This Selected Issues paper analyzes the condition of household, corporate, and bank balance sheets; sustainability of the U.S. external current account deficit; the impact of a slowdown in the growth on the euro area economy; and the implications of the reduction in U.S. treasury securities for monetary policy and financial markets. The study discusses the pros and cons of investing government assets in private securities; the recent changes in agricultural support policy and their impact on other countries; technological innovations and the adoption of new technologies.

Abstract

This Selected Issues paper analyzes the condition of household, corporate, and bank balance sheets; sustainability of the U.S. external current account deficit; the impact of a slowdown in the growth on the euro area economy; and the implications of the reduction in U.S. treasury securities for monetary policy and financial markets. The study discusses the pros and cons of investing government assets in private securities; the recent changes in agricultural support policy and their impact on other countries; technological innovations and the adoption of new technologies.

IV. Implications of the Reduction in U.S. Treasury Securities for Monetary Policy and Financial Markets1

1. In the United States, as in several industrial countries, fiscal surpluses in recent years have led to a marked reduction in federal government debt (Figure 1). Prospects are for continued debt reduction over the next decade, with the Administration’s budget proposal for FY 2002 envisaging an elimination of redeemable Treasury debt held by the public by FY 2011 (see Office of Management and Budget (2001)).2

Figure 1.
Figure 1.

Selected Countries: Gross Federal/ Central Government Debt

(Fiscal years, in percent of GDP)

Citation: IMF Staff Country Reports 2001, 149; 10.5089/9781451839586.002.A004

Sources: World Economic Outlook; WEFA; and official national statistical sources.

2. The reduction in the supply of Treasury securities has implications for monetary policy implementation and financial markets in the United States, as well as for foreign holders of these securities. The Federal Reserve has started to adapt its operations to the reduction in Treasury securities, but further debt reduction will require a broadening in the range of instruments through which the Federal Reserve conducts monetary policy. Treasury securities perform various roles in U.S. financial markets, including as a benchmark for pricing and quoting fixed-income securities; an instrument for hedging market risk; a form of collateral; and a safe-haven asset. Alternative instruments, such as interest rate swaps, are starting to fulfill some of the roles traditionally played by Treasuries although it is not yet clear what will substitute for Treasuries as a safe-haven Let. Foreign central banks hold a significant share of their foreign exchange reserves in the form of U.S. Treasury securities and as the supply of Treasuries declines they are moving toward alternative U.S. dollar assets, such as agency securities.3

A. Debt Developments and Outlook

3. The bulk of federal government debt is interest-bearing securities held by private investors, the Federal Reserve Banks (FRB), and U.S. government accounts, that are both marketable and non-marketable.4 Marketable securities account for just over half of total federal government debt. The significance of marketable securities arises from their use in financial markets and monetary policy implementation. Gross federal government debt held by private investors fell from $3.4 trillion (41 percent of GDP) in FY 1997 to $2.9 trillion (29 percent of GDP) in FY 2000 (Table 1); marketable debt held by private investors declined by over $500 billion to just under $2.5 trillion. These declines reflected reduced domestic holdings, as foreign holdings remained unchanged at around $1.2 trillion (Figure 2). The share of FRB holdings of marketable debt has risen steadily from below 13 percent in 1997 to over 17 percent in 2000.

Figure 2.
Figure 2.

United States: Treasury Securities

Citation: IMF Staff Country Reports 2001, 149; 10.5089/9781451839586.002.A004

Source: U.S. Treasury Bulletin.
Table 1.

United States: Gross Federal Government Debt

(In billions of dollars)

article image
Source: U.S. Treasury Monthly Bulletin, December 2000.

Federal Savings and Loan Insurance Corporation resolution fund, Federal Housing Administration, Farm Credit Sytem Financial Assistance Corporation, and Tennessee Valley Authority.

4. The Treasury’ s debt-management strategy has evolved with the reduction in federal government debt.5 In recent years, its main objectives have included avoiding a further lengthening in the average maturity of the government debt stock and maintaining liquidity in key “benchmark” issues (90- and 180-day bills; 2-, 5-, and 10-year notes; and 30-year bonds). The issuance frequencies in some maturities have been reduced (e.g., 30-year bond auctions were moved from a quarterly to a semi-annual frequency), and other maturities have been eliminated (e.g., the 1-year bill and 3-year note), allowing new security issues to be concentrated on benchmark issues.

