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Stabilization and Recovery Expenditures in a Short Period of Time, but 
Debt Management Challenges Remain' which was released on May 18, 2010. 

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Report to Congressional Committees: 

United States Government Accountability Office: 
GAO: 

May 2010: 

Debt Management: 

Treasury Was Able to Fund Economic Stabilization and Recovery 
Expenditures in a Short Period of Time, but Debt Management Challenges 
Remain: 

GAO-10-498: 

GAO Highlights: 

Highlights of GAO-10-498, a report to congressional committees. 

Why GAO Did This Study: 

This report is part of GAO’s requirement, under the Emergency Economic 
Stabilization Act of 2008, to monitor the Department of the Treasury’s 
(Treasury) implementation of the Troubled Asset Relief Program and 
submit special reports as warranted from oversight findings. It 
evaluates Treasury’s borrowing actions since the start of the crisis, 
and how Treasury communicates with market participants in the context 
of the growing debt portfolio and the medium- and long-term fiscal 
outlook. GAO analyzed market data; interviewed Treasury, the Federal 
Reserve Bank of New York, and market experts; and surveyed major 
domestic holders of Treasury securities. 

What GAO Found: 

The economic recession and financial-market crisis, and the federal 
government’s response to both, have significantly increased the amount 
of federal debt. While the composition of Treasury’s debt portfolio 
changed in response to this increase, Treasury has taken a number of 
steps in the past year to return the composition of the debt portfolio 
to pre–market crisis structure. One action Treasury has undertaken has 
been to reduce its reliance on cash management bills (CMB). While CMBs 
provided Treasury with needed borrowing flexibility immediately 
following the financial market crisis in 2008, Treasury paid a premium 
for its sustained use of CMBs in 2008 and 2009. In recent months, 
Treasury also has begun to stabilize shorter-term bill issuance and 
increase issuance of longer-term coupons. Given the medium- and long-
term fiscal outlook, Treasury will continue to be presented with the 
challenge of raising significant amounts of cash at the lowest costs 
over time. This makes evaluating the demand for Treasury securities 
increasingly important. 

Figure: Congressional Budget Office Estimate of Debt Held by the 
Public and Percent of GDP, Based on President’s Budgetary Proposals, 
2009 to 2020: 

[Refer to PDF for image: combined vertical bar and line graph] 

Fiscal year, actual: 2009; 
Debt held by the public: $7.5 trillion; 
Debt held by the public as a percentage of gross domestic product: 
53.0%. 

Fiscal year, projected: 2010; 
Debt held by the public: $9.2 trillion; 
Debt held by the public as a percentage of gross domestic product: 
63.2%. 

Fiscal year, projected: 2011; 
Debt held by the public: $10.5 trillion; 
Debt held by the public as a percentage of gross domestic product: 
70.1%. 

Fiscal year, projected: 2012; 
Debt held by the public: $11.6 trillion; Debt held by the public as a 
percentage of gross domestic product: 73.6%. 

Fiscal year, projected: 2013; 
Debt held by the public: $12.5 trillion; 
Debt held by the public as a percentage of gross domestic product: 
74.8%. 

Fiscal year, projected: 2014; 
Debt held by the public: $13.3 trillion; 
Debt held by the public as a percentage of gross domestic product: 
75.7%. 

Fiscal year, projected: 2015; 
Debt held by the public: $14.3 trillion; 
Debt held by the public as a percentage of gross domestic product: 
77.4%. 

Fiscal year, projected: 2016; 
Debt held by the public: $15.3 trillion; 
Debt held by the public as a percentage of gross domestic product: 
79.6%. 

Fiscal year, projected: 2017; 
Debt held by the public: $16.4 trillion; 
Debt held by the public as a percentage of gross domestic product: 
81.8%. 

Fiscal year, projected: 2018; 
Debt held by the public: $17.6 trillion; 
Debt held by the public as a percentage of gross domestic product: 
84.3%. 

Fiscal year, projected: 2019; 
Debt held by the public: $18.9 trillion; 
Debt held by the public as a percentage of gross domestic product: 
87.1%. 

Fiscal year, projected: 2020; 
Debt held by the public: $20.3 trillion; 
Debt held by the public as a percentage of gross domestic product: 
90.0%. 

Source: CBO data. 

[End of figure] 

Sufficient information from market participants on their demand for 
Treasury securities, including the type of information that GAO 
received from its survey of the largest domestic holders of Treasury 
securities, will be critical as Treasury moves forward to meet these 
challenges. In GAO’s survey, investors reported increased demand for 
Treasury Inflation Protected Securities (TIPS) and suggested ways for 
Treasury to further improve TIPS liquidity and thereby lower borrowing 
costs. Treasury receives input from market participants through a 
variety of formal and informal channels, but overall satisfaction with 
these communication channels varies by type of market participant. 
Market participants suggested to GAO a number of changes including 
increasing investor diversification on the Treasury Borrowing Advisory 
Committee (TBAC) and regular collection of information from end-
investors. Primary dealers, who are satisfied with their 
communication, raised concerns about the recent increase in direct 
bidding and its effect on Treasury auctions. 

What GAO Recommends: 

GAO recommends that the Secretary of the Treasury should continually 
review methods for collecting market information and consider 
conducting a periodic survey of end-users and broadening the TBAC. The 
Secretary of the Treasury should also continue to reduce the amount 
and term to maturity of CMBs and consider increasing the number of 
TIPS auctions and distributing them more evenly throughout the year, 
and study the effect of the recent increase in direct bidding on 
Treasury’s overall cost of borrowing, including options to promote 
transparency and foster competition. 

Treasury agreed with GAO’s findings, conclusions, and recommendations. 

View [hyperlink, http://www.gao.gov/products/GAO-10-498] or key 
components. For more information, contact Susan J. Irving at (202) 512-
6806 or irvings@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

The Composition of Treasury's Debt Portfolio Changed Substantially 
following the 2008 Financial Market Crisis but Has Begun to Transition 
Back to Pre-Market Crisis Structure: 

Treasury and Investors Communicate through Both Formal and Informal 
Channels; Market Participants Identified Challenges and Suggested 
Improvements to Both: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Methodology for the Analysis of the Cash Management Bill 
Yield Differential: 

Appendix II: Survey Scope and Methodology: 

Appendix III: Survey Instrument: 

Appendix IV: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: Survey Respondents' Reported Treasury Securities Holdings and 
Future Purchases: 

Table 2: Recipients, Respondents, and Treasury Holdings by Sector: 

Figures: 

Figure 1: Average Maturity of Treasury Outstanding Marketable 
Securities and Percentage Maturing in Next 12 Months (December 31, 
2006, to December 31, 2009): 

Figure 2: Cash Management Bills Annual Issuance Amounts and Average 
Term to Maturity (2005 to 2009): 

Figure 3: CBO's Estimate of Debt Held by the Public and Percent of 
GDP, Based on the President's Budgetary Proposals, 2009 to 2020: 

Figure 4: Net Interest Payments as a Percentage of Total Revenues, 
1990 to 2020: 

Figure 5: Treasury's Office of Debt Management's (ODM) Market 
Information Channels: 

Figure 6: Extent to Which Survey Respondents Believe Treasury Receives 
Sufficient Information from End-Investors: 

Figure 7: Extent to Which Commercial Banks and Mutual-Fund Respondents 
Believe Treasury Receives Sufficient Information from End-Investors: 

Figure 8: Extent to Which Life Insurance, Property Casualty Insurance, 
and State and Local Government Retirement Funds Believe Treasury 
Receives Sufficient Information from End-Investors: 

Figure 9: Percentage of Total Financial Assets in Treasury Securities 
by Sector (1984 to 2009): 

Figure 10: Percentage of 5-and 10-year Notes and 30-year Bonds 
Purchased by Direct Bidders at Treasury Securities Auctions (May 2003- 
February 2010): 

Abbreviations: 

CBO: Congressional Budget Office: 

CMB: cash management bill: 

CME: Chicago Mercantile Exchange Group: 

Federal Reserve: Board of Governors of the Federal Reserve System: 

FRBNY: Federal Reserve Bank of New York: 

GDP: gross domestic product: 

NTAAPS: New Treasury Automated Auction Processing System: 

ODM: Department of the Treasury's Office of Debt Management: 

Recovery Act: American Recovery and Reinvestment Act of 2009: 

SFP: Supplementary Financing Program: 

SIFMA: Securities Industry and Financial Markets Association: 

TARP: Troubled Asset Relief Program: 

TBAC: Treasury Borrowing Advisory Committee: 

TIPS: Treasury Inflation Protected Securities: 

Treasury: Department of the Treasury: 

[End of section] 

United States Government Accountability Office:
Washington, DC 20548: 

May 18, 2010: 

Congressional Committees: 

As part of the Emergency Economic Stabilization Act of 2008, GAO is 
required to monitor the United States Department of the Treasury's 
(Treasury) implementation of the Troubled Asset Relief Program (TARP) 
and, under subsection 116, submit special reports as warranted from 
oversight findings. This report examines new debt management 
challenges that Treasury faces and the efforts that Treasury has 
undertaken to borrow more than $3.082 trillion over the 2-year period 
beginning December 2007. Treasury's borrowing financed regular 
government needs, as well as federal government actions related to 
both the financial-market crisis and the recession, including TARP 
investments in financial institutions, housing support through 
purchases of mortgage-backed securities, support of the Board of 
Governors of the Federal Reserve System's (Federal Reserve) actions 
taken to stabilize financial markets, and the American Recovery and 
Reinvestment Act of 2009 (Recovery Act). The current rapid and 
substantial increase in federal debt since 2008 takes place in the 
context of the medium-and long-term fiscal outlook that will present 
Treasury with continued financing challenges long after the return of 
financial-market stability and economic growth. 

In this report, we describe Treasury's borrowing actions since the 
start of the crisis and the challenges of managing its growing debt 
portfolio in the context of the medium-and long-term fiscal outlook by 
answering the following questions: (1) What actions did Treasury take 
between December 2007 and December 2009 to borrow funds for TARP- 
related disbursements, the Supplementary Financing Account Program 
(SFP), the Recovery Act, and other cash needs, and (2) What changes 
should Treasury make, if any, to better gauge end-investor demand and 
increase auction participation?[Footnote 1] 

To identify the actions that Treasury has taken to borrow funds for 
TARP-related disbursements and other cash needs, we analyzed the 
scale, timing, term-to-maturity, and composition of Treasury's 
borrowing between December 2007 and December 2009, using data and 
information obtained from Treasury and the Federal Reserve. We also 
interviewed market experts, primary dealers and end-investors of 
Treasury securities, and Treasury and Federal Reserve Bank of New York 
(FRBNY) staff and officials on Treasury debt management challenges. To 
describe the cost of the use of cash management bills (CMB) during 
this time period, we estimated the differential between CMB yields and 
the yields on outstanding Treasury bills of similar maturity at the 
time of auction using data from Treasury's Bureau of the Public Debt 
and the Wall Street Journal. We also replicated the analysis 
estimating the differential between CMB yields and the yields on 
Treasury auctions that most closely matched the CMB auction in terms 
of issue date and maturity using data from Treasury's Bureau of the 
Public Debt. See appendix I for a detailed description of the 
methodologies that we used to estimate the cost to Treasury of the use 
of CMBs. 

In order to evaluate what changes Treasury should make, if any, to 
better gauge end-investor demand and increase auction participation, 
we analyzed Treasury's communication with investors and identified 
possible actions. In June 2009, we conducted 12 structured interviews 
with the two largest holders of Treasury securities in each of the 
following sectors: mutual funds; commercial banks; life insurance 
companies; property casualty insurance companies; state and local 
government retirement funds; and private pension funds. In addition, 
in August 2009 we conducted a Web-based survey that was sent to 66 of 
the largest domestic holders of Treasury securities in each of these 
sectors except private pension funds[Footnote 2]. The survey addressed 
topics similar to those covered in our structured interviews, 
including: Treasury auctions and holdings, Treasury Inflation 
Protected Securities (TIPS), risk exposure, and Treasury's information 
sources. On October 15, 2009, we briefed Treasury on the findings from 
the survey, which are discussed and expanded upon in this report. See 
appendix II for our detailed survey methodology and appendix III for a 
copy of the survey. Because the sample of holders of Treasury 
securities was not drawn randomly, the survey is not generalizable to 
the broader population of organizations in the sectors we included in 
the survey. 

To assess the reliability of data used in this study, including 
publicly available data from Treasury and the Federal Reserve, we 
examined the data to look for outliers and anomalies and addressed 
such issues as appropriate. We chose data that are commonly used by 
Treasury, researchers, and other market analysts to examine Treasury 
markets and auction performance. Where possible and appropriate, we 
corroborated the results of our data analysis with other sources, such 
as analyses done by other market experts or testimonial evidence. On 
the basis of our assessment we believe the data are reliable for the 
purpose of this review. We conducted our review from December 2008 to 
May 2010 in accordance with generally accepted government auditing 
standards. Those standards require that we plan and perform the audit 
to obtain sufficient, appropriate evidence to provide a reasonable 
basis for our findings and conclusions based on our audit objectives. 
We believe that the evidence obtained provides a reasonable basis for 
our findings and conclusions based on our audit objectives. 

Background: 

Congress has assigned to Treasury the responsibility of borrowing the 
funds necessary to finance the gap between the money that the 
government receives, primarily tax revenues, and the money that the 
government spends. Government expenditures include regular withdrawals 
for programs such as Medicare and Social Security as well as 
extraordinary withdrawals for programs such as TARP. Treasury also 
makes interest and principal payments for outstanding debt and debt 
that is maturing on a continual basis. Treasury's primary debt 
management goal is to finance the government's borrowing needs at the 
lowest cost over time, subject to a statutory limit.[Footnote 3] To 
meet this objective, Treasury issues debt through auctions across a 
wide range of securities mainly in a "regular and predictable" pattern 
based on a preannounced auction schedule, which it releases on a 
quarterly basis. Treasury does not "time the market"--or take 
advantage of low interest rates--when it issues securities. Instead, 
Treasury is able to lower its borrowing costs by relying on regularly 
scheduled auctions because investors and dealers value transparency, 
stability, and certainty of large liquid supply. 

