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Qwafafew talk 31 jan2013
Qwafafew talk 31 jan2013
Qwafafew talk 31 jan2013
Qwafafew talk 31 jan2013
Qwafafew talk 31 jan2013
Qwafafew talk 31 jan2013
Qwafafew talk 31 jan2013
Qwafafew talk 31 jan2013
Qwafafew talk 31 jan2013
Qwafafew talk 31 jan2013
Qwafafew talk 31 jan2013
Qwafafew talk 31 jan2013
Qwafafew talk 31 jan2013
Qwafafew talk 31 jan2013
Qwafafew talk 31 jan2013
Qwafafew talk 31 jan2013
Qwafafew talk 31 jan2013
Qwafafew talk 31 jan2013
Qwafafew talk 31 jan2013
Qwafafew talk 31 jan2013
Qwafafew talk 31 jan2013
Qwafafew talk 31 jan2013
Qwafafew talk 31 jan2013
Qwafafew talk 31 jan2013
Qwafafew talk 31 jan2013
Qwafafew talk 31 jan2013
Qwafafew talk 31 jan2013
Qwafafew talk 31 jan2013
Qwafafew talk 31 jan2013
Qwafafew talk 31 jan2013
Qwafafew talk 31 jan2013
Qwafafew talk 31 jan2013
Qwafafew talk 31 jan2013
Qwafafew talk 31 jan2013
Qwafafew talk 31 jan2013
Qwafafew talk 31 jan2013
Qwafafew talk 31 jan2013
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Qwafafew talk 31 jan2013

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The National Debt: Myths and Realities …

The National Debt: Myths and Realities

The national debt dominates the news, but it is shrouded in misconceptions. A close examination of the debt as a bond portfolio can help to separate the myths from the surprising reality.

