Report on Foreign Holdings of U.S. Securities at End-June 2007

The final results from the survey of foreign portfolio holdings of U.S. securities at end-June 2007 are released today and posted on the U.S. Treasury web site at (http://www.treas.gov/tic/fpis.html).

This annual survey was undertaken jointly by the U.S. Treasury, the Federal Reserve Bank of New York, and the Board of Governors of the Federal Reserve System. The next survey will be for end-June 2008, and preliminary data are expected to be released by February 27, 2009.

Complementary surveys measuring U.S. holdings of foreign securities are also carried out annually. Data from the most recent survey, reporting on securities held on year-end 2007, are currently being processed. Preliminary results are expected to be reported by August 29, 2008.

Overall Preliminary Results

The survey measured foreign holdings of U.S. securities as of June 30, 2007, to be $9,772 billion, with $3,130 billion held in U.S. equities, $6,007 billion in U.S. long-term debt securities1 (of which $1,472 billion are holdings of asset-backed securities (ABS) 2 and $4,535 billion are holdings of non-ABS securities), and $635 billion held in U.S. short-term debt securities. The previous survey, conducted as of June 30, 2006, measured foreign holdings of $2,430 billion in U.S. equities, $4,733 billion in U.S. long-term debt securities, and $615 billion in short-term U.S. debt securities (see Table 1).

1. Long-term debt securities have an original term-to-maturity of over one year.
2. Asset-backed securities are backed by pools of assets, such as pools of residential home mortgages or credit card receivables, which give the security owners claims against the cash flows generated by the underlying assets. Unlike most other debt securities, these securities generally repay both principal and interest on a regular basis, reducing the principal outstanding with each payment cycle.
   

Table 1. Foreign holdings of U.S. securities, by type of security, as of recent survey dates

(Billions of dollars)

Table 2. Foreign holdings of U.S. securities, by country and type of security, for the major investing countries into the U.S., as of June 30, 2007
(Billions of dollars)

1. Excludes Hong Kong, Macau, and Taiwan, which are reported separately.

2. Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, United Arab Emirates.

April 30, 2008
hp-945

Report to The Secretary of the
Treasury from The Treasury Borrowing Advisory Committee
of the
Securities Industry And Financial Markets Association

April 29, 2008

Dear Mr. Secretary:

Since the Committee's previous meeting in late January, credit conditions have remained stringent and the economy has weakened.  Overall, Federal Reserve policies have proved effective in forestalling a financial market crisis by effectively eliminating the possibility of another bank failure but concerns remain about the appropriate quoting of money markets rates, term financing and continued proper functioning of the money markets in the absence of these Fed programs.  Expectations for economic growth in the first half of 2008 have continued to fall and a number of primary dealers judge the economy currently to be in recession.  Housing remains a notable drag through a variety of channels and that weakness now is being augmented by a more cautious approach to spending by businesses and consumers.  Forthcoming tax rebates likely will boost consumer spending in the months ahead but that lift will be temporary.  On balance, the outlook for the economy will remain uncertain until credit conditions improve and financial intermediation begins to function more smoothly.

Inflation has remained somewhat elevated due to ongoing price increases for food and energy.  Slowing economic growth has had a moderating effect on an array of other consumer prices, especially for credit-sensitive goods such as motor vehicles and household durables.  Core consumer prices are increasing in a 2% to 2-1/2% range.  Chances favor some improvement in these measures amid tight financial conditions, softer home prices and higher unemployment.  Nonetheless, rising food and energy costs' possible effect on inflation expectations may sustain concerns about inflationary pressures.

The steady tightening in financial conditions has led the Federal Reserve to lower the federal funds target rate to 2-1/4%.  Futures markets anticipate another quarter-point reduction in the policy rate, followed by a period of stability.  The shift in investor expectations for the path of monetary policy has contributed to the recent rise in market interest rates and the flattening of the U.S. Treasury yield curve.

The Federal government's budget balance is deteriorating in fiscal year 2008.  Weaker economic activity has dampened the pace of revenue collection and lifted growth in economically sensitive spending.  A recent survey of primary dealers estimates that the deficit for the 2008 fiscal year ending in September will exceed $400 billion with some economists expecting a deficit of more than $500 billion--a significant deterioration from fiscal 2007's deficit of $163 billion.  Economic stimulus measures will complement the forces widening the budget deficit.  This year's shortfall may surpass fiscal year 2004 as the largest on record in nominal dollars. 

In its first charge to the Committee, the Treasury solicited our advice and recommendations for Treasury issuance over the near and intermediate term given the aforementioned deterioration in the fiscal budget outlook.

As a near-term solution, there was universal agreement on the Committee that the Treasury should introduce a 52-week bill to its auction schedule.  A "year bill" would reduce the Treasury's reliance on large cash management bills and provide sufficient financing to absorb the increased borrowing needs that have grown so quickly over the last year.

