Search This Blog


Search Tool

Aug 4, 2010

MarketWatch: Personal Finance Daily. August 4th., 2010


Personal Finance Daily
AUGUST 04, 2010

Wednesday's Personal Finance stories

By MarketWatch

Don't miss these top stories:
When it comes to airfares, how cheap is cheap? Recently, my husband and I toyed with the idea of taking a last-minute summer trip to New York. But is $300 round-trip really all that cheap? It is very affordable relative to the steep heights cross-country fares can reach at times. But being cheapskates and not wanting to lay out $600-plus on airfare alone for what was really a spur-of-the-moment fantasy vacation, we thought not.

For $200 a ticket, we would have jumped on a flight. Maybe.

O.K. We weren't really going to go at all. I suggested it on the spur of the moment, and my husband's response was, "Go to New York later this month?" But it was fun to dream. For more on airfares, read Jennifer Waters's story today for a look at how there are plenty of great deals right now, but they're not likely to last long.

Plus, if you've got kids going to college, don't miss Jonathan Burton's story on how renting textbooks can save you money.

And read Andria Cheng's story to find out why you're seeing summer shorts displayed next to pea coats in retail stores this month. To my mind, it's about time retailers figured out that -- even as late as August -- some people would like a better summer-clothes selection. Of course, this particular August, in San Francisco? All we need are pea coats. Brrr.

-- Andrea Coombes , Personal Finance editor


Itching to vacation? Air deals are rampant but act fast

If you have been holding out on a summer vacation for that special deal, your ship might be in if you act fast.
See story on itching to vacation? Air deals are rampant but act fast.

Priceline's performance says travel demand is heating up

Leisure travel is one of the most-discretionary of expenses, and one of the first to be cut by consumers looking reduce spending when the economy turns soft.
See story on Priceline's performance says travel demand is heating up.


Textbook rentals save college students money

Ashley Ornellas found a way to lower those stratospheric college costs. She no longer buys textbooks for her classes. But Ornellas isn't forced to beg, borrow and copy. Instead, the business management major at San Jose State University in San Jose, Calif., is among a growing number of college students who've decided that buying textbooks doesn't pay when you can rent.
See Jonathan Burton's Life Savings on textbook rentals save college students money.

Retailers' new focus: what you want, when you want it

If you shopped at Abercrombie & Fitch Co. this time last year, you'd likely find shorts in the back of the store, on clearance and with few sizes left. You'll have better luck this year: shorts are laid out near the front, in a well-stocked mix of full-price and specially-targeted promotions.
See story on retailers' new focus: what you want, when you want it.

School nurses are in short supply

Whether your child is in good health or not, a registered nurse at school can recognize medical issues you may have missed and be a powerful advocate to ensure your school has life-saving equipment.
See story on school nurses are in short supply - what parents need to know.


Employers slow to resume 401(k) matches

Roughly a year into the current economic expansion, U.S. corporations and their shareholders are enjoying surging profits and rising dividends--yet many employees are still waiting for the restoration of one of their most important benefits, the 401(k) match.
See story on employers slow to resume 401(k) matches.


How Congress' recess affects the stock market

The stock market will get a major boost at the end of this week. That's when Congress' August recess begins, and it isn't scheduled to go back in session until after Labor Day.
See story on how Congress' recess affects the stock market.

Don't rush into tax-selling moves now

Changes in the market, the economy, tax rules and more raise a lot of interesting questions for consumers and investors. Here are a few of them, all from my mailbag:
See story on don't rush into tax-selling moves now.

Money-market funds keep greater European exposure

A little-known but significant consequence of the financial crisis is that U.S. money-market funds have been forced to buy European bank debt in dramatically higher proportions.
See story on money-market funds keep greater European exposure.

Defending yourself against deflation

The dreaded "D" word is back in circulation, and I don't mean "depression." Having skirted that potential calamity, the worry for policy makers and investors now is deflation.
See story on defending yourself against deflation.


Buffett woos America's rich into $60 billion pledge

Berkshire Hathaway Chairman Warren Buffett said Wednesday that 40 of America's richest people publicly pledged to give away at least half their money to charity, a move that could pump about $60 billion into the world of philanthropy.
See story on Buffett woos America's rich into $60 billion pledge.


U.S. employment up 42,000 in July: ADP

U.S. private-sector employment rose 42,000 in July for the sixth consecutive monthly gain, but the pace of hiring remains weak, according to the employment report from payrolls processing firm ADP released Wednesday.
See story on U.S. employment up 42,000 in July.