Published in: Economy & Finance
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  • 1. Win Analytics LLCThe National Debt: Myths and Realities A Presentation to the Denver Chapter of QWAFAFEW by Winthrop T. Smith January 31, 2013
  • 2. Win Smith and Win Analytics LLC• 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 1
  • 3. Background: The National Debt 2
  • 4. The National Debt Clock April 2008 Jesper Rautell Balle 3
  • 5. Federal Outlays Combined On-Budget and Off-Budget 1990-2011 (Actual), 2012-2017 (Est.)$Trillions Net interest National defense Medicare Social Security Other $5 Estimated $4 $3 $2 $1 $0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Fiscal Year Data Source: White House 4
  • 6. Federal Receipts vs Outlays Combined On-Budget and Off-Budget 1990-2011 (Actual), 2012-2017 (Est.)$Trillions $5 Estimated $4 $3 Deficits Surpluses $2 Outlays $1 Receipts $0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Fiscal Year Data Source: White House 5
  • 7. Federal Debt Combined On-Budget and Off-Budget 1990-2011 (Actual), 2012-2017 (Est.)$Trillions Held by Public Held by Govt Accts Held by Federal Reserve$25 Estimated$20$15$10 $5 $0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Fiscal Year Data Source: White House 6
  • 8. U.S. Treasury Marketable Debt Outstanding Debt by Maturity Year As of May 31, 2012$Billions Bills Notes Bonds TIPS$2,500$2,000$1,500$1,000 $500 $0 2012 14 16 18 20 22 24 26 28 30 32 36 38 40 42 Maturity (Calendar Year) Data Source: U.S. Treasury 7
  • 9. U.S. Treasury Marketable Debt Outstanding Securities by Issue Date and Maturity Date as of May 31, 2012 Bills Notes Bonds TIPSIssue Date6/1/806/1/846/1/886/1/926/1/966/1/006/1/046/1/086/1/12 6/1/12 6/1/16 6/1/20 6/1/24 6/1/28 6/1/32 6/1/36 6/1/40 Maturity Date Data Source: U.S. Treasury 8
  • 10. U.S. Treasury Marketable Debt Outstanding Bills and Notes by Issue Date and Maturity Date as of May 31, 2012 Bills NotesIssue Date6/1/006/1/046/1/086/1/12 6/1/12 6/1/16 6/1/20 6/1/24 Maturity Date Data Source: U.S. Treasury 9
  • 11. U.S. Treasury Marketable Debt Outstanding Bills by Issue Date and Maturity Date as of May 31, 2012 Bills Issue Date 6/1/11 8/31/1111/30/11 2/29/12 5/30/12 6/1/12 8/31/12 11/30/12 3/1/13 5/31/13 Maturity Date Data Source: U.S. Treasury 10
  • 12. U.S. Treasury Marketable Debt Outstanding Securities by Interest Rate and Maturity Date as of May 31, 2012 Bills Notes Bonds TIPSInterest Rate 12% 10% 8% 6% 4% 2% 0% 6/1/12 6/1/16 6/1/20 6/1/24 6/1/28 6/1/32 6/1/36 6/1/40 Maturity Date Data Source: U.S. Treasury 11
  • 13. Historic Interest Rates3-Month and 30-Year Treasury Yields 1975 - 2012 12
  • 14. Recent and Historic Yield Curves8%7%6% 5 Years Ago5%4% 20 Years Ago3% 10 Years Ago2%1% 5/31/20120% 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 13
  • 15. Myth #1: The Treasury is “Going Long” 14
  • 16. Nate Silver on January 16, 2013• “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] 15
  • 17. From the U.S. Treasury website in June 2012: 16
  • 18. Average Maturity of Outstanding Debt and New Issuance Fiscal Years 2009-2012Years Months6 72 5.39 5.21 4.885 60 4.39 All Marketable Debt Outstanding4 48 4.03 3.94 3.69 New Debt Issuance3 36 2.872 24 FY 2009 FY 2010 FY 2011 FY 2012 Fiscal Year Data Source: U.S. Treasury 17
  • 19. Marketable U.S. Treasury Securities Securities Issued in FY 2012, as of 9/30/12Principal Issued$3T$2T FY 2012 (3.94 year Avg Maturity)$1T$0T 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 Years to Maturity Data Source: U.S. Treasury 18
  • 20. Marketable U.S. Treasury Securities Outstanding at 2011 Fiscal Year End (9/30/2011)Principal$3T$2T 0-1 Years to Maturity 1-30 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$1T Combined $9.62T Dec-2016 5.21$0T Maturity (Fiscal Year) Data Source: U.S. Treasury 19
  • 21. Marketable U.S. Treasury Securities Outstanding at 2012 Fiscal Year End (9/30/2012)Principal$3T$2T FY 2012 Issues Average Maturity Older Issues 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$1T Combined $10.69T Feb-2017 5.39$0T Maturity (Fiscal Year) Data Source: U.S. Treasury 20
  • 22. Explaining Changes in Weighted Average LifeGroup FY 2011 FY 2012 ChangeFY13-41, Issued by FY11 7.06 6.06 -1.00FY12, Issued by FY11 -1.85 1.85FY12 New Issues -0.73 -0.73FY12 Adjustments 0.06 0.06Totals 5.21 5.39 0.18 21
  • 23. U.S. Treasury Marketable Securities All Outstanding Securities as of September 30, 2012Principal ($Billions)$125 36 Month 65 Month Median Weighted$100 Maturity Average $75 $50 $25 $0 9/30/12 9/30/16 9/30/20 9/30/24 9/30/28 9/30/32 9/30/36 9/30/40 Maturity Data Source: U.S. Treasury 22
  • 24. U.S. Treasury Marketable Securities Securities Issued in Fiscal Year 2012 as of September 30, 2012Principal ($Billions)$125 19 Month Median$100 Maturity 47 Month Weighted Average $75 $50 $25 $0 9/30/12 9/30/16 9/30/20 9/30/24 9/30/28 9/30/32 9/30/36 9/30/40 Maturity Data Source: U.S. Treasury 23
  • 25. Two Ways to Measure the Length of Treasury Debt All Marketable Debt and New Issuance Fiscal Years 2009-2012Years Month6 725 WAM: All Debt 60 Weighted Average Maturity WAM: New Debt4 483 36 Median Maturity2 24 Median: All Debt1 Median: New Debt 120 0 FY 2009 FY 2010 FY 2011 FY 2012 Data Source: U.S. Treasury 24
  • 26. Myth #2: The Debt Doesn’t Matter 25
  • 27. The Debt Doesn’t Matter Because:A. We Can Always RefinanceB. We Managed Similar Debt After WWIIC. Low Rates Mean Investors Aren’t WorriedD. We Owe it to Ourselves 26
  • 28. We Can Always Refinance, Part I Pop Quiz:Suppose we always refinance and never repaythe principal. If we pay interest forever, what isthe present value of $11 trillion in marketabledebt?Assume the interest rate on each security is the appropriatediscount rate. 27
  • 29. We Can Always Refinance, Part II Fiscal Year 2012 Debt Summary Gross Issuance $7.6 trillion Maturing Debt $6.5 trillion Net Issuance $1.1 trillionWe needed more than $7 trillion in funding last year, almost 7xthe new borrowing for the deficit. 28
  • 30. We Managed Similar Debt After World War II 29
  • 31. Debt Structure: 2012 vs 1946 45% 1946 Post 40% 2012 35% 30%% of Total Maturities 25% 20% 15% 10% 5% Today 0% <1y 1-5 5-10 >10 Chart Provided by: Center for Financial Stability, Inc. 30
  • 32. Low Rates Mean Investors Aren’t Worried• There is high demand for “safe” assets• Rates have fallen around the world• Expectations for growth and inflation are lowBut What About the Fed? 31
  • 33. What is the Fed Doing?• Quantitative Easing and Operation Twist• Reduce Duration Held by Private Investors: By reducing the supply of duration in the market, this action should put downward pressure on longer-term interest rates relative to levels that would otherwise prevail.• Fed measures impact in terms of “10-Year Equivalents” 32
  • 34. The Fed’s Impact on the Treasury Market in “Ten-Year Equivalents” Chart Source: Stone & McCarthy Research Associates 33
  • 35. Marketable U.S. Treasury Securities Annual Changes in Principal Fed Holdings Compared to All Outstanding$Billions$1,600 Fed Holdings Outstanding$1,400$1,200$1,000 $800 $600 $400 $200 $0 FY 2010 FY 2011 FY 2012-$200 Data Sources: U.S. Treasury, Federal Reserve 34
  • 36. Marketable U.S. Treasury Securities Annual Changes in Ten-Year Equivalents Fed Holdings Compared to All Outstanding$Billions$1,600 Fed Holdings Outstanding$1,400$1,200$1,000 $800 $600 $400 $200 $0 FY 2010 FY 2011 FY 2012-$200 Data Sources: U.S. Treasury, Federal Reserve 35
  • 37. We Owe it to OurselvesOwnership of Marketable Debt December 2011 Federal Reserve Foreign 16% Central Banks 35% U.S. Private 36% Foreign Private 13% Data Source: U.S. Treasury 36

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