5. Before 2000, the Treasury did not buy back outstanding debt in significant quantities, and as a result the reduction in debt associated with fiscal surpluses was all reflected in reduced debt issuance and retirement of maturing debt, resulting predominantly in a decline in shorter-maturity debt (Table 2). The average maturity of the government’s debt rose, making interest costs higher than they would have been otherwise. In January 2000, the Treasury initiated a debt-buyback program, under which it began to repurchase outstanding Treasury securities in the secondary market. Consistent with the objective of preventing a lengthening in the maturity buybacks were tilted toward longer-maturity debt Going forward, the reduction in government debt is likely to occur across the yield curve.

Table 2.

United States: Marketable Government Debt Held by Private Investors: Maturity Distribution

(In billions of dollars)

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Source: U.S. Treasury Monthly Bulletin, December 2000.

6. The fiscal surpluses projected for the next decade suggest that outstanding federal government debt will fall to very low levels. It is estimated that over this period only around $2 trillion of the $3 trillion outstanding stock of marketable securities at end-FY 2000 will mature or be available for easy repurchase by the government.6 If, in line with the Administration’s intention, the cumulative surpluses of the Social Security trust fund amounting to $2.6 trillion are preserved, annual unified budget surpluses by FY 2009 would start to exceed the debt available for redemption, leaving the federal government with an excess cash balance (Figure 3).

Figure 3.
Figure 3.

United States: Outlook for Federal Government Debt

(Fiscal years, in billions of dollars)

Citation: IMF Staff Country Reports 2001, 149; 10.5089/9781451839586.002.A004

Sources: U.S. Office of Management and Budget, “Budget of the United States Government, Fiscal year 2002,” April 2001; U.S. Congress (Joint Committee on Taxation) Estimated Budget Effects of the Conference Agreement for H.R. 1836, May 26, 2001; and staff calculations.1/ Gross debt minus excess cash balance.

B. Implications for Monetary Policy Implementation

7. The potential implications of debt reduction for monetary policy implementation arise from the key role that Treasury securities play in monetary operations. Open market operations in the United States are of two kinds:

  • Permanent operations, comprising outright open market purchases, are used to meet the expanding demand for currency and reserves. Permanent operations principally involve Treasury securities.7

  • Temporary operations, through repos and matched-sale-purchase transactions (MSPs), are used to move the federal funds rate toward the target rate set by the Federal Open Market Committee of the Federal Reserve. Temporary operations traditionally have been conducted using only Treasuries and agency securities as collateral. In 2000, Treasuries accounted for 89 percent of the total assets of the Federal Reserve (Table 3).

Table 3.

United States: Assets of U.S. Federal Reserve Board

(In percent of total assets)

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Source: U.S. Federal Reserve Board, Federal Reserve Bulletin, various issues.

8. Additional implications of debt reduction for monetary policy implementation could arise from the role of Treasury securities during crises, their role in markets’ interpretation of the stance of monetary policy, and their use in meeting reserve requirements. Treasury securities are typically the means by which the Federal Reserve eases liquidity during periods of financial stress, both by buying up Treasuries and by the fact that it accepts Treasuries as collateral for borrowing by banks. These attributes, together with the absence of credit risk, contribute to making Treasuries a “safe haven” asset in financial markets. In addition, government debt developments affect the government yield curve, an important indicator of market expectations of inflation and the monetary policy stance. When money market conditions indicate persistent reserve imbalances among depository institutions, the Federal Reserve uses outright sales or purchases of Treasury securities to drain or add reserves to the system When they indicate temporary imbalances repos or MSPs backed mainly by Treasuries are used.

9. In the past few years, changes in the stock of Treasuries contributed to distortions in the government yield curve, confusing market signals. The government yield curve is usually a better indicator of market conditions such as inflationary expectations than, say, the corporate yield curve, which, in addition to inflation risk, also reflects liquidity risk and credit risk. With the reduction in Treasuries, idiosyncratic factors (including scarcity at the long end) have started to influence the yield curve. The shape of the yield curve has changed frequently in recent years. From a “normal” upward slope in 1998, the curve flattened in 1999, inverted at the longer end in early 2000, and then inverted altogether in late 2000 before reverting to a normal upward slope in early 2001 (Figure 4). With the frequent changes in its shape, the yield curve has become harder to interpret as an indicator of market conditions. In addition, with a thinner market for Treasuries, small operations by the Federal Reserve can have larger-than-expected effects on interest rates.

Figure 4.
Figure 4.

United States: Yield Curve, 1998-2001

Citation: IMF Staff Country Reports 2001, 149; 10.5089/9781451839586.002.A004

Source: Federal Reserve.