Commentary: Face it, wealth is wasted on the wealthy

The rich have broken their side of the bargain. Here's how it's supposed to work: The super-rich accumulate vast fortunes and spend some of it conspicuously (thank you, Chelsea) while the rest of us emulate them, envy them and gossip about them. In return, all they have to do is keep the rest of us gainfully employed by investing their savings wisely.
See story on face it, wealth is wasted on the wealthy.

Could the government create a backdoor stimulus?

An idea that could create a massive refinance wave -- and a back-door stimulus program to boost consumer spending -- is generating debate among investment bank analysts in New York and in Washington policy circles.
See story on could the government create a backdoor stimulus?

Bill to aid cash-strapped states advances in Senate

A bill that would give $26 billion in aid to cash-strapped state and local governments cleared a Senate hurdle Wednesday.
See story on bill to aid cash-strapped states advances in Senate.

Commentary: Is Obama too smart to run the country?

When Barack Obama gave his first Oval Office speech in June about the Gulf oil crisis, critics pounced on him for pitching it over the heads of his audience.
See story on is Obama too smart to run the country?

Pressure builds on Congress to junk 'nightmare' tax rule

Bipartisan support is building for a repeal of a little-known tax rule in President Barack Obama's signature health-care law that has drawn the ire of small businesses around the country.
See story on pressure builds on Congress to junk 'nightmare' tax rule.

Feds may end oil-drilling ban soon

The federal government may lift a ban on drilling in the deep waters of the Gulf of Mexico ahead of a Nov. 30 deadline, the nation's top regulator of the oil and gas industry said Tuesday.
See story on Feds may end oil-drilling ban soon.

CNBC : Evening Brief .- US Dollar Is Facing a Key Test For Stocks- and the Economy. August 4th., 2010


»click here to see the latest top stories from


 Goldman's Spin Off
Firm to spin off a significant portion of its prop trading, with CNBC's Kate Kelly and Dick Bove, Rochdale Securities.
» Watch Video

Obama Speaks to AFL-CIO
President Barack Obama speaks to the AFL-CIO Executive Council about his administration's efforts to create jobs and spur the economy.
» Watch Video


NYT : Afternoon Business News- Intel Setlles Claim on Anti- Competitive Bahaviour. August 4th., 2010


Intel Settles Claim on Anticompetitive Behavior

The chip maker has agreed to change some practices under a settlement with the Federal Trade Commission.

Outsourcing to India Draws Western Lawyers

American and British lawyers - who might once have turned up their noses at the idea of moving to India - are re-evaluating.

BP's Next Chief Makes a Stop in Moscow

Robert Dudley made a crucial protocol stop as he shifts the focus away from plugging the leak in the gulf to selling assets to pay for its cleanup.
Prescriptions Blog

Hepatitis and Cholesterol Drugs Show Promise

Two late-stage clinical trials for a Merck drug and for a drug by Isis and Genzyme demonstrated success, the companies said.
Small Business Guide

Tapping the Wisdom of the Crowd

Feedback provided by crowdsourcing can help small business owners with merchandise or plans for expansion.

FGC BOLSA - FGC FINANCIAL MARKETS .- MarketWatch - Industry - Financial Services.- ECB To Eye Exit, While Tense BOE Holds Line. August 4th., 2010

ECB to eye exit, while tense BOE holds line  
By William L. Watts MarketWatch

It’s too early to declare victory, but European Central Bank President Jean-Claude Trichet will likely approach Thursday’s monthly policy meeting with a big sense of relief after the bank stress tests helped push once-raging sovereign debt fears further into the background. See full story

Microsoft 'evaluating options' on Yahoo Japan deal

By John Letzing MarketWatch

Microsoft is “evaluating its options” for filing a formal objection to Yahoo Japan’s recent agreement to use Google’s Internet search service. See full story

RTTNews : Evening Market Wrap: Stocks See Moderate Rally As Private Sector Hiring Tops Estimates - U.S. Commentary. Stocks See Moderate Rally As Private Sector Hiring Tops Estimates - U.S. Commentary. August., 2010

Evening Market Wrap Wed Aug 4 17:01 2010 


Aug 4, 2010 Stocks See Moderate Rally As Private Sector Hiring Tops Estimates - U.S. Commentary Stocks saw solid gains on Wednesday as private sector employment and service sector activity data came in higher than anticipated, prompting some buying based on economic optimism. The major averages closed firmly in positive territory, more than offsetting the losses posted in the previous session. Full Article