Market participants often characterize Treasury securities as the 
premium risk-free asset. Investors, traders, banks, and foreign 
central banks actively use them for hedging, liquidity, capital 
requirements, and reserve purposes. Treasury securities are also a 
popular investment for end-investors seeking liquidity and low risk. 
Treasury's "regular and predictable" auctions are for nominal 
marketable securities that range in maturity from 4 weeks to 30 years 
and for TIPS that are issued with 5-, 10-, and 30-year maturities. 
[Footnote 4] TIPS offer a variety of benefits to Treasury, and 
inflation protection to investors, who are willing to pay a premium 
for this protection in the form of an interest rate on TIPS that may 
be lower than a comparable nominal issuance over the life of the 
instrument.[Footnote 5] 

Treasury responds to increases in borrowing needs in a traditional 
manner by: (1) increasing the issuance size of existing securities; 
(2) increasing the frequency of issuances; and (3) introducing new 
securities to its auction calendar as necessary. Treasury announces 
upcoming changes during quarterly refundings so that the market is not 
surprised. In some instances, Treasury supplements its "regular and 
predictable" auction schedule with flexible securities called cash 
management bills (CMB). Because of the nature of CMBs, Treasury does 
not publish information about CMBs on its quarterly auction schedule 
as it does for other securities. Instead, Treasury announces CMB 
auctions anywhere from 1 to 4 days ahead of the auction. Treasury also 
indicates whether it might issue CMBs over the upcoming quarter in 
quarterly refunding statements. The term to maturity--or length of 
time the CMB is outstanding--varies according to Treasury's cash 
needs. Treasury generally uses CMBs to finance intramonth funding gaps 
due to timing differences of large cash inflows and outflows.[Footnote 
6] Treasury also uses CMBs to meet sudden and unexpected borrowing 
needs, such as those that arose from the government's responses to the 
financial market crisis and economic downturn in 2008 and 2009. 

The outstanding mix of Treasury securities can have a significant 
influence on the federal government's interest payments. Longer-term 
nominal securities typically carry higher interest rates (which 
translate to increased cost to the government), primarily due to 
investor concerns about the uncertainty of future inflation. However, 
longer-term securities offer the government the certainty of fixed 
interest payments over a longer period and reduce the amount of debt 
that Treasury needs to refinance in the short term.[Footnote 7] In 
contrast, shorter-term securities generally carry lower interest rates 
but add uncertainty to the government's interest costs and require 
Treasury to conduct more frequent auctions to refinance maturing debt, 
which also poses rollover risk. Among Treasury's short-term 
securities, those that are issued on a "regular and predictable" 
schedule generally carry the lowest interest rates. 

Two groups, (1) the primary dealers and (2) the Treasury Borrowing 
Advisory Committee (TBAC) of the Securities Industry and Financial 
Markets Association (SIFMA) provide regular input to Treasury debt 
management decisions.[Footnote 8] The primary dealers are a group of 
banks and securities broker/dealers, selected by the Federal Reserve 
Bank of New York (FRBNY), that trade in U.S. government securities 
with the FRBNY on behalf of the Federal Reserve in order to implement 
monetary policy. They are also required by the FRBNY to participate in 
all Treasury auctions. On a quarterly basis, Treasury surveys the 
primary dealers and also meets with half of them in person. Treasury 
also meets quarterly with TBAC, an advisory committee that is governed 
by federal statute and comprised of senior level officials who are 
employed by primary dealers, institutional investors, and other major 
participants in the Treasury market. Treasury also monitors market 
trends via regular contact with the Markets Group at FRBNY, 
subscriptions to all major investment houses' fixed income research 
publications, attending fixed income conferences, and meeting with 
large foreign investors and reserve managers. 

The Composition of Treasury's Debt Portfolio Changed Substantially 
following the 2008 Financial Market Crisis but Has Begun to Transition 
Back to Pre-Market Crisis Structure: 

The Size and Composition of Treasury's Debt Portfolio Changed 
Substantially Due in Part to Borrowing for TARP, the SFP, and the 
Recovery Act: 

The borrowing associated with the actions that the federal government 
took in response to the financial-market crisis and recession 
including TARP, the SFP, and the Recovery Act, substantially altered 
the size and composition of Treasury's outstanding debt portfolio. 
Since the onset of the recession in December 2007, Treasury's total 
outstanding debt has increased by $3.082 trillion, and marketable debt 
increased by $2.735 trillion. At the end of December 2009, total 
outstanding debt was $12.311 trillion, and total outstanding 
marketable securities stood at $7.272 trillion.[Footnote 9] According 
to Treasury, in fiscal year 2009, Treasury held a record 291 auctions 
in 251 business days and issued nearly $7 trillion in gross marketable 
securities, a significant portion of which was used to roll over, or 
refinance, existing debt. 

The mix of securities Treasury issued in 2008 and 2009 substantially 
shortened the average maturity of its debt portfolio and increased the 
debt maturing in the next 12 months. As seen in figure 1, when looking 
at Treasury's outstanding marketable securities during the period 
December 31, 2006, to December 31, 2009, the percentage of securities 
maturing within a year peaked in December 2008. Reflecting the same 
trend, the average term to maturity of outstanding marketable 
securities reached its lowest point of 49 months in December 2008. As 
we reported in September 2009, these changes were in accordance with 
what Treasury described to us as its normal operating procedures. Our 
September report included specific details about Treasury's debt 
issuance between December 2007 and June 2009.[Footnote 10] 

Figure 1: Average Maturity of Treasury Outstanding Marketable 
Securities and Percentage Maturing in Next 12 Months (December 31, 
2006, to December 31, 2009): 

[Refer to PDF for image: combined vertical bar and line graph] 

Date: December 2006; 
Average maturity (in months): 54; 
Percentage maturing in 12 months: 36. 

Date: March 2007; 
Average maturity (in months): 54; 
Percentage maturing in 12 months: 36. 

Date: June 2007; 
Average maturity (in months): 56; 
Percentage maturing in 12 months: 34. 

Date: September 2007; 
Average maturity (in months): 56; 
Percentage maturing in 12 months: 36. 

Date: December 2007; 
Average maturity (in months): 55; 
Percentage maturing in 12 months: 36. 

Date: March 2008; 
Average maturity (in months): 55; 
Percentage maturing in 12 months: 38. 

Date: June 2008; 
Average maturity (in months): 56; 
Percentage maturing in 12 months: 36. 

Date: September 2008; 
Average maturity (in months): 52; 
Percentage maturing in 12 months: 41. 

Date: December 2008; 
Average maturity (in months): 49; 
Percentage maturing in 12 months: 44. 

Date: March 2009; 
Average maturity (in months): 49; 
Percentage maturing in 12 months: 43. 

Date: June 2009; 
Average maturity (in months): 51; 
Percentage maturing in 12 months: 41. 

Date: September 2009; 
Average maturity (in months): 53; 
Percentage maturing in 12 months: 39. 

Date: December 2009; 
Average maturity (in months): 55. 

Source: Treasury. 

Note: As of March 31, 2010 Treasury had not yet released the 
percentage of debt maturing in the next 12 months as of the end of 
December 2009. 

[End of figure] 

Treasury Initially Began to Transition the Composition of Its Debt 
Portfolio Back to Pre-Market Crisis Structure by Stabilizing Bill 
Issuance and Increasing Coupon Issuance: 

The changes to Treasury's debt portfolio, as discussed above, were not 
intended to be permanent, and Treasury has already started to 
transition back to pre-financial-market crisis levels of average 
maturity and composition of the debt portfolio in a manner that, 
according to Treasury, was as rapid and as prudent as possible. During 
the November 2009 TBAC press conference, Treasury officials announced 
that the transition has begun with a shift of bill issuances to 
nominal note and bond issuance and TIPS issuance. This shift will 
allow Treasury to retain flexibility in meeting uncertain financing 
needs in the future. Flexibility is retained by increasing the 
borrowing capacity that Treasury has available for shorter-term 
securities, which are used when unexpected financing needs arise. 
During the February 2010 TBAC press conference Treasury indicated a 
shift in the transition with the announcement that nominal note and 
bond issuance will stabilize in the next year and perhaps even 
decrease. In February, Treasury stated that nominal auctions sizes 
were at levels that give Treasury the flexibility to address a broad 
range of potential financing scenarios. Market participants we spoke 
with anticipated the stabilization of note and bond issuance, but 
cautioned that any decrease in the amount of nominal note and bond 
issuance would depend on tax receipts. 

Treasury has said that it expects the average term to maturity of 
outstanding marketable debt to approach the historical average of 5 
years (or 60 months) by the end of fiscal year 2010 and could perhaps 
exceed it in the next 3-5 years. Treasury officials have indicated the 
changes they are making to the overall debt portfolio will bring short-
term bill levels closer to historical averages while stabilizing or 
perhaps even decreasing nominal note and bond issuance. Treasury has 
emphasized the importance of making these changes in a gradual, 
transparent, and incremental manner. Some market participants have 
expressed concern about a reduction in bill supply. Investors use 
bills to invest their funds temporarily in a safe and highly liquid 
asset. Bills are also used by institutional investors that are 
required to buy financial assets maturing in a year or less. Treasury 
recognizes the importance of adequate bill supply and said that it 
will continue to monitor the bills market for any disruptions that the 
decrease in bill supply may cause. 

Treasury's Issuance of CMBs and the Average Maturity of CMBs Increased 
Dramatically in 2008 and 2009: 

Shortly after the start of the financial-market crisis in the fall of 
2008, Treasury borrowed an unprecedented $1.1 trillion in under 18 
weeks largely by issuing CMBs, which are intended for unexpected and 
immediate cash needs. Treasury's use of CMBs was substantial and 
continued well after the beginning of the financial-market crisis. The 
sustained increase was due in part to the Supplementary Financing 
Program (SFP), a temporary program created in September 2008 to 
provide cash for use in Federal Reserve initiatives intended to 
address heightened liquidity pressures in the financial markets. 
[Footnote 11] 

In 2008 and 2009, Treasury's gross issuance of CMBs was $1.432 
trillion and $1.142 trillion respectively (of which $785 billion and 
$835 billion were issued for the SFP in 2008 and 2009). This compares 
to average issuance of about $254 billion annually from 2005 to 2007. 
(See figure 2.) To issue $1.432 trillion worth of CMBs in 2008, 
Treasury held 47 auctions (of which 21 were issued for the SFP), 
compared to an average of 18 auctions annually from 2005 to 2007. 

Figure 2: Cash Management Bills Annual Issuance Amounts and Average 
Term to Maturity (2005 to 2009): 

[Refer to PDF for image: combined vertical bar and line graph] 

Calendar year: 2005; 
Amount issued: $263 billion; 
Average term to maturity: 10 days. 

Calendar year: 2006; 
Amount issued: $242 billion; 
Average term to maturity: 9 days. 

Calendar year: 2007; 
Amount issued: $256 billion; 
Average term to maturity: 10 days. 

Calendar year: 2008; 
Amount issued: $1,432 billion; 
Average term to maturity: 82 days. 

Calendar year: 2009; 
Amount issued: $1,142 billion; 
Average term to maturity: 102 days. 

Source: GAO analysis of Treasury data. 

Note: On a fiscal-year basis, Treasury issued the following CMB 
amounts and with the following average term to maturity: 2005--$268 
billion (10 days); 2006--$252 billion (9 days); 2007--$259 billion (10 
days); 2008--$725 billion (35 days); and 2009--$1.82 trillion (119 
days). 

[End of figure] 

CMBs that were issued in 2008 and 2009 also departed from historical 
norms in that their terms to maturity increased significantly. Prior 
to 2008, Treasury typically used CMBs to fund intramonth funding gaps 
and, in certain instances, to provide Treasury borrowing flexibility 
when it was approaching the debt limit.[Footnote 12] Between 2002 and 
2007, CMBs typically had a term to maturity of less than 2 weeks. 
During 2005, 2006, and 2007, the average term to maturity of CMBs was 
10 days, 9 days, and 10 days respectively. In contrast, in 2009, the 
average term to maturity of CMBs was 109 days or 15.6 weeks. Removing 
those CMBs that were used for the SFP (debt issued for the SFP does 
not pay for government expenditures), the average term to maturity of 
the remaining CMBs was 99 days in 2008 and 198 days in 2009. During 
its February 2008 quarterly refunding process, Treasury announced its 
plans to issue longer-dated CMBs. This was a change to Treasury's 
recent practice of not issuing CMBs with maturities greater than 21 
days and according to Treasury was necessary in order to spread the 
extraordinary financing needs away from the front end of the bill 
market. Treasury stated that longer-dated maturities would be issued 
because of seasonal fluctuations in cash balances, volatility 
associated with the timing of tax refunds, and the increased use of 
electronic payments versus check payments. On February 13, 2008, 
Treasury auctioned a 63-day CMB, which had a longer maturity than any 
other CMB issued in the previous 3 fiscal years. Treasury issued 
additional CMBs with terms to maturity of greater than 300 days during 
both fiscal years 2008 and 2009. Longer-dated CMBs were also, in many 
instances, reopenings of existing Treasury bills. Twenty of the 37 non-
SFP CMBs issued in 2008 and 2009 were reopenings of outstanding 
Treasury bills. Treasury officials told us that they consulted with 
market participants and decided that longer-dated CMBs, for example 9- 
month bills, were a prudent, short-term mechanism to raise cash and 
approximately the length of time that it would take for coupon 
issuance to "catch up" and shoulder a bigger share of Treasury's 
financing needs. 

Treasury Paid a Premium for the Sustained Use of CMBs in 2008 and 2009: 

While CMBs provided Treasury with needed borrowing flexibility 
immediately following the start of the financial market crisis in 
2008, Treasury paid a premium for its sustained use of CMBs in 2008 
and 2009. We reported in 2006 that Treasury had paid a premium for its 
use of CMBs during the period of 1996 to 2005.[Footnote 13] During 
that period, Treasury paid a higher yield on most CMBs than 
outstanding Treasury bills of a similar maturity paid in the secondary 
market. In the low-interest-rate environment during 2008 and 2009, all 
debt, but particularly short-term debt, was relatively inexpensive for 
Treasury; however, since the dollar amount of CMBs issued in 2008 was 
5.6 times greater than the amount issued in 2007, even a small premium 
could be costly. 

Our analysis shows that of the 37 CMBs not issued for the SFP in 2008 
and 2009, most had a higher yield when compared with outstanding 
Treasury bills of a similar maturity in the secondary market. The 
difference between these CMB yields and similar maturing outstanding 
bills--known as the yield differential--was positive for the second 
half of 2008 and all of 2009, averaging 2.7 basis points higher (or 
$184 million based on the amount issued) than outstanding bills of a 
similar maturity.[Footnote 14] CMBs play an important role in Treasury 
debt management, and it is likely that Treasury will always need to 
use CMBs, but Treasury could achieve savings by limiting the amount of 
CMBs it issues. 