10. Debt reduction could complicate the implementation of monetary policy well before the debt is fully paid down. In particular, as the Treasury market becomes less liquid over time, outright purchases of Treasuries by the Federal Reserve to accommodate the trend growth in currency demand may start to unduly affect market prices.8 Also, reduced activity in the Treasury repo market could make it harder for these repos to be used in response to temporary imbalances in banks’ reserves.

11. The Federal Reserve has started to adapt its operations to the declining stock of government debt.9 In 1999, the Federal Reserve temporarily expanded the asset class for eligible collateral in repos to include mortgage-backed securities guaranteed by a GSE or federal agency, and expanded the eligible maturity of term repos from 15 to 90 days.10 These changes have facilitated an increased reliance on the use of temporary operations and minimized disruptions in monetary policy operations. In 2000, the Federal Reserve met part of the demand for reserves through longer-term repos rather than outright purchases of Treasuries. In addition, a legal revision in 2000 allowed the Federal Reserve to use discount loans to banks as backing for paper currency. Since Treasuries are the principal asset-backing currencv the revision effectively allowed the Federal Reserve to reduce its holdings of Treasuries.11

12. Furthermore, in July 2000, the Federal Reserve instituted self-imposed limits on its holdings of individual Treasury security issues as a proportion of the outstanding amounts of the issues. The limits range from 35 percent for Treasury bills to 15 percent for longer-term bonds. To keep within the limits, the Federal Reserve has from time to time redeemed some of its holdings of Treasuries, whenever the amount of maturing holdings has exceeded the amount that could be rolled over into newly issued Treasuries within the set limits.12

13. Despite these temporary measures, the prospect of continued debt reduction suggests that the Federal Reserve’s limits will become binding significantly earlier than the date by which the redeemable debt will be eliminated. Estimates of the slack remaining under the limits are in the range of only about $230 billion as of early 2001 (Table 4). In the next few years, if the Federal Reserve continues to purchase Treasuries in order to expand its balance sheet in line with nominal growth in the economy, and if the Treasury reduces debt proportionately across maturities as fiscal surpluses accumulate, the ceilings could be reached by FY 2003.13

14. The Federal Reserve is examining several possible adaptations to its monetary operations.14 For the near term, one possibility being considered is a further expansion of the class of eligible collateral for repos to include certain debt obligations of U.S. states and foreign governments.15 In the longer term, the Federal Reserve has identified several issues for further study, including whether it should expand the use of the discount window for depository institutions (the current alternative to open market operations for injecting liquidity). One approach would be to auction discount loans to financially sound depository institutions, although such a program would have to be structured to take account of moral hazard, specifically to prevent certain institutions from becoming unduly dependent on such loans or from taking excessive risk Furthermore the process of credit allocation through the discount window is currently kept separate from day-to-day monetary policy implementation (through open market operations) helping to keep such operations free from direct pressure to bail out troubled financial institutions. Heavy reliance on the discount window would eliminate this implicit firewall.16. Another issue for further study is whether there are merits in relying more heavily on temporary short-term transactions in a broader range of assets (in the form of both repos with security dealers and discount window loans to depository institutions) as compared with outright purchases of such a range of assets.17

Table 4.

United States: Caps on Federal Reserve Holdings of Treasury Securities

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Source: Folkerts-Landau, Garber, and Dinmore (February 2001).

15. A key issue is whether it will eventually be necessary for the Federal Reserve to seek to acquire a wider range of assets in its open market operations. Both international and historical U.S. experience suggest that such instruments have on occasion been used successfully. In principle, open market operations can be based on any highly rated, liquid asset rather than only on government securities. Cross-country experience does indeed suggest that monetary policy operations need not be based only on government securities. In the euro area, open market operations by the European System of Central Banks (ESCB) are based on a range of assets, so-called “tier one” and “tier two” assets, which must fulfill certain criteria (such as meeting high credit standards) but are not restricted to government securities. 18 In the United Kingdom, the class of eligible securities for monetary operations by the Bank of England includes, in addition to various government securities, securities accepted by the ESCB and eligible bank bills Even in the United States before 1932 the Federal Reserve was not allowed to use government securities to back the currency and instead transacted in eligible commercial paper and bankers’ acceptances.19

