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Alternative Views on Isssuance Modeling Jonathan H. Wright Panel - - PowerPoint PPT Presentation
Alternative Views on Isssuance Modeling Jonathan H. Wright Panel - - PowerPoint PPT Presentation
Alternative Views on Isssuance Modeling Jonathan H. Wright Panel Discussion: Roundtable on Treasury Markets and Debt Management November 19, 2015 Introduction Term structure models can answer key questions on optimal management. Introduction
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Introduction
Term structure models can answer key questions on optimal management. Model uncertainty is a problem. Models have difficulty pinning down long-run expectation of short rates.
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Introduction
Term structure models can answer key questions on optimal management. Model uncertainty is a problem. Models have difficulty pinning down long-run expectation of short rates. Incorporating information from surveys helps.
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Expected 10-Year Borrowing Costs from Term Structure Model: 9/2015
3-month 2.03 2-year 2.16 5-year 2.38 10-year 2.14
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Expected 10-Year Borrowing Costs from Term Structure Model: 12/1999
3-month 5.11 2-year 5.71 5-year 6.06 10-year 6.70
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Complications
Treasury wants stable issuance. Issuance affects yields. Not a one-shot decision.
◮ Short issuance gives option value of reoptimizing.
Rollover risk.
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PDF of 10-year average of 3 month rates from Term Structure Model: 9/2015
1 2 3 4 5 6 0.05 0.1 0.15 0.2 0.25 0.3 0.35 0.4 Percent Per Annum Probability
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Nominal v. TIPS Issuance
Treasury minimizing expected cost should issue TIPS if breakeven is greater than expected inflation. Irrelevant whether difference reflects inflation risk premium or TIPS liquidity premium.
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Are TIPS a good deal for Treasury?
2000 2002 2004 2006 2008 2010 2012 2014 2016 1 1.2 1.4 1.6 1.8 2 2.2 2.4 2.6 2.8 3 Percent Per Annum 10 Y Breakeven 10 Y SPF Inflation Expectations