Treasury has already begun its transition out of CMBs that are not 
linked to the SFP.[Footnote 15] As part of that transition, it has 
extended the average term to maturity of outstanding marketable 
securities by stabilizing short-term debt issuances and transitioning 
to nominal note and bond issuances. In February 2010, Treasury 
officials said that they planned to stabilize nominal note and bond 
issuance in the first half of 2010 and perhaps reduce nominal note and 
bond issuance in the second half of 2010. As of September 2009, 28.5 
percent of Treasury's debt portfolio was in bills. If Treasury does 
not alter its current pattern of issuance, Treasury projects this 
share will decline to 19 percent by September 2010 and to 16 percent 
by September 2011. Continuing to transition out of CMBs could reduce 
Treasury's borrowing costs, increase Treasury's borrowing capacity on 
the short end of the yield curve, and extend the average term to 
maturity of the debt portfolio. 

The Medium-and Long-Term Fiscal Outlook Will Continue to Present Debt 
Management Challenges: 

The actions that Treasury has taken to increase borrowing in response 
to the recession and financial-market crisis take place within the 
context of the already-serious longer-term fiscal condition of the 
federal government. As seen in figure 3, the Congressional Budget 
Office (CBO) projects that under the President's fiscal year 2011 
budget proposals, the debt held by the public will increase from $9.2 
trillion in fiscal year 2010 to $20.3 trillion in 2020. Over this same 
period, CBO projects that debt held by the public will increase from 
63 percent of gross domestic product (GDP) in fiscal year 2010 to 90 
percent by the end of fiscal year 2020. Our long-term simulations show 
growing deficits and debt, underscoring that the long-term fiscal 
outlook is unsustainable.[Footnote 16] 

Figure 3: CBO's Estimate of Debt Held by the Public and Percent of 
GDP, Based on the President's Budgetary Proposals, 2009 to 2020: 

[Refer to PDF for image: combined vertical bar and line graph] 

Fiscal year, actual: 2009; 
Debt held by the public: $7.5 trillion; 
Debt held by the public as a percentage of gross domestic product: 
53.0%. 

Fiscal year, projected: 2010; 
Debt held by the public: $9.2 trillion; 
Debt held by the public as a percentage of gross domestic product: 
63.2%. 

Fiscal year, projected: 2011; 
Debt held by the public: $10.5 trillion; 
Debt held by the public as a percentage of gross domestic product: 
70.1%. 

Fiscal year, projected: 2012; 
Debt held by the public: $11.6 trillion; Debt held by the public as a 
percentage of gross domestic product: 73.6%. 

Fiscal year, projected: 2013; 
Debt held by the public: $12.5 trillion; 
Debt held by the public as a percentage of gross domestic product: 
74.8%. 

Fiscal year, projected: 2014; 
Debt held by the public: $13.3 trillion; 
Debt held by the public as a percentage of gross domestic product: 
75.7%. 

Fiscal year, projected: 2015; 
Debt held by the public: $14.3 trillion; 
Debt held by the public as a percentage of gross domestic product: 
77.4%. 

Fiscal year, projected: 2016; 
Debt held by the public: $15.3 trillion; 
Debt held by the public as a percentage of gross domestic product: 
79.6%. 

Fiscal year, projected: 2017; 
Debt held by the public: $16.4 trillion; 
Debt held by the public as a percentage of gross domestic product: 
81.8%. 

Fiscal year, projected: 2018; 
Debt held by the public: $17.6 trillion; 
Debt held by the public as a percentage of gross domestic product: 
84.3%. 

Fiscal year, projected: 2019; 
Debt held by the public: $18.9 trillion; 
Debt held by the public as a percentage of gross domestic product: 
87.1%. 

Fiscal year, projected: 2020; 
Debt held by the public: $20.3 trillion; 
Debt held by the public as a percentage of gross domestic product: 
90.0%. 

Source: CBO data. 

[End of figure] 

According to CBO, interest rates and the size of debt held by the 
public will increase in the medium term, leading to higher interest 
costs for the government. One way to measure the affordability of debt 
held by the public is to compare interest payments with expected 
revenues. As seen in figure 4, according to CBO, net interest payments 
as a percentage of total revenues will increase from 9.9 percent in 
fiscal year 2010 to 20.7 percent in fiscal year 2020.[Footnote 17] 

Figure 4: Net Interest Payments as a Percentage of Total Revenues, 
1990 to 2020: 

[Refer to PDF for image: line graph] 

Actual: 

Fiscal year: 1990; 
Net Interest Payments: 17.9%. 

Fiscal year: 1991; 
Net Interest Payments: 18.4%. 

Fiscal year: 1992; 
Net Interest Payments: 18.3%. 

Fiscal year: 1993; 
Net Interest Payments: 17.2%. 

Fiscal year: 1994; 
Net Interest Payments: 16.1%. 

Fiscal year: 1995; 
Net Interest Payments: 17.2%. 

Fiscal year: 1996; 
Net Interest Payments: 16.6%. 

Fiscal year: 1997; 
Net Interest Payments: 15.5%. 

Fiscal year: 1998; 
Net Interest Payments: 14%. 

Fiscal year: 1999; 
Net Interest Payments: 12.6%. 

Fiscal year: 2000; 
Net Interest Payments: 11%. 

Fiscal year: 2001; 
Net Interest Payments: 10.4%. 

Fiscal year: 2002; 
Net Interest Payments: 9.2%. 

Fiscal year: 2003; 
Net Interest Payments: 8.6%. 

Fiscal year: 2004; 
Net Interest Payments: 8.5%. 

Fiscal year: 2005; 
Net Interest Payments: 8.5%. 

Fiscal year: 2006; 
Net Interest Payments: 9.4%. 

Fiscal year: 2007; 
Net Interest Payments: 9.2%. 

Fiscal year: 2008; 
Net Interest Payments: 10%. 

Fiscal year: 2009; 
Net Interest Payments: 8.9%. 

Projections: 

Fiscal year: 2010; 
Net Interest Payments: 9.9%. 

Fiscal year: 2011; 
Net Interest Payments: 9.9%. 

Fiscal year: 2012; 
Net Interest Payments: 10.6%. 

Fiscal year: 2013; 
Net Interest Payments: 11.8%. 

Fiscal year: 2014; 
Net Interest Payments: 13.2%. 

Fiscal year: 2015; 
Net Interest Payments: 14.8%. 

Fiscal year: 2016; 
Net Interest Payments: 16.1%. 

Fiscal year: 2017; 
Net Interest Payments: 17.4%. 

Fiscal year: 2018; 
Net Interest Payments: 18.7%. 

Fiscal year: 2019; 
Net Interest Payments: 19.8v 

Fiscal year: 2020; 
Net Interest Payments: 20.7%. 

Source: GAO analysis of CBO data. 

[End of figure] 

Treasury says its existing suite of securities will leave Treasury 
well-positioned to meet federal government borrowing needs in fiscal 
year 2010. Looking beyond 2010, sustained increases in debt in the 
medium and long term mean that communication with all types of 
investors to accurately gauge market demand will become increasingly 
important for Treasury. 

Treasury and Investors Communicate through Both Formal and Informal 
Channels; Market Participants Identified Challenges and Suggested 
Improvements to Both: 

Treasury and Investors Communicate through Both Formal and Informal 
Channels: 

Sufficient information from market participants, including their 
likely demand for Treasury securities, is critical for debt management 
decisions. Treasury receives market information through multiple 
formal and informal channels. (See figure 5.) Formal communication 
channels are quarterly meetings with TBAC and with the primary dealers 
held as part of Treasury's quarterly refunding process. TBAC is 
currently comprised of primary dealers, investment managers, hedge 
funds, and a small broker dealer. According to Treasury officials, 
TBAC was once more weighted towards primary dealers than it is now. 
Buy-and-hold investors of Treasury securities are currently 
underrepresented. TBAC quarterly meetings serve as a forum for 
Treasury officials to discuss economic forecasts and the federal 
government's borrowing needs with knowledgeable market participants. 
Treasury officials pose questions on specific debt management issues 
in advance and TBAC members present their observations to Treasury on 
these issues and economic conditions. While TBAC meetings are closed 
due to the sensitivity of the matters under discussion, Treasury 
releases TBAC meeting minutes at a press conference 1 day after each 
meeting and announces the details of its quarterly refunding and any 
changes to its auction calendar or to debt management policies. 
Treasury officials told us that Treasury seeks to promote market 
stability by reserving the release of any new information for the 
formal quarterly announcements. 

Figure 5: Treasury's Office of Debt Management's (ODM) Market 
Information Channels: 

[Refer to PDF for image: illustration] 

Treasury’s Office of Debt Management: 

Public announcements: 
Domestic and foreign Treasury market investors. 

Conferences/informal phone and e-mail communication: 
Domestic and foreign Treasury market investors. 

Quarterly meetings: 
Securities Industry and Financial Markets Association (468 members). 

Quarterly meetings: 
Primary dealers (18 members[A]); 
Treasury Borrowing Advisory Committee (14 members[A]); 
These two groups function as communication intermediaries between 
Treasury and investors and are generally members of SIFMA. 

Source: GAO. 

[A] There are five common members among TBAC and the primary dealers. 

[End of figure] 

Treasury also surveys all 18 primary dealers quarterly and meets with 
half of them one quarter and the other half the following quarter. 
Primary dealers are those banks and securities broker-dealers that are 
designated by FRBNY and maintain active trading relationships with 
FRBNY. Primary dealers are also required by FRBNY to participate in 
all Treasury auctions. Primary dealers account for a majority of 
purchases at auction, some of which they purchase for themselves and 
some of which they purchase for their customers. Treasury meets with 
half of the primary dealers before each quarterly refunding to obtain 
estimates on borrowing, issuance, and the federal budget deficit, as 
well as input on a variety of debt management discussion topics, posed 
in advance. The only information about these meetings that is released 
to the public is the agenda. 

Treasury officials also receive information from FRBNY's Markets 
Group, which has approximately 400 staff engaged in market 
surveillance. FRBNY provides morning and afternoon briefings, hosts a 
daily afternoon conference call, and provides a daily report on 
delivery fails in the secondary market for Treasury securities. 
[Footnote 18] FRBNY will also conduct specific market research at the 
request of Treasury. According to Treasury officials, the Office of 
Debt Management (ODM) relies on FRBNY for some of its market 
information.[Footnote 19] FRBNY is able to carry out large data-
collection operations because of its greater resources, which 
supplements market data Treasury already collects. 

In addition to its formal communication with the market, Treasury 
continually collects information through informal channels, but this 
communication is not conducted or logged in a systematic manner. ODM's 
informal communication includes both ad hoc and regular telephone and 
e-mail contact between six ODM officials and staff and approximately 
500 foreign and domestic financial organizations. Treasury also has 
seven market-room staff who maintain continuous contact with market 
participants. Treasury also maintains regular informal contact with 
representatives of foreign central banks. In addition, Treasury 
regularly contacts primary dealers to discuss operational issues in 
the Treasury debt market as well to gather information about what they 
expect to occur in the Treasury debt market on a given day. Treasury 
staff and officials also reach out to investors by speaking at and 
attending conferences sponsored by market participants and meeting 
with large investors globally. 

Investors Reported Mixed Satisfaction with Treasury's Receipt of 
Information from End-Investors: 

Responses to our survey of the largest domestic holders of Treasury 
securities indicate that their views vary on the extent to which 
Treasury receives sufficient information and input from end-investors. 
Overall, survey responses suggested room for improvement in Treasury's 
practices for gathering market information. 

Our survey asked respondents the extent to which they believed 
Treasury receives sufficient information and input from end-investors. 
They were presented with five response categories that included very 
great extent, great extent, moderate extent, some extent, and little 
or no extent, as well as a no basis to judge response choice.[Footnote 
20] Seventeen of the 38 respondents who answered this question on our 
survey (see figure 6), answered either some extent or little or no 
extent. This compares with only 10 respondents who answered very great 
extent or great extent. 

Figure 6: Extent to Which Survey Respondents Believe Treasury Receives 
Sufficient Information from End-Investors: 

[Refer to PDF for image: vertical bar graph] 

Scale: Great or very great extent; 
Number of survey responses: 10. 

Scale: Moderate extent; 
Number of survey responses: 11. 

Scale: Some, little or no extent; 
Number of survey responses: 17. 

Source: GAO. 

[End of figure] 

Survey responses varied by market sector. Commercial banks and mutual 
funds expressed a greater belief that Treasury receives sufficient 
information and input from end-investors than did other sectors we 
surveyed. (See figure 7.) At the time of our survey, the mutual-funds 
sector, the sector with the largest amount of Treasury holdings in our 
survey, held over $201 billion in Treasury securities. The commercial- 
banking sector held $125 billion.[Footnote 21] 

Figure 7: Extent to Which Commercial Banks and Mutual-Fund Respondents 
Believe Treasury Receives Sufficient Information from End-Investors: 

[Refer to PDF for image: stacked vertical bar graph] 

Number of survey responses: 

Scale: Very great extent; 
Mutual funds: 1; 
Commercial banking: 0. 

Scale: Great extent; 
Mutual funds: 1; 
Commercial banking: 5. 

Scale: Moderate extent; 
Mutual funds: 0; 
Commercial banking: 6. 

Scale: some extent; 
Mutual funds: 2; 
Commercial banking: 2. 

Scale: Little or no extent; 
Mutual funds: 0; 
Commercial banking: 1. 

Source: GAO. 

[End of figure] 

In contrast to the mostly positive responses of mutual funds and 
commercial banks, respondents from the remaining sectors--life 
insurance companies, property casualty insurance companies, and state 
and local government retirement funds--were more likely to respond 
negatively.[Footnote 22] As shown in figure 8, 12 of 20 respondents 
from life insurance companies, property casualty insurance companies, 
and state and local government retirement funds answered some or 
little or no extent when asked whether they believe Treasury currently 
receives sufficient information from end-investors. Both of the life 
insurance companies that completed our survey chose little or no 
extent. Treasury officials have agreed that they could receive better 
input from end-investors and have made it a priority to improve 
investor outreach. 