There was also universal agreement on the Committee that the Treasury needs to prepare for additional financing needs over a more intermediate term.  In fact, several members argued that the current deterioration in the fiscal outlook might be more than temporary and that the risk of further deterioration outweighs the risk of a surprise improvement in the deficit.

Furthermore, additional members again reiterated their concern that this latest "cyclical" deterioration in the fiscal outlook is particularly troublesome as the longer-term "secular" forces of entitlement spending and the aging of the baby boom generation and their effect on the budget deficit are no longer that distant in the future.

Consequently, there was strong agreement on the Committee that the Treasury consider altering its issuance calendar over the intermediate term to account for these forces.

The Committee recommends that the Treasury review its issuance calendar and increase the size and the frequency of existing coupon issuance over the coming quarters in addition to the near-term solution of adding a year bill.  Several members noted that the increased reliance on Treasury bills, as the deficit has deteriorated, has shortened the average maturity of the debt, and that steps should be taken to arrest this trend, if not, to purposefully reverse it.

The majority of members believe that the addition of the year bill combined with increases to the size and frequency of existing coupon debt over coming quarters will still not be sufficient to satisfy the increased financing needs of the Treasury over the intermediate and longer term.

Consequently, most members recommended that the Treasury prepare the markets for a re-introduction of a coupon note over the coming quarters.  The Committee was somewhat divided as to the maturity of such a note.  A 3-year note was suggested by  some given its relative ease of issuance, while longer-dated notes were suggested by others who are concerned with the shrinking of the average maturity of the debt as argued above.

In any event, the Committee was in strong agreement that the Treasury cannot view the deterioration in the fiscal deficit as "temporary" and must plan for increased flexibility of bills and notes over coming quarters to ensure a continued effective financing environment.

In the second charge, the Committee was asked to address the prevailing low interest rate environment's potential impact on an increase in systemic fails in the Treasury market. The consequences of such fails would be an impairment of liquidity and an increased cost to Treasury borrowing.  Consequently, the Treasury has encouraged market participants to discuss and pursue market-oriented solutions to ease this potential burden.

The discussion was accompanied by a chart that depicted tangible spikes in fail activity during the low rate periods of 2001, 2003 into 2004, and the recent fail rate increases over the past few months, as rates have once again declined precipitously.

The presentation suggested that a number of private sector participants, including the Securities Industry and Financial Markets Association Group (SIFMA) and the Treasury Market Practices Group (TMPG), were encouraging some actionable steps towards dealing with this issue.  A few of the Borrowing Committee members actually sit on one or more of these industry groups and suggested that their work was yielding some positive results.

One of these suggestions was in the form of a prompt delivery trading practice or buy-in mechanism.  A couple of Committee members suggested that while these measures would enhance clarity and boundaries for market participants, they would also encourage arbitrage, and increased market activity around these rules or guidelines.  However, the notes from the presentation did suggest that there was a broad consensus around encouraging a cash settlement of fails before the 30^th day after the fail had occurred.

There was also some discussion of a negative rate repo trading practice, which had some support, due to its ability to allow the marketplace to source securities at a price that would guarantee delivery. SIFMA has formed a task force to study this and related issues.

There was general consensus among committee members that a well-defined series of "Fails Best Practices" outlined by SIFMA and TMPG, which defined such parameters as margining of fails, cash settlement procedures, and initiatives related to pair-offs and security-delivery, would be extremely beneficial.

To supplement this "Best Practices" set of procedures, the Committee was supportive of a Treasury Fails Monitoring Committee that would be comprised of senior funding and cash market participants.  This committee would be established to assess market conditions in this arena, make those issues transparent to the broader market, and recommend practices aimed at dealing with the issues if they became outside the bounds of normal market activity.

This Fails Monitoring Committee, alongside of traditional Treasury Department surveillance, and potentially increased Treasury position disclosure (although some suggested that this could have harmful market-effects), should provide for the ability to monitor and influence appropriate market behavior.

The majority of the Committee feels as if subtle activity by the Treasury such as moral suasion, timely reporting of abnormal market activity, and otherwise regular market surveillance, will also help provide for efficient and normal market conditions to exist.

The Committee suggested that continued review and assessment of these issues would be beneficial in the near future, as it would appear that the market will be in for a more sustained low interest rate environment.

In its third charge to the Committee, the Treasury asked for our views of recent initiatives taken by public and private entities to address the problems in the U.S. housing sector.

Committee members were in agreement that the problems in the housing market were significant, and many were concerned that without intervention the problems would grow worse.  In fact, housing price data from S&P/Case-Shiller was released hours before our meeting and highlighted that the decline in housing prices is not over but that prices are actually accelerating to the downside.  For example, while year-over-year prices were reported to be down almost 13%, prices on a 6-month, 3-month and 1-month basis have declined 21%, 25% and 28% annualized, respectively.

