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 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.

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.

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

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

Complications Treasury wants stable issuance. Issuance affects yields. Not a one-shot decision. ◮ Short issuance gives option value of reoptimizing. Rollover risk.

PDF of 10-year average of 3 month rates from Term Structure Model: 9/2015 0.4 0.35 0.3 0.25 Probability 0.2 0.15 0.1 0.05 0 0 1 2 3 4 5 6 Percent Per Annum

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.

Are TIPS a good deal for Treasury? 3 2.8 2.6 2.4 2.2 2 1.8 1.6 1.4 10 Y Breakeven 1.2 10 Y SPF Inflation Expectations 1 2000 2002 2004 2006 2008 2010 2012 2014 2016 Percent Per Annum