Figure 8: Extent to Which Life Insurance, Property Casualty Insurance, 
and State and Local Government Retirement Funds Believe Treasury 
Receives Sufficient Information from End-Investors: 

[Refer to PDF for image: stacked vertical bar graph] 

Number of survey responses: 

Scale: Very great extent; 
Life insurance companies: 0; 
State and local government retirement funds: 0; 
Property casualty insurance companies: 0. 

Scale: Great extent; 
Life insurance companies: 0; 
State and local government retirement funds: 3; 
Property casualty insurance companies: 0. 

Scale: Moderate extent; 
Life insurance companies: 0; 
State and local government retirement funds: 3; 
Property casualty insurance companies: 2. 

Scale: some extent; 
Life insurance companies: 0; 
State and local government retirement funds: 6; 
Property casualty insurance companies: 2. 

Scale: Little or no extent; 
Life insurance companies: 2; 
State and local government retirement funds: 0; 
Property casualty insurance companies: 2. 

Source: GAO. 

[End of figure] 

The survey findings were consistent with information we received 
during interviews with investors conducted in June 2009 that indicated 
that many investors in liability-driven sectors, such as life 
insurance and pension funds, both lack formalized means of 
communication with Treasury and believe such contact would be 
beneficial. These investors may have a different demand portfolio than 
those in other market sectors with whom Treasury maintains closer 
contact. For example, there may be greater interest in these sectors 
in buy-and-hold securities like TIPS. With debt levels predicted to 
continue to rise in the medium and long term, the importance of good 
information from a range of investors in all sectors increases in 
importance. 

Market Participants and Experts Suggested Ways for Treasury to Improve 
Its Collection of Information from End-Investors: 

Respondents to our survey of the largest domestic holders of Treasury 
securities suggested ideas for improving Treasury's collection of 
information from end-investors. The most frequently suggested ideas 
involved increasing the range of investors from whom Treasury obtains 
information. Survey respondents told us that they thought Treasury 
could better gauge market demand for securities if a broader range of 
investors were represented on TBAC. Survey respondents suggested 
changes such as broadening membership or rotating membership more 
frequently. Multiple survey respondents told us that some types of end-
investors, particularly liability-driven investors such as insurance 
companies and pensions funds, have limited formal means of 
communicating their views to Treasury. 

Survey respondents also suggested that Treasury could better gauge 
market demand through a periodic collection of market data from a 
broad range of end-investors. They suggested that the periodic data 
collection could be in the form of a survey, interviews, focus groups, 
or additional data reporting by market participants. These responses 
echoed what market experts told us, that Treasury could benefit from 
periodic "temperature-taking" of the market through surveys or 
interviews and from changes to the organization or composition of the 
groups from which Treasury routinely receives market information and 
advice. Several survey respondents told us that a good model for a 
future Treasury survey might resemble the survey we conducted. While 
Treasury has not conducted a survey of end-investors in the past, 
similar surveys have been conducted by organizations like SIFMA. 

Treasury staff and officials agree that more inclusive representation 
on TBAC would be desirable, but they also said that increasing the 
number of members (to even the TBAC charter limit of 20 members) could 
impede optimal committee functioning. Treasury staff told us that if 
the committee were to become too large, it might be difficult to allow 
enough time for members to provide feedback and contribute to 
discussions. Treasury staff and officials told us that they could 
broaden TBAC membership to include one or more representatives of buy- 
and-hold investors such as insurance companies or endowments. Treasury 
staff and officials also told us that one of Treasury's priorities is 
to improve investor outreach and to collect information more 
systematically. Treasury officials told us that improvements to how 
Treasury communicates with investors are likely to be a priority for 
ODM in 2010 and beyond. 

Investors Reported Increased Demand for TIPS and Suggested Actions for 
Treasury to Take That Could Improve the TIPS Market: 

Investors and Market Experts Reported an Increased Demand for TIPS: 

As previously noted, one challenge for Treasury will be to gauge 
investor demand for Treasury securities in order to finance 
historically large deficits expected in the medium and long term. 
Faced with this challenge, communication with investors becomes 
essential. When we surveyed major domestic holders of Treasury 
securities in August 2009, many survey participants indicated that 
their demand could increase for TIPS. As seen in table 1, as of July 
31, 2009, survey respondents reported holding $143 billion in TIPS--
which represented approximately 26 percent of the total marketable 
TIPS outstanding. This amount also constituted approximately 21 
percent of the survey respondents' total portfolio of Treasury 
securities. This share allocated to TIPS may indicate that our survey 
respondents already viewed TIPS favorably. According to Treasury data, 
TIPS generally represent a much smaller percentage of total 
outstanding Treasury securities. At the time of our survey in August 
2009, TIPS constituted only 8 percent of all Treasury marketable 
securities outstanding. 

Table 1: Survey Respondents' Reported Treasury Securities Holdings and 
Future Purchases: 

Dollars in billions: 

Bills: 
Treasury securities (as of Dec. 31, 2008): $280; 
Treasury securities (as of July 31, 2009): $247; 
Anticipated purchases (Aug. 1, 2009-Dec. 31, 2010): $26. 

Notes: 
Treasury securities (as of Dec. 31, 2008): $153; 
Treasury securities (as of July 31, 2009): $189; 
Anticipated purchases (Aug. 1, 2009-Dec. 31, 2010): $50. 

Bonds: 
Treasury securities (as of Dec. 31, 2008): $73; 
Treasury securities (as of July 31, 2009): $62; 
Anticipated purchases (Aug. 1, 2009-Dec. 31, 2010): $6. 

TIPS: 
Treasury securities (as of Dec. 31, 2008): $139; 
Treasury securities (as of July 31, 2009): $143; 
Anticipated purchases (Aug. 1, 2009-Dec. 31, 2010): $29. 

STRIPS: 
Treasury securities (as of Dec. 31, 2008): $25; 
Treasury securities (as of July 31, 2009): $27; 
Anticipated purchases (Aug. 1, 2009-Dec. 31, 2010): $1. 

Total: 
Treasury securities (as of Dec. 31, 2008): $670; 
Treasury securities (as of July 31, 2009): $668; 
Anticipated purchases (Aug. 1, 2009-Dec. 31, 2010): $112. 

Source: GAO. 

Note: Not all survey respondents were able to provide figures for 
anticipated purchases of Treasury securities due to constant changes 
in the value of Treasury securities relative to other investment 
options. 

[End of table] 

Even though the survey respondents were already heavily invested in 
TIPS, they indicated that they planned to greatly increase their TIPS 
purchases over the next 17 months. From August 2009 through the end of 
December 2010, our survey respondents said that they planned to 
purchase an additional $29 billion in TIPS. 

The increased investor interest in TIPS, as reported through our 
survey, corroborates information we received from individual 
interviews we conducted earlier with large domestic holders of 
Treasury securities. The investment managers we interviewed at public 
and private pension funds, mutual funds, insurance companies, and 
commercial banks expressed continued or growing interest in TIPS 
during 2009. 

At the start of 2009, financial-market experts were recommending that 
investors purchase TIPS and other inflation-protected investments. 
Over the course of the year, mutual funds began reporting large 
inflows into inflation-protected funds, which consist mostly of TIPS. 
During 2009, the five largest inflation-protected bond mutual funds 
increased their total net assets by almost 70 percent.[Footnote 23] 
The largest of these funds saw its net assets increase by an average 
of almost $1 billion per month in 2009. Also during 2009, one of the 
largest fixed income managers introduced three new mutual funds 
designed to protect investors against inflation.[Footnote 24] One of 
those new funds is intended to provide a hedge against inflation but 
also provide tax-efficient income by allocating at least half of its 
investments to municipal bonds.[Footnote 25] The other two new funds 
are intended to produce monthly income payments that consist of both 
inflation-adjusted interest and principal. These two funds consist 
primarily of investments in TIPS and have initial target maturity 
dates of 2019 and 2029. 

Recent Changes to TIPS Suggest That Treasury Is Responding to Investor 
Concerns about the Liquidity of TIPS: 

GAO and others have recommended that Treasury take action to improve 
the liquidity of TIPS, which could lower Treasury's cost of borrowing. 
[Footnote 26] Prior to 2009, holdings of Treasury securities by 
sectors that we surveyed had been in decline for nearly two decades. 
(As seen in figure 9.) By the onset of the financial crisis in 2008, 
the share of Treasury securities relative to each sector's total 
assets was less than half their historical averages for the preceding 
two decades. By the end of 2007, no sector reported holding more than 
5-½ percent of its total assets in Treasury securities. 

Figure 9: Percentage of Total Financial Assets in Treasury Securities 
by Sector (1984 to 2009): 

[Refer to PDF for image: multiple line graph] 

Calendar year: 1984; 
Commercial banking: 8.53%; 
Property-casualty insurance companies: 9.27%; 
Mutual funds: 5.91%; 
State and local	government retirement funds: 19.6%; 
Life insurance companies: 4.87%. 

Calendar year: 1985; 
Commercial banking: 7.97%; 
Property-casualty insurance companies: 9.64%; 
Mutual funds: 6.49%; 
State and local	government retirement funds: 21.25%; 
Life insurance companies: 15.78%. 

Calendar year: 1986; 
Commercial banking: 7.54%; 
Property-casualty insurance companies: 12.04%; 
Mutual funds: 6.52%; 
State and local	government retirement funds: 24.2%; 
Life insurance companies: 16.7%. 

Calendar year: 1987; 
Commercial banking: 7.01%; 
Property-casualty insurance companies: 12.59%; 
Mutual funds: 5.68%; 
State and local	government retirement funds: 26.11%; 
Life insurance companies: 17.5%. 

Calendar year: 1988; 
Commercial banking: 6.28%; 
Property-casualty insurance companies: 13.22%; 
Mutual funds: 5.21%; 
State and local	government retirement funds: 25.25%; 
Life insurance companies: 16.04%. 

Calendar year: 1989; 
Commercial banking: 5.11%; 
Property-casualty insurance companies: 14.11%; 
Mutual funds: 4.25%; 
State and local	government retirement funds: 21.83%; 
Life insurance companies: 13.81%. 

Calendar year: 1990; 
Commercial banking: 5.16%; 
Property-casualty insurance companies: 14.81%; 
Mutual funds: 4.38%; 
State and local	government retirement funds: 23.05%; 
Life insurance companies: 14.32%. 

Calendar year: 1991; 
Commercial banking: 6.75%; 
Property-casualty insurance companies: 18.07%; 
Mutual funds: 5.26%; 
State and local	government retirement funds: 19.43%; 
Life insurance companies: 13.5%. 

Calendar year: 1992; 
Commercial banking: 8.05%; 
Property-casualty insurance companies: 18.19%; 
Mutual funds: 5.59%; 
State and local	government retirement funds: 21.7%2; 
Life insurance companies: 11.13%. 

Calendar year: 1993; 
Commercial banking: 8.27%; 
Property-casualty insurance companies: 19.38%; 
Mutual funds: 6.27%; 
State and local	government retirement funds: 20.87%; 
Life insurance companies: 9.74%. 

Calendar year: 1994; 
Commercial banking: 6.98%; 
Property-casualty insurance companies: 19.61%; 
Mutual funds: 5.75%; 
State and local	government retirement funds: 19.74%; 
Life insurance companies: 8.83%. 

Calendar year: 1995; 
Commercial banking: 6.19%; 
Property-casualty insurance companies: 18.02%; 
Mutual funds: 5.24%; 
State and local	government retirement funds: 15.69%; 
Life insurance companies: 7.76%. 

Calendar year: 1996; 
Commercial banking: 5.55%; 
Property-casualty insurance companies: 15.7%; 
Mutual funds: 4.15v; 
State and local	government retirement funds: 14.1%; 
Life insurance companies: 5.37%. 

Calendar year: 1997; 
Commercial banking: 5.21%; 	
Property-casualty insurance companies: 10.8%; 
Mutual funds: 3.4%; 
State and local	government retirement funds: 12.2%; 
Life insurance companies: 4.56%. 

Calendar year: 1998; 
Commercial banking: 3.8%; 
Property-casualty insurance companies: 8.03%; 
Mutual funds: 2.58%; 
State and local	government retirement funds: 10.47%; 
Life insurance companies: 3.9%. 

Calendar year: 1999; 
Commercial banking: 3.82%; 
Property-casualty insurance companies: 6.97%; 
Mutual funds: 2.05%; 
State and local	government retirement funds: 8.55%; 
Life insurance companies: 2.58%. 

Calendar year: 2000; 
Commercial banking: 2.75v; 
Property-casualty insurance companies: 6.07%; 
Mutual funds: 1.85%; 
State and local	government retirement funds: 7.81%; 
Life insurance companies: 2.87%. 

Calendar year: 2001; 
Commercial banking: 2.28%; 
Property-casualty insurance companies: 6.09%; 
Mutual funds: 1.66%; 
State and local	government retirement funds: 7.03%; 
Life insurance companies: 2.84%. 

Calendar year: 2002; 
Commercial banking: 2.68%; 
Property-casualty insurance companies: 6.55%; 
Mutual funds: 2.35%; 
State and local	government retirement funds: 8.23%; 
Life insurance companies: 3.71%. 

Calendar year: 2003; 
Commercial banking: 1.6%; 
Property-casualty insurance companies: 6.11%; 
Mutual funds: 1.9%; 
State and local	government retirement funds: 6.33%; 
Life insurance companies: 3.1%. 

Calendar year: 2004; 
Commercial banking: 1.19%; 
Property-casualty insurance companies: 6.15%; 
Mutual funds: 1.9%; 
State and local	government retirement funds: 5.86%; 
Life insurance companies: 2.74%. 

Calendar year: 2005; 
Commercial banking: 0.99%; 
Property-casualty insurance companies: 5.55%; 
Mutual funds: 2.1%; 
State and local	government retirement funds: 5.65%; 
Life insurance companies: 2.57%. 

Calendar year: 2006; 
Commercial banking: 0.88%; 
Property-casualty insurance companies: 5.67%; 
Mutual funds: 1.78%; 
State and local	government retirement funds: 5.05%; 
Life insurance companies: 2.27%. 

Calendar year: 2007; 
Commercial banking: 0.95%; 
Property-casualty insurance companies: 3.99%; 
Mutual funds: 1.38%; 
State and local	government retirement funds: 5.25%; 
Life insurance companies: 2.29%. 

Calendar year: 2008; 
Commercial banking: 0.67%; 
Property-casualty insurance companies: 4.2%; 
Mutual funds: 2.34%; 
State and local	government retirement funds: 7.5%; 
Life insurance companies: 3.46%. 