16. The use of non-Treasury securities would seem to be viable from the perspective of monetary operations, but it raises a few broader policy questions. The selection of a particular non-government security would confer the security with a special status in the market, providing the issuer with an indirect advantage that may or may not be desirable from a broader policy perspective. In the context of the GSEs, for example, a concern has been that their special status might divert additional resources into one sector (housing). Furthermore, with the use of private securities as collateral for repos, the Federal Reserve would have less control over the composition of the collateral on its books, and dealers typically would post the assets (within the eligible class) they value the least.20

17. In addition, the Federal Reserve would start to bear credit risk, especially if it were to hold non-Treasury securities outright. Although credit risk would not affect monetary operations (because the monetary injection is completed with the open market purchase), it could have other implications, including the remote possibility of a need to recapitalize the Federal Reserve in the event of widespread defaults. Also, monetary operations currently involve substitution between two assets (cash and Treasuries), both of which are free of credit risk. The introduction of a risky asset could influence private capital allocation.21 Furthermore, the Federal Reserve would have to incur costs associated with evaluating asset values and creditworthiness. Finally, when the status of a particular asset or loan in the Federal Reserve’s portfolio deteriorates, requiring it to be sold or not rolled over, political or supervisory considerations may not always allow the Federal Reserve to sell the asset or call the loan.22

C. Financial Market Implications

18. A reduction in government debt has the potential to affect financial markets because of the key roles that government securities play in most countries with mature financial systems:23

  • Government bonds represent the main benchmark asset against which other fixed-income assets are priced.

  • Government bond yields are used as the risk-free rate in many valuation decisions and are also used as a reference rate against which yields on other fixed-income securities are quoted.

  • Government bonds are important vehicles for hedging private sector credit risk, and, in addition, are used in day-to-day liquidity management and as collateral.

  • Finally, government bonds represent a “safe haven” during periods of market turmoil, and their value in such situations is enhanced by the fact that central banks typically ease liquidity by buying up government securities.

19. In U.S. financial markets, the shrinking supply of Treasury securities has already led to substantial changes in the instruments used by market participants for various purposes. For pricing and quoting private fixed-income instruments, hedging market risks, and to some extent in collateralizing counterparty risks, market participants have shifted significantly to private financial instruments (mainly interest-rate swaps). In some of the other roles played by Treasuries, there is a concern that private securities may not be able to substitute adequately. First, a comparable security to substitute for the role of Treasuries as domestic and international safe havens is difficult to envision at this stage. Second, private securities include an element of credit risk, and it may take time before market participants come to accept them as universal collateral in place of Treasuries. Also, they have not been tested in times of stress, which may lead some market participants to move toward cash (bank deposits) as an alternative collateral to Treasuries. Third, for some types of institutional investors, such as pension funds and insurance companies, which have a substantial demand for relatively safe long-term investments, private substitutes may not be available in sufficient volume to adequately replace long-term government securities.24

20. The reduction in federal debt since 1998 has affected financial markets in several dimensions. Liquidity in the government securities’ market has declined across maturities, reflected in lower trading volumes (Figure 5). The cost of borrowing in the repo market has increased since early 2000, partly reflecting the increased scarcity of the one-year Treasury bill, which was used as collateral on overnight repos (Figure 6).25 The relationship among different Treasury securities has changed at times, reflected most visibly in the yield-curve inversion in 2000. The relationship between Treasuries and other fixed-income securities has also varied, with the spreads between interest rate swaps, agency securities, and corporate debt versus the ten-year Treasury note all widening since 1998, as well as becoming more volatile (Figure 7).26 In addition the correlation of private fixed-income yields with Treasury yields has declined while their correlation with swap rates has been rising.

Figure 5.
Figure 5.

United States: Treasury Securities Trading Volumes1

(Billions of dollars)

Citation: IMF Staff Country Reports 2001, 149; 10.5089/9781451839586.002.A004

Source: Bloomberg. 1/ Trade volume of all Treasury bill securities transacted through inter-dealer brokers.
Figure 6.
Figure 6.

United States: One-Month Repo Rates

(Percent)

Citation: IMF Staff Country Reports 2001, 149; 10.5089/9781451839586.002.A004

Figure 7.
Figure 7.

United States: Yield Spreads on Fixed-Income Securities

Citation: IMF Staff Country Reports 2001, 149; 10.5089/9781451839586.002.A004

Sources: U.S. Federal Reserve; and Bloomberg.

21. The greater disparity between the performance of Treasuries and other fixed-income securities has reduced the usefulness of Treasuries as a reference rate and a hedging vehicle. At the long end, the decline in liquidity of the 30-year Treasury bond has resulted in higher and more volatile spreads vis-à-vis other 30-year securities, reducing its reference and hedging role in this segment. With the changing yield curve, it has proved difficult to find an alternative Treasury security with which to proxy the 30-year Treasury yield.

