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. 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. 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. Treasury receives market information through multiple formal and  informal channels. 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. Investors Reported Increased Demand for TIPS and Suggested Actions for Treasury to Take That Could the TIPS Market

			Investors and Market Experts Reported an Increased Demand for TIPS

As previously noted, one challenge for Treasury will be to gauge inve demand for Treasury securities in order to finance historically large  deficits expected in the medium and long term. 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. 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. Raising significant amounts of  cash at the lowest cost of borrowing over time requires sufficien competitive participation at auctions. Information from market  participants on their demand for Treasury securities, including the typ information that we received from our survey of the largest domestic  holders of Treasury securities, is critical to this effort. a. The liquidity of TIPS has been found to be less than nominal Treasury securities. a.
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. 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.