Calendar year: Q1-2009; 
Commercial banking: 0.81%; 
Property-casualty insurance companies: 4.3%; 
Mutual funds: 2.83%; 
State and local	government retirement funds: 7.97%; 
Life insurance companies: 3.78%. 

Calendar year: Q2-2009; 
Commercial banking: 0.87%; 
Property-casualty insurance companies: 4.23%; 
Mutual funds: 2.95%; 
State and local	government retirement funds: 7.29%; 
Life insurance companies: 3.45%. 

Calendar year: Q3-2009; 
Commercial banking: 1.26%; 
Property-casualty insurance companies: 4.15%; 
Mutual funds: 2.96%; 
State and local	government retirement funds: 6.81%; 
Life insurance companies: 3.19%. 

Source: GAO analysis of Federal Reserve data . 

[End of figure] 

In 2009, Treasury decided to increase TIPS issuance, reversing the 
trend of the past few years. As we previously reported, Treasury 
reduced the annual gross amount of TIPS issuance by 19 percent from 
2006 to 2008. Treasury then gradually increased total TIPS issuance in 
2009 by 4 percent to $58 billion. During the August 2009 TBAC press 
conference, Treasury officials stated that they are committed to the 
TIPS program and to issuing TIPS in a regular and predictable manner 
across the yield curve. Further, during the November 2009 and February 
2010 TBAC meetings, Treasury officials announced that they planned to 
gradually increase TIPS issuance and would consider making changes to 
the TIPS auction calendar by increasing the number of TIPS auctions. 
These changes, which are meant to improve TIPS liquidity, are based on 
Treasury's own analysis and on input that Treasury received from 
market participants and GAO. At the time of this report, Treasury had 
already begun to increase TIPS issuance. The size of the 10-year TIPS 
auction held in January 2010 was $10 billion--an increase of 25 
percent over the previous 10-year TIPS auctions that held in July 2009. 

If investors continue to express and demonstrate interest in TIPS, 
Treasury may be able to issue a greater amount of TIPS at a lower cost 
than in past years. Survey respondents who anticipated a change in 
their demand for TIPS said that any reallocation into TIPS would most 
likely be drawn from holdings of nominal Treasury securities or non- 
Treasury assets. Investments into TIPS were less likely to come from 
an overall increase in total assets. As previously reported, if 
Treasury has to increase the supply of nominal securities 
substantially to fund larger deficits, yields may have to rise in 
order to attract enough buyers due to the saturation of the nominal 
Treasury market.[Footnote 27] Therefore, issuing TIPS may make sense 
since a substantial shift in the composition of Treasury issuance into 
TIPS from nominal Treasuries could also lead to lower interest rates 
paid on the remaining nominal Treasury issuance. The most common 
reasons cited by our survey respondents for this specific anticipated 
shift into TIPS were inflation protection and TIPS' valuation relative 
to other investments--the same reasons most often cited for a general 
interest in TIPS. Compared to other sectors that we surveyed, mutual 
fund companies and state and local government retirement funds also 
responded that some of their investments in TIPS were dedicated based 
upon active allocation decisions made by clients. 

Treasury has also responded to investor concern about the maturity of 
TIPS issued across the yield curve by reintroducing the 30-year TIPS. 
At the November 2009 TBAC meeting, there was general consensus to 
eliminate the 20-year TIPS and replace it with the 30-year TIPS. TBAC 
members thought this change may allow Treasury to lower its cost of 
borrowing while it would create a TIPS issue that could be better 
compared to the 30-year nominal issuance point. Following the TBAC 
meeting, Treasury announced that it would discontinue the auctions of 
the 20-year TIPS and reintroduce the 30-year TIPS starting in February 
2010.[Footnote 28] 

Options Exist to Improve TIPS Auction Participation, Which Could 
Improve TIPS Liquidity: 

As we reported previously, investors demand a premium for less-liquid 
TIPS, which increases Treasury's borrowing costs.[Footnote 29] Through 
our survey, market participants identified a number of options to 
improve participation at TIPS auctions, which could improve TIPS 
liquidity. Most respondents to our survey were more likely to purchase 
TIPS in the secondary market rather than at auction. The most common 
reasons listed for this were infrequency of TIPS auctions, portfolio 
needs, relative valuation, and liquidity. On average, survey 
respondents planned to purchase almost 80 percent of their TIPS in the 
secondary market. Over half of survey respondents said that although 
they never participate in Treasury auctions, they were active in the 
secondary market at least monthly. 

Survey respondents said that increasing the dollar amount of TIPS 
issued per auction and increasing the frequency of TIPS auctions could 
help improve participation during TIPS auctions. Survey respondents 
also pointed out that a clearer commitment from Treasury to the TIPS 
program would improve TIPS liquidity. In interviews with us in 
February 2010, some primary dealers said that Treasury should modify 
its current TIPS auction schedule to decrease the amount of time 
between TIPS auctions, thereby staggering the supply of TIPS so that 
issuance is not as concentrated. Since 2005, Treasury has held eight 
TIPS auctions every calendar year--two auctions each in January, 
April, July and October. At the May 2010 TBAC press conference, the 
Assistant Secretary for Financial Markets, Mary Miller, said that 
Treasury will be adding a second reopening of the 10-year TIPS, which 
would lead to six 10-year TIPS auctions a year. According to Treasury, 
these changes would help improve TIPS liquidity while diversifying its 
funding sources. 

A More Liquid TIPS Market Could Support a TIPS Futures Market, Which 
in Turn Could Further Enhance the TIPS Market: 

The combination of increased TIPS issuance, Treasury's statements of 
commitment to TIPS, and the reintroduction of the longer-dated 30-year 
TIPS, could help sustain a viable TIPS futures market.[Footnote 30] In 
interviews and in published material, some financial-market experts 
have noted the lack of a viable futures trading market for TIPS. Some 
of these experts have speculated that a successful futures contract 
could bolster the liquidity of TIPS. In a public discussion with the 
Chicago Mercantile Exchange Group (CME) in March 2009, Acting 
Assistant Secretary for Financial Markets Karthik Ramanathan explained 
that futures products help increase the liquidity, depth, and price 
transparency of the U.S. Treasury market. 

According to market experts, however, the lack of liquidity in the 
current TIPS market would make it difficult to sustain a viable TIPS 
futures product. In interviews with GAO in February 2010, primary 
dealers expressed different opinions on the structure of a potential 
inflation futures contract. We heard preferences for both a cash- 
settled index as the basis for an inflation futures contract and also 
an inflation futures contract with a basket of deliverables similar to 
how futures contracts for nominal securities are structured. Primary 
dealers told us that if TIPS were to become more liquid, then a TIPS 
futures contract might succeed, and that this in turn could further 
increase the liquidity of TIPS. 

One of the Most Important Groups through Which Treasury Receives 
Market Information Has Expressed Concerns about the Increase in Direct 
Bidding in Treasury Auctions: 

One of Treasury's important channels of communication is with primary 
dealers. Primary dealers that we interviewed told us that they are 
satisfied with their communication with Treasury. They told us they 
had recently raised concerns about what they see as consequences of 
the recent increase in direct bidding in Treasury auctions. 

Direct bidders are financial institutions that, like primary dealers, 
can bid for and buy Treasury securities competitively at auction 
directly from Treasury instead of in the secondary market. Unlike 
primary dealers, direct bidders are not required to participate in all 
Treasury auctions. Most Treasury securities are bought at auction by 
primary dealers. A much smaller, but growing volume of securities is 
purchased by direct bidders.[Footnote 31] 

In April 2004, Treasury stated that there were 825 "investors" making 
use of the auction system that allows direct bidding. Three months 
later, a Treasury press release announcing the new version of 
TAAPSLink, the communications system through which auction market 
participants are provided Internet-based access to Treasury auctions, 
said that over 600 "firms" used the on-line bidding system.[Footnote 
32] This is the most recent information that Treasury has disclosed to 
the market on the potential number of direct bidders at an auction. 

Direct bidding has grown in size and volatility since 2008. Figure 10 
illustrates both the overall increase in participation and the 
volatility of that participation. Direct bidder purchase share in 
auctions for 5-and 10-year notes and 30-year bonds began to trend 
upward and show greater variation starting on October 30, 2008, and 
then hit a 5-year high of almost 30 percent at the March 11, 2010, 
auction of 30-year bonds. During this period, the average direct-
bidder purchase share of 5-and 10-year notes and 30-year bonds was 5.8 
percent with a standard deviation of 5.3 percentage points. This 
contrasts with the period between May 5, 2003, and October 30, 2008, 
when direct bidders purchased an average of only 1.6 percent of 5-and 
10-year notes and 30-year bonds. The standard deviation during this 
time period was 3.9 percentage points. 

Figure 10: Percentage of 5-and 10-year Notes and 30-year Bonds 
Purchased by Direct Bidders at Treasury Securities Auctions (May 2003- 
February 2010): 

[Refer to PDF for image: line graph] 

Date: May 2003; 
Percent of auction purchased by direct bidders: 0; 
Percent of auction purchased by direct bidders: 0; 
Percent of auction purchased by direct bidders: 0; 
Percent of auction purchased by direct bidders: 0; 
Percent of auction purchased by direct bidders: 0; 
Percent of auction purchased by direct bidders: 0. 

Date: September 2003; 
Percent of auction purchased by direct bidders: 0; 
Percent of auction purchased by direct bidders: 0; 
Percent of auction purchased by direct bidders: 0; 
Percent of auction purchased by direct bidders: 1; 
Percent of auction purchased by direct bidders: 2; 
Percent of auction purchased by direct bidders: 1. 

Date: January 2004; 
Percent of auction purchased by direct bidders: 0; 
Percent of auction purchased by direct bidders: 0; 
Percent of auction purchased by direct bidders: 0; 
Percent of auction purchased by direct bidders: 2; 
Percent of auction purchased by direct bidders: 0; 
Percent of auction purchased by direct bidders: 0. 

Date: May 2004; 
Percent of auction purchased by direct bidders: 1; 
Percent of auction purchased by direct bidders: 1; 
Percent of auction purchased by direct bidders: 0; 
Percent of auction purchased by direct bidders: 0; 
Percent of auction purchased by direct bidders: 4; 
Percent of auction purchased by direct bidders: 0; 
Percent of auction purchased by direct bidders: 0. 

Date: September 2004; 
Percent of auction purchased by direct bidders: 32; 
Percent of auction purchased by direct bidders: 1; 
Percent of auction purchased by direct bidders: 1; 
Percent of auction purchased by direct bidders: 0; 
Percent of auction purchased by direct bidders: 0; 
Percent of auction purchased by direct bidders: 0; 
Percent of auction purchased by direct bidders: 0. 

Date: January 2005; 
Percent of auction purchased by direct bidders: 0; 
Percent of auction purchased by direct bidders: 0; 
Percent of auction purchased by direct bidders: 1; 
Percent of auction purchased by direct bidders: 7; 
Percent of auction purchased by direct bidders: 6; 
Percent of auction purchased by direct bidders: 0. 

Date: May 2005; 
Percent of auction purchased by direct bidders: 1; 
Percent of auction purchased by direct bidders: 19; 
Percent of auction purchased by direct bidders: 1; 
Percent of auction purchased by direct bidders: 0; 
Percent of auction purchased by direct bidders: 2; 
Percent of auction purchased by direct bidders: 3; 
Percent of auction purchased by direct bidders: 1. 

Date: September 2005; 
Percent of auction purchased by direct bidders: 1; 
Percent of auction purchased by direct bidders: 2; 
Percent of auction purchased by direct bidders: 15; 
Percent of auction purchased by direct bidders: 9; 
Percent of auction purchased by direct bidders: 1; 
Percent of auction purchased by direct bidders: 1; 
Percent of auction purchased by direct bidders: 2. 

Date: January 2006; 
Percent of auction purchased by direct bidders: 1; 
Percent of auction purchased by direct bidders: 2; 
Percent of auction purchased by direct bidders: 0; 
Percent of auction purchased by direct bidders: 1; 
Percent of auction purchased by direct bidders: 1; 
Percent of auction purchased by direct bidders: 1; 
Percent of auction purchased by direct bidders: 8. 

Date: May 2006; 
Percent of auction purchased by direct bidders: 1; 
Percent of auction purchased by direct bidders: 2; 
Percent of auction purchased by direct bidders: 1; 
Percent of auction purchased by direct bidders: 2; 
Percent of auction purchased by direct bidders: 1; 
Percent of auction purchased by direct bidders: 1; 
Percent of auction purchased by direct bidders: 1; 
Percent of auction purchased by direct bidders: 1. 

Date: September 2006; 
Percent of auction purchased by direct bidders: 0; 
Percent of auction purchased by direct bidders: 0; 
Percent of auction purchased by direct bidders: 1; 
Percent of auction purchased by direct bidders: 1; 
Percent of auction purchased by direct bidders: 1; 
Percent of auction purchased by direct bidders: 0; 
Percent of auction purchased by direct bidders: 1. 

Date: January 2007; 
Percent of auction purchased by direct bidders: 0; 
Percent of auction purchased by direct bidders: 1; 
Percent of auction purchased by direct bidders: 12; 
Percent of auction purchased by direct bidders: 1; 
Percent of auction purchased by direct bidders: 0; 
Percent of auction purchased by direct bidders: 2; 
Percent of auction purchased by direct bidders: 0. 

Date: May 2007; 
Percent of auction purchased by direct bidders: 1; 
Percent of auction purchased by direct bidders: 1; 
Percent of auction purchased by direct bidders: 1; 
Percent of auction purchased by direct bidders: 2; 
Percent of auction purchased by direct bidders: 0; 
Percent of auction purchased by direct bidders: 0; 
Percent of auction purchased by direct bidders: 0; 
Percent of auction purchased by direct bidders: 0; 
Percent of auction purchased by direct bidders: 0. 

Date: September 2007; 
Percent of auction purchased by direct bidders: 0; 
Percent of auction purchased by direct bidders: 0; 
Percent of auction purchased by direct bidders: 1; 
Percent of auction purchased by direct bidders: 0; 
Percent of auction purchased by direct bidders: 1; 
Percent of auction purchased by direct bidders: 0; 
Percent of auction purchased by direct bidders: 1; 
Percent of auction purchased by direct bidders: 1. 

Date: January 2008; 
Percent of auction purchased by direct bidders: 1; 
Percent of auction purchased by direct bidders: 1; 
Percent of auction purchased by direct bidders: 0; 
Percent of auction purchased by direct bidders: 1; 
Percent of auction purchased by direct bidders: 5; 
Percent of auction purchased by direct bidders: 1; 
Percent of auction purchased by direct bidders: 0. 