22. Financial markets have started to assess the usefulness of alternative instruments as benchmarks. The main alternative instruments are interest rate swaps, agency securities, and corporate debt, with interest rate swaps appearing to be the favored alternative at present.27 Swap rates have tended to move closely with other fixed-income yields, increasing their attractiveness for referencing and hedging. Fixed-income positions are often hedged using interest rate swaps, several corporate issues have been priced off swap rates, and swap rates are increasingly being used to evaluate other fixed-income securities. The predominance of swaps is consistent with the experience in the euro area, where there is no uniform government asset to play a benchmark role and where pricing and hedging are typically done with swaps. Swaps are not, however, a perfect substitute for Treasuries. Being bilateral contracts for a fixed period of time, they are costly to unwind. In addition, given that they are over-the-counter instruments, they are not as widely accessible as Treasuries and are confined to large corporations and financial institutions.28

23. Agency debt is increasing in importance, although its liquidity remains much lower than that of Treasuries (Table 5). Since 1998, agencies have increased issuance of “benchmark” securities, which mimic many of the features of Treasuries. Agency yields have indeed moved closely with other fixed-income yields (Figure 7), and there is an active repo market and a developing futures market. High-rated corporate debt used to be the main long-term benchmark in U.S. financial markets before the introduction of 30-year Treasuries in the mid-1970s. Although such debt is sometimes used for pricing and hedging, it is not a practical alternative to Treasuries, since few issues are actively traded. In addition, individual issues are subject to credit risk and although there is an active repo market, there is no futures market.

Table 5.

United States: Agency Debt

(In billions of dollars)

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Source: Federal Reserve Bulletin, various issues.

D. International Implications

24. A reduction in U.S. government debt has the potential to affect other countries through several channels, including the role of Treasuries as a component of foreign central banks’ international reserves, as a means of settlement for international transactions in goods and services, and as safe haven assets in international financial markets. Foreign holdings of U.S. Treasuries account for over one-fifth of the total and are roughly evenly split between central banks and the private sector.29

25. Foreign central banks hold the bulk of their official foreign exchange reserves in U.S. dollars,30 and nearly 60 percent of the dollar reserves are held in the form of Treasuries. A fall in the supply of Treasuries has implications for central banks’ reserve management, and in turn for the foreign demand for U.S. financial assets. A key question is whether central banks will shift the composition of their reserves toward other U.S. assets or whether they will move away from U.S. assets altogether. Thus far, they appear to be shifting toward other -U.S. assets, mainly agency securities. Moreover, the move toward non-Treasury U.S. assets began even before debt reduction was speeded up through buybacks (Table 6). To the extent that central banks do hold some Treasuries, and that they manage their portfolios much less actively than other foreign investors, their demand would contribute to reducing market liquidity. In recent years, foreign official holdings of Treasury securities have been equivalent to about 2½ percent of the financial transactions of the rest of the world, as proxied by the rest of the world’s current and capital account flows (Figure 8). On this basis, foreign official demand for Treasuries would rise from about $600 billion in 2000 to nearly $950 billion in 2006.31

Figure 8.
Figure 8.

United States: Foreign Official Holdings of U.S. Treasuries/Gross Financial Transactions of the Rest of the World

(In percent)

Citation: IMF Staff Country Reports 2001, 149; 10.5089/9781451839586.002.A004

Sources: U.S. Treasury Bulletin; and World Economic Outlook.
Table 6.

Instrument Composition of Foreign U.S. Dollar Official Reserves

(In percent)

article image
Source: Fung and McCauley (2000).

26. Other factors also will influence the foreign demand for U.S. Treasuries. In several economies (e.g., Hong Kong SAR, Singapore) the authorities have continued to issue government bonds even in the absence of a financing need, in part to continue to provide fixed-income markets with government benchmarks.32 In Hong Kong SAR and Singapore, the proceeds of such “overfunding” are invested in foreign currency assets. To the extent that this includes U.S. Treasury securities, it accelerates the decline in the stock of Treasuries in private hands.33 In addition, as the stock of Treasuries declines, foreign fiscal authorities will, like central banks, need to consider alternative investment vehicles.

27. The international demand for U.S. Treasuries as safe-haven assets may be influenced by the debt reduction, which could potentially influence international safe-haven flows. The main questions include whether such flows will continue to be directed toward U.S. assets, what the alternative U.S. assets might be, and whether the volume of flows is likely to be affected. It is possible that private investors will increase their demand for agency securities, for which there are deep and liquid markets and which have only a thin sliver of credit risk. However without any recent experience of significant financial stress it is difficult to answer these questions definitively and several outcomes are possible.