Economic News

Aug 4, 2010 Pace Of Service Sector Growth Unexpectedly Accelerates In July Service sector activity expanded at a faster pace in the month of July, the Institute for Supply Management said in a report released on Wednesday, with the acceleration in the pace of growth coming as a surprise to economists. The ISM said its non-manufacturing index rose to 54.3 in July from 53.8 in June, with a reading above 50 indicating continued growth in the service sector. Economists had been expecting the index to edge down to a reading of 53.0. Full Article
Aug 4, 2010 MBA: Home Purchase Applications Rise For Third Week The demand for applications to purchase homes in the United States rose last week for a third consecutive week as interest rates remained exceedingly low, industry data showed Wednesday. For the week ending July 30, the Mortgage Bankers Association's (MBA) Market Composite Index, a measure of mortgage loan application volume, increased 1.3 percent on a seasonally adjusted basis from one week earlier. Full Article

Earnings News

Aug 4, 2010 Polo Ralph Lauren Reports Stylish Results Apparel maker Polo Ralph Lauren Corp. (RL) reported Wednesday a sharp 57% year-over-year growth in profit for the first quarter of fiscal 2011, reflecting revenue and margin growth. Earnings per share for the quarter and revenues topped analysts' expectations. Full Article

Corporate News

Aug 4, 2010 BP 'Static Kill' Success As Vast Majority Of Spilled Oil Collected The United States woke up to glad news on Wednesday morning hearing two hopeful developments in containment of the 107-day-old BP oil spill, marking major success in efforts of energy giant BP plc. (BP, BP.L) and the federal government. BP claimed that the "static kill" operation to permanently seal its ruptured oil well appeared to be successful, while the U.S. government said most of the oil spilled in the Gulf of Mexico had been cleaned up or broken down by natural forces. Full Article

Forex Top Story

Aug 4, 2010 Dollar Ends Skid Versus Euro, Yen On Encouraging Jobs Report The dollar found its footing versus other majors on Wednesday, halting a dismal stretch of losses fueled by concerns about the pace of the US recovery. For today at least, a pair of economic reports eased fears that a double-dip recession may be lurking around the corner. Full Article

Political News

Aug 4, 2010 Senate Bill Providing $26 Bln To States Clears Procedural HurdleA Senate bill to provide $26 billion in aid to state governments cleared a procedural hurdle Wednesday, as moderate Republicans Olympia Snowe, R-Me., and Susan Collins, R-Me., broke with their party to help Democrats overcome a GOP filibuster. The 61 to 38 vote allows the Senate to move forward with the bill, which includes $16.1 billion to help states pay for Medicaid and $10 billion to prevent layoffs of teachers and first responders. Full Article

FGC BOLSA -FGC FINANCIAL MARKETS: U.S. Markets Snapshot At Close . August 4th., 2010


 U.S, Market Snapshot
Index Last Change %Change
DJIA 10,685.65 +49.27 0.46% Hilighted
Nasdaq 2,303.67 +20.15 0.88%
S&P 500 1,128.17 +7.71 0.69%
FOX 50 814.21 +2.14 0.26%
DIJA Chart

Investopedia: News to Use.- 9 Ways to go Bankrupt. August 4th., 2010

Go To!

Get News To Use!

 Articles Articles 

 9 Ways To Go Bankrupt
The 10 Greatest Entrepreneurs
Economic Cults - Don't Drink The Kool-Aid
Top 10 Investments For Baby Boomers
Dangerous Advice For Beginner Investors
Trade The Calm, Profit From The Storm
How To Prepare For Rising Interest Rates

Recently Asked Questions
What is a Chinese hedge?

FGC BOLSA - FGC FINANCIAL MARKETS : MarketWatch - Industry -Financial services.- Corrections Chile's Stock Bubble. August 4th., 2010


Corrections: Chile's stock bubble
By MarketWatch

A previous version of Jon Markman's Speculations column, published Aug. 4., misstated the geographic characteristics of Chile. See the corrected story. See full story

Buffett woos America's richest into $60B pledge
By Alistair Barr MarketWatch

Berkshire Hathaway Chairman Warren Buffett said Wednesday that forty of America's richest people publicly pledged to give away at least half their money to charity, a move that could pump about $60 billion into the world of philanthropy. See full story

Forbes: Financial .- More Colleges see bond downgrade. August 4th. 2010

More Colleges See Bonds Downgraded
William P. Barrett
Brandeis, Howard on growing list of schools hit by Moody's in 2010.