Date: May 2008; 
Percent of auction purchased by direct bidders: 1; 
Percent of auction purchased by direct bidders: 1; 
Percent of auction purchased by direct bidders: 1; 
Percent of auction purchased by direct bidders: 0; 
Percent of auction purchased by direct bidders: 0; 
Percent of auction purchased by direct bidders: 1; 
Percent of auction purchased by direct bidders: 1; 
Percent of auction purchased by direct bidders: 0; 
Percent of auction purchased by direct bidders: 1. 

Date: September 2008; 
Percent of auction purchased by direct bidders: 1; 
Percent of auction purchased by direct bidders: 0; 
Percent of auction purchased by direct bidders: 0; 
Percent of auction purchased by direct bidders: 0; 
Percent of auction purchased by direct bidders: 1; 
Percent of auction purchased by direct bidders: 0; 
Percent of auction purchased by direct bidders: 14; 
Percent of auction purchased by direct bidders: 5; 
Percent of auction purchased by direct bidders: 5; 
Percent of auction purchased by direct bidders: 2; 
Percent of auction purchased by direct bidders: 0; 
Percent of auction purchased by direct bidders: 8. 

Date: January 2009; 
Percent of auction purchased by direct bidders: 0; 
Percent of auction purchased by direct bidders: 1; 
Percent of auction purchased by direct bidders: 2; 
Percent of auction purchased by direct bidders: 16; 
Percent of auction purchased by direct bidders: 2; 
Percent of auction purchased by direct bidders: 3; 
Percent of auction purchased by direct bidders: 10; 
Percent of auction purchased by direct bidders: 2; 
Percent of auction purchased by direct bidders: 4; 
Percent of auction purchased by direct bidders: 2. 

Date: May 2009; 
Percent of auction purchased by direct bidders: 4; 
Percent of auction purchased by direct bidders: 4; 
Percent of auction purchased by direct bidders: 3; 
Percent of auction purchased by direct bidders: 9; 
Percent of auction purchased by direct bidders: 6; 
Percent of auction purchased by direct bidders: 3; 
Percent of auction purchased by direct bidders: 13; 
Percent of auction purchased by direct bidders: 2; 
Percent of auction purchased by direct bidders: 2; 
Percent of auction purchased by direct bidders: 2; 
Percent of auction purchased by direct bidders: 9; 
Percent of auction purchased by direct bidders: 3. 

Date: September 2009; 
Percent of auction purchased by direct bidders: 2; 
Percent of auction purchased by direct bidders: 3; 
Percent of auction purchased by direct bidders: 11; 
Percent of auction purchased by direct bidders: 5; 
Percent of auction purchased by direct bidders: 9; 
Percent of auction purchased by direct bidders: 3; 
Percent of auction purchased by direct bidders: 5; 
Percent of auction purchased by direct bidders: 12; 
Percent of auction purchased by direct bidders: 3; 
Percent of auction purchased by direct bidders: 9; 
Percent of auction purchased by direct bidders: 7; 
Percent of auction purchased by direct bidders: 13. 

Date: January 2010	
Percent of auction purchased by direct bidders: 17. 

Source: GAO analysis of Treasury data. 

Note: The frequency of issuance of the 5-and 10-year notes and 30-year 
bond varied between May 2003 and January 2010. 

[End of figure] 

Primary dealers have made public statements expressing concerns about 
both the increase and the unpredictable role of direct bidders in 
Treasury auctions. Through interviews, we learned that they had 
expressed their concerns to both Treasury and the FRBNY. Primary 
dealers said they believe both more direct bidding and the increase in 
the volatility of direct bidding "dis-incentivizes" primary dealers 
because it means they have less certainty of information surrounding a 
particular Treasury auction. For example, if an investor purchases 
Treasury securities directly at auction instead of going through a 
primary dealer, a primary dealer could have less information available 
about the auction. Volatility in direct bidding also increases 
uncertainty. Increased uncertainty could lead to primary dealers 
making less aggressive bids, which could lead to increased borrowing 
costs for Treasury. Some primary dealers also told us that an overall 
lack of transparency regarding direct bidding potentially contributes 
to "sloppy auctions." A sloppy auction typically means poor reception 
or demand for a Treasury auction relative to what was expected and 
leads to higher yields at the auction. Treasury officials told us that 
they have not seen any evidence of this and have also stated publicly 
that Treasury supports broad access to the auction process and that 
direct bidding fosters competition, therefore helping achieve its goal 
of the lowest cost of borrowing over time. 

According to primary dealers that we interviewed, part of the lack of 
transparency surrounding direct bidding comes from not knowing the 
exact number of direct bidders that could potentially bid at each 
auction and what sectors of the market they represent. One source of 
information that provides a breakdown of auction results by sector is 
Treasury's data on Investor Class Auction Allotments, which is 
released on the 7th business day of each month.[Footnote 33] Primary 
dealers that we spoke with said that if Treasury were to provide this 
data on a more frequent basis it might alleviate some of the 
uncertainty that currently exists in the market. 

Conclusions: 

In 2008 and 2009, Treasury successfully raised unprecedented amounts 
of cash in a very short period of time. However, absent policy 
changes, the medium-and long-term fiscal outlook means that Treasury 
will have to continue to raise significant amounts of cash, while 
achieving its goal of the lowest cost of borrowing over time. Raising 
significant amounts of cash at the lowest cost of borrowing over time 
requires sufficient and competitive participation at auctions. 
Information from market participants on their demand for Treasury 
securities, including the type of information that we received from 
our survey of the largest domestic holders of Treasury securities, is 
critical to this effort. 

Treasury initially raised cash to meet TARP and Recovery Act needs by 
issuing primarily short-term debt, including CMBs, dramatically 
changing the composition of its debt portfolio. In 2009, Treasury 
began to take steps to return the composition of its debt portfolio to 
its pre-market crisis structure. In September 2009 we reported that a 
more robust TIPS program could benefit Treasury by diversifying and 
expanding its funding sources and reducing the cost of nominal 
securities. Treasury reaffirmed its commitment to TIPS and announced 
plans to gradually increase issuance of TIPS.[Footnote 34] Through our 
survey of the largest domestic holders of Treasury securities in 
August 2009, we found that Treasury can improve the extent to which it 
receives sufficient information from end-investors. We also found that 
options exist for Treasury to increase investor participation in TIPS 
auctions and further improve TIPS liquidity. We briefed Treasury on 
the findings contained in this report in October 2009, December 2009, 
and March 2010. 

Recommendations for Executive Action: 

The Secretary of the Treasury should continually review methods for 
collecting market information and consider the following actions to 
help gauge investor demand in the context of projected sustained 
increases in federal debt: 

* conducting a systematic and periodic survey of the largest holders 
of Treasury securities in all sectors, and: 

* increasing the number of representatives on TBAC and ensuring 
diverse representation by including members that represent end-
investors. 

The Secretary of the Treasury should continue to reduce the amount and 
term to maturity of CMBs, when appropriate. 

The Secretary of the Treasury should consider increasing the number of 
TIPS auctions and distributing them more evenly throughout the year in 
order to improve participation in TIPS auctions. 

The Secretary of the Treasury should study whether the recent increase 
in direct bidding at Treasury auctions has changed Treasury's overall 
cost of borrowing. As part of this study, Treasury should consider 
options to promote transparency surrounding direct bidding that would 
not discourage participation or affect Treasury's goal of fostering 
competition at auctions, including releasing its data on Investor 
Class Auction Allotments more frequently. 

Agency Comments and Our Evaluation: 

We requested comments on a draft of this report from the Secretary of 
the Treasury and received e-mailed comments on behalf of the Treasury 
from its Deputy Assistant Secretary of Federal Finance. Treasury 
agreed with our findings, conclusions, and recommendations, and said 
that the report captured Treasury's actions clearly and succinctly. 
Treasury officials also pointed out that at the May 2010 quarterly 
refunding, they announced that (1) they are increasing the frequency 
of investor class data releases, and (2) they decided to increase the 
frequency of 10-year TIPS auctions, both of which are consistent with 
our recommendations. Treasury also provided technical comments, which 
are incorporated into the report where appropriate. 

We are sending copies of this report to interested congressional 
committees, the Secretary of the Treasury, and other interested 
parties. In addition, the report is available at no charge on the GAO 
Web site at [hyperlink, http://www.gao.gov]. 

If you or your staff have any questions concerning this report, please 
contact Susan J. Irving at (202) 512-6806 or irvings@gao.gov. Contact 
points for our Offices of Congressional Relations and Public Affairs 
may be found on the last page of this report. GAO staff making key 
contributions to this report are listed in appendix IV. 

Signed by: 

Susan J. Irving: 
Director for Federal Budget Analysis Strategic Issues: 

List of Committees: 

The Honorable Daniel K. Inouye:
Chairman:
The Honorable Thad Cochran:
Vice Chairman:
Committee on Appropriations:
United States Senate: 

The Honorable Christopher J. Dodd:
Chairman:
The Honorable Richard C. Shelby:
Ranking Member:
Committee on Banking, Housing, and Urban Affairs:
United States Senate: 

The Honorable Kent Conrad:
Chairman:
The Honorable Judd Gregg:
Ranking Member:
Committee on the Budget:
United States Senate: 

The Honorable Max Baucus:
Chairman:
The Honorable Charles E. Grassley:
Ranking Member:
Committee on Finance:
United States Senate: 

The Honorable David R. Obey:
Chairman:
The Honorable Jerry Lewis:
Ranking Member:
Committee on Appropriations:
House of Representatives: 

The Honorable John M. Spratt, Jr.
Chairman:
The Honorable Paul Ryan:
Ranking Member:
Committee on the Budget:
House of Representatives: 

The Honorable Barney Frank:
Chairman:
The Honorable Spencer Bachus:
Ranking Member:
Committee on Financial Services:
House of Representatives: 

The Honorable Sander M. Levin:
Acting Chairman:
The Honorable Dave Camp:
Ranking Member:
Committee on Ways and Means:
House of Representatives: 

[End of section] 

Appendix I: Methodology for the Analysis of the Cash Management Bill 
Yield Differential: 

We analyzed the yield differential for all cash management bills (CMB) 
issued over a 2-year period beginning on January 1, 2008, and ending 
on December 31, 2009, removing from our analysis any cash management 
bills that were used for the Supplementary Financing Program (SFP). We 
used two methods to analyze the yield differential between CMBs and 
equivalent regular 4-, 13-, 26-, or 52-week Department of the Treasury 
(Treasury) bills. First, we compared CMB yields to recently auctioned 
Treasury bills of similar maturity. Second, we compared CMB yields to 
average secondary market yields on Treasury bills of similar maturity. 
There are limitations to both of these yield differential estimates. 
Neither captures any effect from the announcement of CMBs on yields 
for similar maturing bills. If the announcement of a CMB increased the 
yield on similar maturing bills, then our estimate may be understated. 
Also, in some cases, the surrounding Treasury bills we used could 
include CMBs that were reopenings of regular Treasury bills. This 
would also lead to an understatement of the yield differential because 
the yield on the outstanding securities including CMBs would be higher 
than outstanding securities that did not include CMBs. 

CMB Yields Compared to Recently Auctioned Treasury Bills of Similar 
Maturity: 

We compared CMB yields with the yields of similar Treasury bills that 
were auctioned the same day, or immediately before and after the date 
of the CMB auction. Once we identified two Treasury bills (one 
auctioned before and one after each CMB) with a maturity closest to 
the CMB, we derived a weighted average yield for the two bills. The 
weights were based on the relative difference in each bill's auction 
date from that of the CMB, with the Treasury bill having a closer 
auction date receiving a greater weight and the weights summing to 1. 
Then, the weighted average Treasury bill yield was subtracted from the 
CMB auction yield to obtain the yield differential. In the final step, 
the yield differential was applied to the dollar amount of the CMB to 
obtain an estimate of the cost of issuing a CMB instead of a regular 
Treasury bill. 

CMB Yields Compared to Average Secondary Market Yields on Treasury 
Bills of Similar Maturity: 

Taking a second approach, we also calculated the difference between a 
CMB's yield and the average secondary market yield on other Treasury 
bills that are most similar (in terms of maturity) to the CMB on the 
day of auction.[Footnote 35] That is, we compared CMB yields with 
yields on the nearest-maturing Treasury bills--either same day 
maturity, or one maturing before the CMB and one after. The CMB yields 
were obtained from the Bureau of the Public Debt while rates on 
similar-maturity outstanding Treasury bills were obtained from the 
Wall Street Journal. Due to the availability of Wall Street Journal 
data at the time of our analysis, the secondary market yield 
differential could only be calculated for the second half of 2008, but 
was calculated for all of 2009. For each Treasury bill, the asked 
yield was identified. Next, the weighted average yield for the two 
bills nearest in maturity to the CMB was derived. The weights were 
based on the relative difference in each bill's maturity date from 
that of the CMB, with the Treasury bill having a closer maturity date 
receiving a greater weight and the weights summing to 1. Then, the 
weighted average Treasury bill yield was subtracted from the CMB 
auction yield to obtain the yield differential. In the final step, the 
yield differential was applied to the dollar amount of the CMB to 
obtain an estimate of the cost of issuing a CMB instead of a regular 
Treasury bill. 

[End of section] 

Appendix II: Survey Scope and Methodology: 

To help achieve our objective of determining what changes the 
Department of the Treasury (Treasury) could make to better gauge end- 
investor demand and increase auction participation, we conducted a Web-
based survey of domestic institutional investors in Treasury 
securities. 

Population and Sample Design: 

In June 2009, we conducted 12 structured interviews with the two 
largest holders of Treasury securities in each of the following 
sectors: mutual funds; commercial banks; life insurance companies; 
property casualty insurance companies; state and local government 
retirement funds; and private pension funds. Based on what we learned 
in these interviews, in August 2009 we conducted a more comprehensive 
Web-based survey that was sent to the 12 holders of Treasury 
securities that we interviewed in June, as well as to additional 
holders of Treasury securities in each sector, with the exception of 
private pension funds. Private pension funds were excluded from the 
Web-based survey because our initial interviews revealed that their 
funds are managed primarily by external investment management 
companies represented in other sectors. Neither the structured 
interviews nor the Web-based survey are generalizible. 