Several members voiced their endorsement for the Frank/Dodd bill that is currently in Congress.  One member noted that while none of these bills are perfect, that this proposal is certainly focused on the key problem which is encouraging lenders and borrowers to find an alternative to foreclosure which serves few interests and might in and of itself fuel housing price declines and create additional defaults.

While few members argued against the "intent" of the proposal, several people articulated their concerns that embedded in such proposals are many unintended consequences.  One such concern that otherwise able borrowers would be incentivised to default to capture the same benefit as the borrowers targeted by this legislation.

Several members noted that one of the key issues to encourage servicers to modify loans in hopes of preventing default and foreclosures is the legal liability associated with these actions given the disparate interests embedded in a securitized loan.  A number of members recommended that Congress indemnify the servicers while at least one other questioned the long-term impact of what is essentially a repudiation of contract law.

In the final section of the charge, the Committee considered the composition of marketable financing for the April-June Quarter to refund the $74.0 billion of privately held notes and bonds maturing May 15, 2008, the Committee recommended a $15 billion 10-year note due May 15, 2018 and a $7 billion reopening of the 30-year bond due February 15, 2038. For the remainder of the quarter, the Committee recommends a $30 billion 2-year note in May and $31 billion 2-note in June, $20 billion 5-year notes in May and June, and a $10 billion re-opening of the 10-year note in June.

For the July-September quarter, the Committee recommended financing as found in the attached table. Relevant figures included three 2-year note issuances monthly, three 5-year note issuances monthly, a 10-year note issuance in August followed by a re-opening in September, a 30-year bond in August, as well as a 10-year TIPs note in July, and a 20-year TIPs re-opening later that same month.

Respectfully submitted,   

Keith T. Anderson
Chairman

Rick Rieder
Vice Chairman

REPORTS

• Table Q2 08
• Table Q3 08

April 16, 2008
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Treasury Releases Fourth in A Series of Social Security Papers

Washington – Treasury today released the fourth in a series of papers on Social Security. Issue Brief No. 4 is entitled Social Security Reform: Mechanisms for Achieving True Pre-Funding.

REPORTS

• Issue Brief No. 4: Social Security Reform: Mechanisms for Achieving True Pre-Funding

April 16, 2008
hp-929

Paulson Approves Puerto Rico Plan to Distribute Stimulus Payments

REPORTS

• Puerto Rico Rebate Distribution Plan
• Paulson Approval Letter

April 15, 2008
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Treasury International Capital (TIC) Data for February

Treasury International Capital (TIC) data for February 2008 are released today and posted on the U.S. Treasury web site (www.treas.gov/tic). The next release, which will report on data for March, is scheduled for May 15, 2008.

Net foreign purchases of long-term securities were $72.5 billion.

• Net foreign purchases of long-term U.S. securities were $82.8 billion. Of this, net purchases by foreign official institutions were $6.1 billion, and net purchases by private foreign investors were $76.6 billion.
  
  
• U.S. residents purchased a net $10.2 billion of long-term foreign securities.

Net foreign acquisition of long-term securities, taking into account adjustments, is estimated to have been $60.1 billion.

Foreign holdings of dollar-denominated short-term U.S. securities, including Treasury bills, and other custody liabilities increased $3.4 billion. Foreign holdings of Treasury bills increased $14.6 billion.

Banks' own net dollar-denominated liabilities to foreign residents increased $0.5 billion.

Monthly net TIC flows were positive $64.1 billion. Of this, net foreign private flows were $73.1 billion, and net foreign official flows were negative $9.0 billion.

REPORTS

• (PDF) TIC Monthly Reports on Cross-Border Financial Flows (Billions of dollars, not seasonally adjusted)

April 11, 2008
HP-918

Treasury, IRS Issue Funding Guidance for Single-Employer Defined Benefit Plans

Washington, DC--The Treasury Department and the Internal Revenue Service issued today proposed regulations under section 430 of the Internal Revenue Code that provide employers sponsoring single-employer defined benefit plans with guidance regarding the determination of minimum required contributions under the new funding rules enacted as part of the Pension Protection Act of 2006. 

The proposed regulations, together with three earlier sets of proposed regulations, enable plan sponsors to determine the contribution requirements that apply to their defined benefit plans under the new funding regime, including the application of the quarterly contribution requirements. 

Although the new funding rules are generally effective for plan years beginning on or after January 1, 2008, these regulations are proposed to be effective for plan years beginning on or after January 1, 2009.  Plan sponsors, however, can rely on the proposed regulations for purposes of satisfying the minimum funding requirements for plan years beginning in 2008.

On December 19, 2007, the Senate passed an amended version of the Pension Protection Technical Corrections Act of 2007 and on March 13, 2008, the House of Representatives passed similar legislation.  These proposed regulations, like the earlier proposed regulations, do not reflect those technical corrections.  After technical corrections are enacted, the regulations will be modified to reflect the new provisions.  

A copy of the proposed regulations is attached.

-30-

REPORTS

• REG 108508-08