How To Be Debt-Free In 2011
Claire Bradley
It's hard to think of Christmas when you're busy beating the summer heat, but now is the best time to prepare.
Weird Insurance Bets Worth Millions
Stephen Simpson
These are not the policies written by the folks in grey flannel suits.
Eight Reasons To Tough Out Your Job
Jean Folger
Yes, there are many reasons to search for a new job--but consider these eight factors before burning a bridge.
Six Things To Know Before Taking Out A Student Loan
Mark P. Cussen
Before you sign your loan documents, make sure you know what you are getting into.

NYT: Breaking News Alert: Alex Rodriguez Hits 600th Career Home Run. August 4th., 2010

Breaking News Alert
The New York Times
Wed, August 04, 2010 -- 1:32 PM ET
Alex Rodriguez Hits 600th Career Home Run
New York Yankees third baseman Alex Rodriguez homered to
center field with two men out and a man on base in the bottom
of the first inning off Shaun Marcum of the Toronto Blue
Jays, giving him 17 for the season and 600 for his career so
far. The blast gave the Yankees a 2-0 lead in the game.
Read More:

FGC BOLSA - FGC FINANCIAL MARKETS: MarketWatch - Industry - Financial Services.- Tech Stocks Follow EA, Priceline Gains North. August 4th., 2010


By Rex Crum MarketWatch

Tech stocks rise in early activity, led by gains from video game publisher Electronic Arts Inc. and online travel site Inc. after those companies report better-than-expected quarterly results. See full story

Financial Stocks: Financials up as InterncontinentalExchange gains

By April H. Lee MarketWatch

U.S. financial companies open modestly higher, after investor sentiment is buoyed by a positive employment report released before the bell. See full story

U.S. Department of the Treasury: August 2010 Quaterly Refunding Statement. August 4th., 2010

August 2010 Quarterly Refunding Statement
August 4, 2010
August 2010 Quarterly Refunding Statement
FOR IMMEDIATE RELEASE: August 4, 2010                                 
CONTACT: Office of Public Affairs, (202) 622-2960


WASHINGTON – The U.S. Department of the Treasury is offering $74 billion of Treasury securities to refund approximately $33.0 billion of privately held securities maturing on August 15, 2010.  This will raise approximately $41 billion.  The securities are:

-        A 3-year note in the amount of $34 billion, maturing August 15, 2013;
-        A 10-year note in the amount of $24 billion, maturing August 15, 2020; and
-        A 30-year bond in the amount of $16 billion, maturing August 15, 2040.

The 3-year note will be auctioned on a yield basis at 1:00 p.m. EDT on Tuesday, August 10, 2010. The 10-year note will be auctioned on a yield basis at 1:00 p.m. EDT on Wednesday, August 11, 2010, and the 30-year bond will be auctioned on a yield basis at 1:00 p.m. EDT on Thursday, August 12, 2010.  All of these auctions will settle on Monday, August 16, 2010. 

The balance of Treasury financing requirements will be met with 4-, 13-, 26- and 52-week bills; monthly 2-year, 3-year, 5-year, and 7-year notes; the August 30-year TIPS reopening, the September 10-year TIPS reopening, and the October 5-year TIPS reopening.

Treasury may also issue cash management bills during the quarter.

Projected Financing Needs

In recent months Treasury has reduced coupon offering sizes, particularly in the front to intermediate sectors of the nominal coupon curve.  Based on current fiscal forecasts, Treasury expects to continue to decrease coupon auction sizes at a gradual pace.  The ultimate magnitude of offering size reductions will depend on the pace and extent of the economic recovery.  Treasury will continue to monitor projected financing needs and make appropriate adjustments.

Treasury Inflation-Indexed Securities (TIPS)

TIPS are an important component of Treasury's debt management strategy.  Over the past year, Treasury has taken steps to improve liquidity in the TIPS market.  This has included increasing overall TIPS issuance, as well as replacing 20-year TIPS with 30-year TIPS.  Based on investor feedback, Treasury also believes that increasing the frequency of TIPS auctions will improve liquidity in the product. 

Going forward, Treasury is considering additional reopenings of TIPS offerings.  Adding the second reopening to the 10-year TIPS at the May refunding was the first step in this process. Additional information on the 2011 TIPS auction calendar will be provided at the November 2010 quarterly refunding.  Any decision will be made after extensive consultation with market participants. 