We established two criteria for inclusion of a sector in the 
nonprobability sample for our 12 structured interviews. First, the 
sector had to have Treasury holdings in the top 20 of all sectors as 
of the third quarter of 2008, according to table L.209 of the Flow of 
Funds Account of the United States. Second, the sector had to be 
identified by market experts that we interviewed in February 2009 as 
having the potential to purchase large quantities of Treasury 
securities in the future. Both criteria were used to ensure that the 
sectors have a relevant financial stake in Treasury markets. 

The household sector and federal-government retirement funds sector 
were identified by the criteria, but not included in our sample. The 
household sector was not included due to the difficulty of 
identifying, ranking, and contacting individual household investors. 
In addition, it would have been beyond our ability to survey a 
sufficient number of households to reach the 50 percent market-share 
criterion that we later applied to the other sectors. The federal-
government retirement funds sector was not included because the Thrift 
Savings Plan does not invest in nominal Treasury securities and 
Treasury Inflation Protected Securities (TIPS), and therefore, it was 
outside the scope of our survey. 

To identify the organizations within each sector that would receive 
our Web-based survey, we used rankings of the largest organizations in 
each sector based on total assets (or an equivalent financial 
indicator).[Footnote 36] From these ranked lists, we determined 
Treasury holdings for each organization, and selected as many 
organizations as needed to represent at least 50 percent of the total 
amount of Treasury holdings for that sector (based on table L.209 of 
the Flow of Funds Account of the United States, as of the third 
quarter 2008).[Footnote 36] 

Survey Administration and Response Rates: 

Table 2: Recipients, Respondents, and Treasury Holdings by Sector: 

Sector: Mutual fund; 
Total recipients of survey: 27; 
Total completed surveys: 18; 
Response rate (percent): 67; 
Treasury holdings reported in survey (as of July 31, 2009): $473 
billion. 

Sector: Commercial banking; 
Total recipients of survey: 7; 
Total completed surveys: 4; 
Response rate (percent): 57; 
Treasury holdings reported in survey (as of July 31, 2009): $32 
billion. 

Sector: Property casualty insurance; 
Total recipients of survey: 10; 
Total completed surveys: 9; 
Response rate (percent): 90; 
Treasury holdings reported in survey (as of July 31, 2009): $41 
billion. 

Sector: Life insurance; 
Total recipients of survey: 3; 
Total completed surveys: 2; 
Response rate (percent): 67; 
Treasury holdings reported in survey (as of July 31, 2009): $36 
billion. 

Sector: State and local government retirement fund; 
Total recipients of survey: 19; 
Total completed surveys: 16; 
Response rate (percent): 84; 
Treasury holdings reported in survey (as of July 31, 2009): $86 
billion. 

Source: GAO. 

[End of table] 

Analysis of Open-Ended Responses: 

Several survey questions solicited open-ended responses from 
respondents. To analyze the responses to these questions, two GAO 
analysts separately reviewed the responses and identified themes for 
each item. They then developed a mutual list, which was used to 
independently code survey responses. Independently coded responses 
were then compared and successfully coded at 80 percent agreement or 
higher, with any remaining disagreements reconciled through 
discussion. At least 80 percent agreement was obtained in all cases. 
The coded responses were then used in two ways: (1) to obtain a sense 
of the range of perspectives on a given point, and (2) to obtain an 
idea of the frequency or extent to which a particular viewpoint or 
perspective was held by our survey respondents. 

[End of section] 

Appendix III: Survey Instrument: 

Survey Respondent: 

1. Please provide the following information for the organization and 
the person primarily responsible for completing this survey in case we 
need to contact you to clarify a response. 

Organization name: 
Contact name (first and last): 
Telephone (Include area code): 
E-mail address: 

Treasury Auctions and Holdings: 

2. For the following types of Treasury securities that your 
organization may purchase at auction, at what frequency does it 
usually do so? (Select one answer in each row.) 

a. Bills: 
Daily: 
Weekly: 
Monthly
At every auction: 
Other (Specify below): 

b. Notes: 
Daily: 
Weekly: 
Monthly
At every auction: 
Other (Specify below): 

c. Bonds: 
Daily: 
Weekly: 
Monthly
At every auction: 
Other (Specify below): 

d. TIPS: 
Daily: 
Weekly: 
Monthly
At every auction: 
Other (Specify below): 

If you answered "Other" above, please enter the frequency of purchase 
at auction below.
a. Bills:
b. Notes:
c. Bonds:
d. TIPS: 

3. For the following types of Treasury securities that your 
organization may purchase in the secondary market, at what frequency 
does it usually do so? (Select one answer in each row.)
Weekly	Monthly	Other
(Specify below) 
a. Bills: 
Daily: 
Weekly: 
Monthly
At every auction: 
Other (Specify below): 

b. Notes: 
Daily: 
Weekly: 
Monthly
At every auction: 
Other (Specify below): 

c. Bonds: 
Daily: 
Weekly: 
Monthly
At every auction: 
Other (Specify below): 

d. TIPS: 
Daily: 
Weekly: 
Monthly
At every auction: 
Other (Specify below): 

e. STRIPS: 
Daily: 
Weekly: 
Monthly
At every auction: 
Other (Specify below): 

If you answered "Other" above, please enter the frequency of purchase 
in the secondary market below.
a. Bills: 
b. Notes: 
c. Bonds: 
d. TIPS: 
e. STRIPS: 

4. What factors influence your organization's choice to purchase 
Treasury securities at auction rather than in the secondary market? 
(Check all answers that apply in each row.) 

a. Nominals: 
Relative valuation: 
Amount: 
Timing of auction: 
Liquidity: 
Portfolio needs: 
Other (Specify below): 

b. TIPS: 
Relative valuation: 
Amount: 
Timing of auction: 
Liquidity: 
Portfolio needs: 
Other (Specify below): 

a. Nominals: 
b. TIPS: 

5. What factors influence your organization's choice to purchase 
Treasury securities in the secondary market rather than at auction? 
(Check all answers that apply in each row.) 

a. Nominals: 
Relative valuation: 
Amount: 
Timing of auction: 
Liquidity: 
Portfolio needs: 
Other (Specify below): 

b. TIPS: 
Relative valuation: 
Amount: 
Timing of auction: 
Liquidity: 
Portfolio needs: 
Other (Specify below): 	
		
If you answered "Other" above, please enter the factor(s) influencing 
your purchase in the secondary market. 

a. Nominals: 
b. TIPS: 

6. What amounts of the following types of Treasury securities did your 
organization hold as of the following dates and what would you 
estimate to be the change in the amount of Treasury securities held by 
your organization between August 1, 2009 and the end of 2010? 

(Enter dollars in billions. Use a decimal to show the portion of a 
billion; for example, 500 million would be entered as 0.5 billion; one-
and-a-half billion would be entered as 1.5 billion, etc. For the 
anticipated changes, please include a minus sign preceding the dollar 
amount to indicate a decrease.) 

Treasury Bills: 
Amount held as of December 31, 2008: 
Amount held as of July 31, 2009: 
Anticipated change between August 1, 2009 and the end of 2010 (Please 
include a minus sign to indicate a decrease.) 

Treasury Notes: 
Amount held as of December 31, 2008: 
Amount held as of July 31, 2009: 
Anticipated change between August 1, 2009 and the end of 2010 (Please 
include a minus sign to indicate a decrease.) 

Treasury Bonds: 
Amount held as of December 31, 2008: 
Amount held as of July 31, 2009: 
Anticipated change between August 1, 2009 and the end of 2010 (Please 
include a minus sign to indicate a decrease.)			
	
TIPS: 
Amount held as of December 31, 2008: 
Amount held as of July 31, 2009: 
Anticipated change between August 1, 2009 and the end of 2010 (Please 
include a minus sign to indicate a decrease.) 

STRIPS: 
Amount held as of December 31, 2008: 
Amount held as of July 31, 2009: 
Anticipated change between August 1, 2009 and the end of 2010 (Please 
include a minus sign to indicate a decrease.)	 

7. To what extent, if at all, do you consider each of the following to 
be masons why Treasury securities are an attractive investment option 
for your organization or clients? (Select one answer in each row.) 

a. Liquidity (Ability to buy and sell with little effect on prices): 
Very great extent: 
Great extent: 
Moderate extent: 
Some extent: 
Little or no extent: 
No basis to judge: 

b. Depth of the Treasury market (Ability to purchase large amounts): 
Very great extent: 
Great extent: 
Moderate extent: 
Some extent: 
Little or no extent: 
No basis to judge: 

c. Treasuries am used for hedging: 
Very great extent: 
Great extent: 
Moderate extent: 
Some extent: 
Little or no extent: 
No basis to judge: 

d. Treasuries have the backing of the U.S. Government: 
Very great extent: 
Great extent: 
Moderate extent: 
Some extent: 
Little or no extent: 
No basis to judge: 

e. Ability to purchase Treasury securities across the yield curve: 
Very great extent: 
Great extent: 
Moderate extent: 
Some extent: 
Little or no extent: 
No basis to judge: 

f. Treasuries am used to meet investment guidelines: 
Very great extent: 
Great extent: 
Moderate extent: 
Some extent: 
Little or no extent: 
No basis to judge: 

g. Low charge against risk-based capital: 
Very great extent: 
Great extent: 
Moderate extent: 
Some extent: 
Little or no extent: 
No basis to judge: 

h. Stability of terms and conditions: 
Very great extent: 
Great extent: 
Moderate extent: 
Some extent: 
Little or no extent: 
No basis to judge: 

i. Inflation protection: 
Very great extent: 
Great extent: 
Moderate extent: 
Some extent: 
Little or no extent: 
No basis to judge: 

j. Macroeconomic outlook: 
Very great extent: 
Great extent: 
Moderate extent: 
Some extent: 
Little or no extent: 
No basis to judge: 

k. Relative valuation: 
Very great extent: 
Great extent: 
Moderate extent: 
Some extent: 
Little or no extent: 
No basis to judge: 

1. Cash management: 
Very great extent: 
Great extent: 
Moderate extent: 
Some extent: 
Little or no extent: 
No basis to judge: 

m. Asset liability matching: 
Very great extent: 
Great extent: 
Moderate extent: 
Some extent: 
Little or no extent: 
No basis to judge: 

n. Other - Please select an answer and specify below: 
Very great extent: 
Great extent: 
Moderate extent: 
Some extent: 
Little or no extent: 
No basis to judge: 

o. Other - Please select an answer and specify below: 
Very great extent: 
Great extent: 
Moderate extent: 
Some extent: 
Little or no extent: 
No basis to judge: 

p. Other - Please select an answer and specify below: 
Very great extent: 
Great extent: 
Moderate extent: 
Some extent: 
Little or no extent: 
No basis to judge: 

Treasury Inflation-Protected Securities (TIPS): 

8. If your organization currently invests in TIPS, what percentage of 
your organization's TIPS purchases is dedicated based on active 
allocation decisions made by clients? (Enter percentage below.) 

Percentage dedicated based on active allocation decisions made by 
clients: 

Please enter any comments you may have relating to your answer to 
question 8 above. 

9. How interested, if at all, would your organization be in purchasing 
TIPS with the following maturities? (Select one answer in each row.) 

a. 5-year TIPS: 
Extremely interested: 	
Very interested: 
Moderately interested: 
Slightly interested: 
Not interested: 
No basis to judge: 

b. 10-year TIPS: 
Extremely interested: 	
Very interested: 
Moderately interested: 
Slightly interested: 
Not interested: 
No basis to judge: 

C. 20-year TIPS: 
Extremely interested: 	
Very interested: 
Moderately interested: 
Slightly interested: 
Not interested: 
No basis to judge: 

d. 30-year TIPS (if introduced): 
Extremely interested: 	
Very interested: 
Moderately interested: 
Slightly interested: 
Not interested: 
No basis to judge: 

10. What are the primary reasons your organization purchases TIPS or 
plans to purchase TIPS in the future? (Please list up to five reasons 
in order of importance.) 

Reason #1: 
Reason #2: 
Reason #3: 
Reason #4: 
Reason #5: 

11. In your opinion, what effect, if any, would a 30-year TIPS have on 
demand for TIPS securities with other maturities? 
Would increase demand: 
Would have no effect on demand: 
Would decrease demand: 
No basis to judge: 

12. Do you anticipate any change in your organization's demand for 
TIPS from this year to next year? 
Yes - Continue with question 13. 
No (Click here to skip to question 15). 
No basis to judge (Click here to skip to question 15). 

13. If you anticipate change in your organization's demand, what do 
you anticipate the change(s) will be? (Check all answers that apply.) 
A reallocation into TIPS from nominal Treasury securities: 
A reallocation out of TIPS into nominal Treasury securities: 
A reallocation into TIPS from an increase in total assets: 
A reallocation out of TIPS from a decrease in total assets: 
A reallocation into TIPS from non-Treasury assets: 
A reallocation out of TIPS into non-Treasury assets: 
Other change(s) - Please specify below: 
No basis to judge: 

If you answered "Other change(s)" above, please specify below. 

14. What are the primary reasons behind the change in demand for TIPS 
from this year to next year? (Please list up to five reasons in order 
of importance.) 
Reason #1:
Reason #2: 
Reason #3: 
Reason #4: 
Reason #5: 

15. In your estimation, about what percent of your organization's TIPS 
purchases in the next year will be made through the following means?
a. Auctions: percent; 
b. Secondary market: percent. 

Please enter any comments you may have relating to your answer to 
question 15 above. 

16. Would the following actions by Treasury increase the likelihood 
that your organization would: 1) participate in a TIPS auction, and 2) 
buy more securities at each auction? (Select one answer in each row.)
			
a. Increase the frequency of TIPS auctions and reopenings: 
Would increase our participation: 
Would increase the amount of securities purchased: 
Would increase both participation and amount purchased: 
Would do neither: 
No basis to judge: 

b. Increase TIPS issuance amounts per auction: 
Would increase our participation: 
Would increase the amount of securities purchased: 
Would increase both participation and amount purchased: 
Would do neither: 
No basis to judge: 

c. Purchase off-the-run TIPS securities: 
Would increase our participation: 
Would increase the amount of securities purchased: 
Would increase both participation and amount purchased: 
Would do neither: 
No basis to judge: 

d. Other - Please answer and specify below: 
Would increase our participation: 
Would increase the amount of securities purchased: 
Would increase both participation and amount purchased: 
Would do neither: 
No basis to judge: 

e. Other - Please answer and specify below: 
Would increase our participation: 
Would increase the amount of securities purchased: 
Would increase both participation and amount purchased: 
Would do neither: 
No basis to judge: 

f. Other - Please answer and specify below: 
Would increase our participation: 
Would increase the amount of securities purchased: 
Would increase both participation and amount purchased: 
Would do neither: 
No basis to judge: 

If you answered "Other" above, please specify other ways to increase 
participation or amount of securities bought.
		