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1

Prepared by Vivek Arora and Rodolfo Luzio.

2

The U.S. fiscal year starts October 1.

3

Agency securities are securities issued by Government Sponsored Enterprises (GSE)—the largest of which are the Federal National Mortgage Association (or Fannie Mae) and the Federal Home Loan Mortgage Association (or Freddie Mac)—and federal agencies, such as the Government National Mortgage Association (or Ginne Mae).

4

Marketable securities can be traded after their initial purchase. New marketable securities are regularly issued in maturities ranging from 13 weeks to 30 years. They comprise bills (with initial maturity of one year or less), notes (initial maturity of 1–10 years), and bonds (over 10 years). Notes account for almost half the marketable debt outstanding, with the rest roughly evenly split between bills and bonds. Nearly all marketable debt is nominally denominated (with coupon and principal fixed in dollar terms), although the Treasury has issued some inflation-indexed debt since 1997. Most of the marketable debt is non-callable. Non-marketable securities, which cannot be traded, are mostly held in U.S. government accounts (mainly in the Social Security trust funds); a portion is held by private investors in the form of U.S. savings bonds.

6

The remaining, “non-redeemable” debt would comprise debt that had not yet reached maturity, was held in non-marketable forms (e.g., savings bonds), or whose repurchase would require a premium that the Treasury may consider too high.

7

Under the Federal Reserve Act, the Federal Reserve is also allowed to buy agency securities, some municipal securities, foreign exchange, and sovereign debt.

9

For further discussion of the U.S. experience, see Fleming, Hall, and Krieger (2000), and Reinhart and Sack (2000).

10

These temporary measures initially extended through January 2001, at which time they were renewed.

11

The revision was not, however, made in response to the falling stock of Treasuries, but rather was in response to a decline in banks’ reserve deposits at the Federal Reserve, which led to a reduction in permissible assets to back currency issuance.

15

As noted, the Federal Reserve has statutory authority under the Federal Reserve Act to transact in these assets, but it has traditionally not used them in open market operations.

18

The most important instruments are refinancing operations in the form of reverse transactions, which are conducted on the basis of either repurchase agreements or collateralized loans. In addition to refinancing operations, the ESCB may use outright transactions, issuance of debt certificates, foreign exchange swaps, and collection of fixed-term deposits. However, these additional instruments have not yet been used. For details, see European Central Bank (1998).

19

The Federal Reserve also transacted in gold, since the United States was on the gold standard at the time. See Meltzer (2001).

20

The effects on the Federal Reserve’s balance sheet would be mitigated to some extent by marking to market of collateral. The Federal Reserve has noted in addition that the use of private securities in open market operations raises risk management and accounting questions that need to be studied further, as well as the question of whether their introduction should be incremental or rapid.

22

See Broaddus and Goodfriend (2001).

24

If the supply of Treasuries declines substantially, these investors may simply need to manage greater mismatches between their assets and liabilities.

25

The one-year Treasury bill stopped being issued in February 2001.

26

The change in spreads between Treasuries and other fixed-income securities partly reflects the failure of Long-Term Capital Management in 1998 which led market participants to re-evaluate financial transactions.

28

Steps that would widen the tradability and accessibility of swaps could include the establishment of a clearing house as well as of a swap futures market.

30

Fung and McCauley (2000) estimate the proportion at over three quarters.

31

The foreign official demand for Treasuries could be smaller than this, especially if foreigners remain willing to move into other dollar-demonimated instruments.

33

The choice of assets in which to invest such proceeds is a separate policy issue, which is discussed in Chapter V of the selected issues paper.

United States: Selected Issues
Author: International Monetary Fund
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    Selected Countries: Gross Federal/ Central Government Debt

    (Fiscal years, in percent of GDP)

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    United States: Treasury Securities

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    United States: Outlook for Federal Government Debt

    (Fiscal years, in billions of dollars)

  • View in gallery

    United States: Yield Curve, 1998-2001

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    United States: Treasury Securities Trading Volumes1

    (Billions of dollars)

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    United States: One-Month Repo Rates

    (Percent)

  • View in gallery

    United States: Yield Spreads on Fixed-Income Securities

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    United States: Foreign Official Holdings of U.S. Treasuries/Gross Financial Transactions of the Rest of the World

    (In percent)