 Merrill Lynch does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

2 U.S. Treasury Market Primary market: U.S. Treasury auctions debt to public Secondary market: Trading through brokers/ dealers Refer to important disclosures on page 29. 2

3 Auction Rules Competitive Bids and Non-competitive Bids Competitive bids specify a bid price and quantity Maximum non-competitive bid is $5M par 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 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

4 Auction Schedule SECURITY Bills 4-Week 13-Week 26-Week Notes 2-Year 3-Year 5-Year 10-Year / Reopening Bonds 20-Year 30-Year / Reopening TIPS 5-Year / Reopening 10-Year / Reopening 20-Year / Reopening 30-Year AUCTION FREQUENCY Weekly (usually Tuesdays) Weekly (usually Mondays) Weekly (usually Mondays) Every month Feb., May, Aug., Nov. Every month Feb., May, Aug., Nov. / Mar., Jun., Sep., Dec. Last auctioned 1/8/86 February / August April / October Jan. & Jul. / Apr. and Oct. January / July Last auctioned 10/10/01 ISSUE / SETTLEMENT DAY Thursday Thursday Thursday End of month 15 th of month End of month 15 th of month N/A 15 th of month Last business day of month 15 th of month Last business day of month N/A Refer to important disclosures on page 29. 4

5 Auction Result Announcement Refer to important disclosures on page 29. 5

6 Special Types of Marketable Treasury Securities Inflation-Indexed Securities - Principal adjusts to reflect inflation STRIPS - Principal and interest components trade separately Refer to important disclosures on page 29. 6

7 Outstanding Public Debt: Total & Marketable Debt 9,000 8,000 7,000 Public Debt Outstanding Marketable Treasury Debt 6,000 (US$ Billions) 5,000 4,000 3,000 2,000 1, Source: Bureau of the Public Debt. Note: 06 numbers are as of March 31, 2006 Refer to important disclosures on page 29. 7

8 Marketable Treasury Debt Outstanding 5,000 4,500 4,000 3,500 (US$ Billions) 3,000 2,500 2,000 1,500 1, Source: Bureau of the Public Debt. Note: 06 numbers are as of March 31, 2006 Refer to important disclosures on page 29. 8

9 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. 9

10 Unified Budget Deficit/Surplus (US$ Billion) Refer to important disclosures on page

11 Treasury Securities Outstanding (US$ Trillions) Bills Notes Source: Bureau of the Public Debt. Note: 06 numbers are as of March 31, 2006 Refer to important disclosures on page

12 Ownership of Domestically Held UST Securities State & Local Gov Mutual Funds $ Billions Insurance Companies Pension Fund State & Local Gov Pension Fund Private U.S. Saving Bonds Depository Institutions Other Investors Mar 1996 Mar 1997 Mar 1998 Mar 1999 Mar 2000 Mar 2001 Mar 2002 Mar 2003 Mar 2004 Mar 2005 Mar Refer to important disclosures on page

13 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% Mutual Funds 14% Pension Fund State & Local Gov 7% Insurance Companies 9% Refer to important disclosures on page

14 U.S. Treasurys: Total Marketable Debt and Foreign Holdings 4,500 57% $ Billions 4,000 3,500 3,000 2,500 2,000 1,500 1, Total Marketable Debt Outstanding Foreign Holdings of Treasurys as a % of Total Marketable Debt Outstanding (RHS) Foreign Holdings of US Treasurys 52% 47% 42% 37% 32% % of Total Marketable Debt Outstanding 0 27% Mar- 00 Sep- 00 Mar- 01 Sep- 01 Mar- 02 Sep- 02 Mar- 03 Sep- 03 Mar- 04 Sep- 04 Mar- 05 Sep- 05 Mar- 06 Refer to important disclosures on page

15 U.S. Treasurys: Total Marketable Debt and Foreign Official Holdings 4, % 4,000 Total Marketable Debt Outstanding 31.0% $ Billions 3,500 3,000 2,500 2,000 1,500 1, Foreign Official Holdings of Treasurys as a % of Total Marketable Debt Outstanding Foreign Official Holdings of US 30.0% 29.0% 28.0% 27.0% 26.0% 25.0% 24.0% % of Total Marketable Debt Outstanding % Jun- 02 Sep- 02 Dec- 02 Mar- 03 Jun- 03 Sep- 03 Dec- 03 Mar- 04 Jun- 04 Sep- 04 Dec- 04 Mar- 05 Jun- 05 Sep- 05 Dec- 05 Mar- 06 Refer to important disclosures on page

16 U.S. Treasury Secondary Market 24-hours trading Electronic Trading System increasingly being used High trading volume (liquidity), Narrow bid-offer spreads (efficiency) On-the-run and Off-the-run Refer to important disclosures on page

17 Primary Dealers Designated by Federal Reserve Bank of New York Bid competitively in Treasury auctions Participate in coupon passes Financing commitment to Federal Reserve Bank of New York Provide market color Merrill Lynch is one of primary dealers. Others: ABN Amro, Banc of America Securities, etc. Refer to important disclosures on page

18 Inter-Dealer Brokers (IDB) Intermediaries Post aggregated bids and offers from various dealers Execute trades between dealers Provide anonymity and price transparency Two largest: ICAP PLC and Cantor Fitzgerald (60% and 28% market share, 2005)* * Source: Mizrach and Neely, 2006, Refer to important disclosures on page

19 Primary Dealer Transactions U.S. Treasurys Average Daily Volume with Inter-Dealer Brokers with Others 400 US$ Billions 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

20 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, Source: Michael Fleming, Measuring Treasury Market Liquidity, 2003 Refer to important disclosures on page

21 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, Source: Michael Fleming, Measuring Treasury Market Liquidity, 2003 Refer to important disclosures on page

22 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

23 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, nds is 32nds of a point Source: Michael Fleming, Measuring Treasury Market Liquidity, 2003 Refer to important disclosures on page

24 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

25 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, Source: Michael Fleming, Measuring Treasury Market Liquidity, 2003 Refer to important disclosures on page

26 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

27 Regulations Largely self-regulated U.S. Treasury Set rules for issuance and sale of U.S. Treasurys Enforcement of the rules Federal Reserve (Fed) Market surveillance Agent of Treasury in auctions, spot-checks customer bids Improved market transparency GovPX in 1990 Refer to important disclosures on page

28 The Role of GovPx Founded in 1990 by Primary Dealers & interdealer brokers to enhance price transparency in Treasury market 24-hour source for real-time & historic price information Available through all major market data vendors, & on the Internet Refer to important disclosures on page

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