Specify entry in d. above: 
Specify entry in e. above: 
Specify entry in f. above: 

17. The liquidity of TIPS has been found to be less than nominal 
Treasury securities. In your opinion, what actions could Treasury take 
to enhance the liquidity of TIPS? (Please list up to five actions in 
order of importance.) 

Action #1: 
Action #2: 
Action #3: 
Action #4: 
Action #5: 

Risk Exposure: 

18. In your opinion, what are the risks that your organization faces 
as an investor in Treasury markets? (Please list up to five risks in 
order of importance.) 

Risk #1: 
Risk #2: 
Risk #3: 
Risk #4: 
Risk #5: 

19. In your opinion, what actions could be taken to address and 
mitigate the risks identified in question 18 above? (Please list up to 
five actions corresponding to the risks identified in question 18 
above.) 
Action #1:
Action #2: 
Action #3: 
Action #4: 
Action #5: 

Treasury Information Sources: 

20. In your opinion, to what extent, if at all, does Treasury 
currently receive sufficient information and input from end-investors? 
Very great extent: 
Great extent: 
Moderate extent: 
Some extent: 
Little or no extent: 
No basis to judge: 

21. How effective, if at all, do you consider each of the following 
communication channels between your organization and Treasury to be at 
providing Treasury with sufficient information and input from end-
investors? (Select one answer in each row.) 

a. Direct contact with Treasury debt management officials and staff: 
Extremely effective: 
Very effective: 
Moderately effective: 
Slightly effective: 
Not effective: 
No basis to judge: 

b. Direct contact with Federal Reserve officials and staff: 
Extremely effective: 
Very effective: 
Moderately effective: 
Slightly effective: 
Not effective: 
No basis to judge: 

c. Direct contact with Treasury Borrowing Advisory Committee (TBAC) 
members: 
Extremely effective: 
Very effective: 
Moderately effective: 
Slightly effective: 
Not effective: 
No basis to judge: 

d. Direct contact with Primary Dealers: 
Extremely effective: 
Very effective: 
Moderately effective: 
Slightly effective: 
Not effective: 
No basis to judge: 

e. Direct participation in TBAC or Primary Dealer quarterly meetings: 
Extremely effective: 
Very effective: 
Moderately effective: 
Slightly effective: 
Not effective: 
No basis to judge: 

f. Other - Please select an answer and specify below: 
Extremely effective: 
Very effective: 
Moderately effective: 
Slightly effective: 
Not effective: 
No basis to judge: 

g. Other - Please select an answer and specify below: 
Extremely effective: 
Very effective: 
Moderately effective: 
Slightly effective: 
Not effective: 
No basis to judge: 

h. Other - Please select an answer and specify below: 
Extremely effective: 
Very effective: 
Moderately effective: 
Slightly effective: 
Not effective: 
No basis to judge: 

If you answered "Other" in rows f through h above, please specify. 

Specify entry in "f' above: 
Specify entry in "g" above: 
Specify entry in "h" above: 

22. What actions could Treasury take to ensure that it receives 
sufficient information and input from end-investors? (Please list up 
to five actions in order of importance.) 
Action #1:
Action #2:
Action #3:
Action #4:
Action #5: 

Submit Your Responses to GAO: 

23. Are you ready to submit your final completed questionnaire to GAO?
(This is equivalent to mailing a completed paper questionnaire to us. 
It tells us that your answers are official and final.) 

Yes, my questionnaire is complete - Click on the "Exit" button below 
to submit your answers. 

No, my questionnaire is not yet complete
You may view and print your completed questionnaire by clicking on the 
Summary link in the menu to the left. 

Print this Page: 

Exit: 

[End of section] 

Appendix IV: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Susan J. Irving, (202) 512-6806, or irvings@gao.gov: 

Staff Acknowledgments: 

In addition to the contact named above, Jose Oyola (Assistant 
Director), Tara Carter (AIC), Richard Cambosos, Stuart Kaufman, Mark 
Kehoe, Erik Kjeldgaard, Richard Krashevski, Margaret McKenna, Donna 
Miller, Dawn Simpson, Jeff Tessin, Jason Vassilicos, Gregory Wilmoth, 
and Melissa Wolf all made contributions to this report. 

[End of section] 

Footnotes: 

[1] There is no one-to-one relationship between Treasury securities 
issued and TARP expenditures and, therefore, our objectives were not 
to look into this specific relationship. For more information on 
Treasury debt issuance between December 2007 and July 2009 see GAO, 
Debt Management: Treasury Inflation Protected Securities Should Play a 
Heightened Role in Addressing Debt Management Challenges, [hyperlink, 
http://www.gao.gov/products/GAO-09-932] (Washington, D.C.: Sept. 29, 
2009). 

[2] Private pension funds were excluded from the survey because during 
our structured interviews we were told that many large private pension 
funds hired external investment managers and therefore did not manage 
the funds in-house. 

[3] Gross debt of the federal government (excluding some minor 
adjustments) is subject to a statutory ceiling--known as the debt 
limit. The current limit--$14,294 billion--was enacted in February 
2010. Treasury's authorities are codified in chapter 31 of title 31 of 
the United States Code. 

[4] In November 2009, Treasury announced that it was replacing the 20- 
year TIPS with the 30-year TIPS. The reinstituted 30-year TIPS auction 
was held in February 2010. 

[5] For additional information on TIPS, see [hyperlink, 
http://www.gao.gov/products/GAO-09-932]. 

[6] For additional information on securities that are not issued as 
part of Treasury's "regular and predictable" schedule, see GAO, Debt 
Management: Treasury Has Refined Its Use of Cash Management Bills but 
Should Explore Options That May Reduce Cost Further, [hyperlink, 
http://www.gao.gov/products/GAO-06-269] (Washington, D.C.: Mar. 30, 
2006). 

[7] In this report we use the term refinance to mean rolling over 
maturing debt into a new issuance of Treasury securities. In times of 
federal budget deficits, all maturing debt must be rolled over into a 
new issuance. 

[8] SIFMA is a group that represents the shared interests of 
participants in the global financial markets. SIFMA was formed by a 
merger of the Bond Markets Association and the Securities Industry 
Association in 2006. Membership in SIFMA is open to firms rather than 
individuals. Broker-dealer firms can be full members while other firms 
with interest in the financial markets can be associate members. While 
SIFMA provides limited financial support to TBAC, SIFMA does not 
participate in TBAC deliberations. 

[9] Federal debt includes both debt held by the public as well as debt 
held by government accounts, which is federal debt held by the federal 
government itself, or intragovernmental debt. Treasury issues two 
major types of debt securities to the public: marketable and 
nonmarketable securities. Marketable securities, which consist of 
Treasury bills, notes, bonds, and TIPS and can be resold by whoever 
owns them while nonmarketable securities, such as savings securities 
and special securities for state and local governments, cannot be 
resold. Intragovernmental debt is primarily held by trust funds, such 
as Social Security and Medicare. Most trust funds invest in special 
U.S. Treasury nonmarketable securities, with a small amount in 
marketable securities. For the purpose of analyzing the market for 
U.S. Treasuries, we primarily focus on marketable securities in this 
report. 

[10] See [hyperlink, http://www.gao.gov/products/GAO-09-932]. 

[11] Under the SFP, Treasury issued new securities and left the 
proceeds from the sale of these securities on deposit at the Federal 
Reserve, increasing its liabilities. For additional information see, 
Todd Keister and James J. McAndrews, "Why are Banks Holding So Many 
Excess Reserves?" Federal Reserve Bank of New York, Current Issues in 
Economics and Finance, vol. 15, no. 8 (December 2009). 

[12] The debt limit is a legal ceiling on the amount of gross federal 
debt (excluding some minor adjustments), which must be raised 
periodically to accommodate additional federal borrowing. 

[13] See [hyperlink, http://www.gao.gov/products/GAO-06-269]. 

[14] One basis point is equal to 1/100th of 1 percent. Thus, 2.7 basis 
points is 0.027 percent. A similar analysis, which compared the 
auction yields of CMBs with the auction yields of similar maturity 
Treasury bills that were auctioned before and after the CMBs, found 
that the yield differential was also positive. During 2008 and 2009, 
the auction yield differential averaged 2.1 basis points. Our analysis 
only covers half of 2008 and all of 2009 due to availability of 
Treasury quote data from the Wall Street Journal. 

[15] At its height in October 2008, the SFP reached a cash value of 
$559 billion, funded entirely with CMBs. In September 2009, Treasury 
announced that it anticipated that the balance in the SFP would 
decrease to $15 billion, as outstanding SFP bills mature and were not 
rolled over. In February 2010, Treasury announced that it would 
increase the balance of the SFP to $200 billion. 

[16] See GAO, The Federal Government's Long-Term Fiscal Outlook: 
January 2010 Update, [hyperlink, 
http://www.gao.gov/products/GAO-10-468SP] (Washington, D.C.: March 
2010). See [hyperlink, http://www.gao.gov/special.pubs/longterm/]. 

[17] See Congressional Budget Office, An Analysis of the President's 
Budgetary Proposals for Fiscal Year 2011 (Washington, D.C.: March 
2010). 

[18] A delivery failure occurs when one party fails to deliver 
Treasuries to another party by the date previously agreed by the 
parties. 

[19] ODM is responsible for providing the Assistant Secretary for 
Financial Markets with advice and analysis on matters related to the 
Treasury's debt management policy, the issuance of Treasury and 
federal-related securities, and financial markets. 

[20] "No basis to judge" responses have generally been excluded from 
our totals except in cases where large numbers of respondents gave 
this response. 

[21] This figure is the total sector holdings derived from Flow of 
Funds Accounts of the United States, a statistical release compiled by 
the Federal Reserve. These figures differ from the reported holdings 
of our survey respondents reported in appendix II. The figures in 
appendix II represent only a subset of the sector. 

[22] At the time of our survey, life insurance companies had Treasury 
holdings of $106.2 billion, property casualty insurance companies held 
$56.0 billion, and state and local government retirement funds held 
$177.7 billion. 

[23] As of December 31, 2009, the five largest inflation-protected 
bond mutual funds (with their respective total net assets) were: 
Vanguard Inflation-Protected Securities Fund ($27.4 billion); PIMCO 
Real Return Fund ($16.8 billion); Barclays TIPS Bond Fund ($18.5 
billion); American Century Inflation-Adjusted Bond Fund ($3.1 
billion); and Fidelity Inflation-Protected Bond Fund ($2.2 billion). 

[24] PIMCO introduced the Real Income Funds on September 8, 2009, and 
the Tax Managed Real Return Fund on November 9, 2009. The Real Income 
Funds are designed to provide retirees a steady stream of monthly 
income that is hedged against inflation, and the Tax Managed Real 
Return Fund is designed to provide tax-efficient income and a hedge 
against inflation. 

[25] Interest income from municipal bonds is exempt from federal, and 
in some cases state, taxes. 

[26] For additional information on TIPS, see [hyperlink, 
http://www.gao.gov/products/GAO-09-932]. 

[27] For additional information on TIPS, see [hyperlink, 
http://www.gao.gov/products/GAO-09-932]. 

[28] The first auction of the reintroduced 30-year TIPS was held on 
February 22, 2010, and the total issuance amount was $8 billion. 

[29] For additional information on TIPS, see [hyperlink, 
http://www.gao.gov/products/GAO-09-932]. 

[30] In 1997, after Treasury introduced TIPS, the Chicago Board of 
Trade developed a related futures product but ultimately terminated 
the contract due to a lack of trading and demand. In 2004, the Chicago 
Board of Trade introduced a CPI futures contract but again terminated 
the product for similar reasons. 

[31] The Treasury Auction Results statement also defines a third 
category of competitive bidders in Treasury auctions. Indirect Bidders 
are defined as customers placing competitive bids through a direct 
submitter, including foreign and international monetary authorities 
placing bids through the FRBNY. Auction participants may also bid 
noncompetitively but will pay whatever price is paid by successful 
competitive bidders. 

[32] TAAPSLink is no longer used as Treasury introduced its New 
Treasury Automated Auction Processing System (NTAAPS), now called 
TAAPS, in April 2008. 

[33] The Investor Class categories listed in the Auction Allotment 
Data are: Federal Reserve System, Depository Institutions, 
Individuals, Dealers and Brokers, Pension and Retirement Funds and 
Insurance Companies, Investment Funds, Foreign and International, and 
Other. See [hyperlink, http://www.ustreas.gov/offices/domestic-
finance/debt-management/investor_class_auction.shtml] (downloaded on 
Mar. 31, 2010). 

[34] See [hyperlink, http://www.gao.gov/products/GAO-09-932]. 

[35] This method was used in our previous report on cash management 
bills issued in 2006. See GAO, Debt Management: Treasury Has Refined 
Its Use of Cash Management Bills but Should Explore Options That May 
Reduce Cost Further, [hyperlink, 
http://www.gao.gov/products/GAO-06-269] (Washington, D.C.: Mar. 30, 
2006). 

[36] We used the following listings of organizations for each of the 
following sectors: (1) Mutual fund sector: Organizations were 
identified and selected based on a listing provided by the Investment 
Company Institute of the largest intermediate-and long-term government 
funds and inflation-protected funds in terms of total assets; (2) 
Commercial bank sector: Organizations were identified and selected 
based on a listing made available by the American Bankers Association 
of the largest bank and thrift holding companies in terms of total 
assets; (3) Property casualty insurance sector: Organizations were 
identified and selected based on a listing made available by the 
National Association of Insurance Commissioners of the largest 
property casualty insurance organizations in terms of total direct 
premiums; (4) Life insurance sector: Organizations were identified and 
selected based on a listing made available by the National Association 
of Insurance Commissioners of the largest life insurance organizations 
in terms of total direct premiums; and (5) State and local government 
retirement fund sector: Organizations were identified and selected 
based on a listing made available by the National Association of State 
Retirement Administrators of the largest funds in terms of total 
assets. 

[37] This methodology was the same for the structured interviews 
mentioned above, except that for the structured interviews we selected 
and interviewed the two largest organizations in each sector. 

[End of section] 

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