Data Releases

The Office of Debt Management is currently engaged in the development of a new IT system to replace legacy systems.  As part of this process we are reevaluating the type, frequency and form of the data that we previously released as part of the quarterly refunding process. 

We are seeking suggestions on what data would be useful.  Please send comments and suggestions on this and/or other subjects to 

The next quarterly refunding announcement will take place on Wednesday, November 3, 2010. 

U.S. Department of the Treasury : Report to the Secretary of the Treasury. August 4th., 2010

Report to the Secretary of the Treasury
August 4, 2010

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

August 3, 2010

Dear Mr. Secretary:

When the Committee met in early May, the economy was firmly transitioning to a self-sustaining expansion.  Economic releases since then suggest that this progress has slowed. Business spending and private employment rose at a solid pace last quarter but momentum appears to have slowed into midyear. Similarly, the robust gains in retail spending recorded early this year has been tempered by recent weakness. Rising uncertainty about growth prospects and the direction of policy has also weighed on consumer confidence.  In all, the expansion continues to move forward but at a more modest pace than had been anticipated three months ago. This loss of momentum heightens lingering concerns about the expansion's resiliency in the face of a significant fiscal tightening planned for the quarters ahead.       

The US economy has just completed a year of economic expansion in which real GDP rose 3.2%. Importantly, all components of private demand – consumption, fixed investment and inventory accumulation – contributed to growth in the first two quarters of the year. However, their relative magnitudes remain imbalanced. The latest figures show strong gains in business spending and inventory accumulation this year. In addition, exports are rising at a double-digit pace. Consumer spending, by contrast, is sluggish. Despite solid income growth, consumption rose at a 1.8% annualized rate in the first half as the household saving rate moved up to 6.2%.  This mix of strong business spending and sluggish personal outlays has concentrated much of the gain in output to goods producing industries. Services GDP has increased at a meager 0.5% pace during the first year of economic expansion.  

The US manufacturing sector has benefited from the lift in domestic and foreign goods demand with output rising 8.3% over the past year. This year of boom has realigned depressed levels of manufacturing activity to final demand. With inventories now rising, output growth is poised to slow. The slide in the ISM manufacturing survey to 55.5 in July suggests moderation is underway. A downshift in manufacturing following a bounce is a regular feature of the early stages of US expansions. Generally, service sector activity tends to improve as the expansion matures and the manufacturing lift fades. With the downshift in production indicators providing less of a directional signal, demand and labor market indicators will shoulder the burden of highlighting the progress of this rotation and the underlying health of the expansion.  

The continued shift by cash-rich firms away from a defensive posture is likely to provide further fuel for growth in the coming quarters. Adjusted corporate profits are estimated to have increased more than 35% over the past year, the most rapid rise in more than a quarter century. Although the lift to growth from a shift away from paring inventories management is largely spent, a recovery in capital spending and hours worked from depressed levels remains in its early stages. The tentative expansion now underway should receive additional support in the coming quarters as credit availability improves and global demand continues to rise.  It is encouraging that last quarter produced the expansion's first material rise in private payrolls (1.6%, saar) although momentum on hiring appears to have slowed as the quarter came to an end.

Households are expected to remain cautious in the coming quarters as they continue to adjust their balance sheets to an environment of weak labor and housing markets. With saving rates drifting higher, rising labor income will be the key for bolstering confidence and sustaining modest consumption gains. The first half of this year provided encouraging news as labor compensation rose at a 2.7% pace. More disappointing has been the sharp drop in home sales with the end of tax incentives. Household credit quality appears to be improving but an overhang of existing homes in the foreclosure process looks likely to limit any lift in home prices.   

In spite of a year of growth, resource utilization remains depressed and disinflationary pressures persist. Over the past year, the core CPI rose at less than 1%, the slowest pace since the early 1960s. With trends in hourly labor costs still moving lower, inflation will likely stay low for some time to come. Faced with high unemployment and very low inflation, the recent loss of growth momentum has raised concerns that the economy could slip into deflation. The Federal Reserve has responded by balancing its discussion of exit strategies with rhetoric that signals it would consider additional monetary stimulus if needed. The Federal Reserve looks likely to remain on hold for some time to come and asset sales will wait until levels of employment and inflation are consistent with a tightening in policy.  

US monetary policy will need to maintain an extremely accommodative stance in part because fiscal policy is turning restrictive. The ARRA federal stimulus is already fading and state and local spending is likely to continue to contract at its current 1.5% pace. As the economy turns towards next year, ARRA federal transfers to states will end and a number of tax cuts will expire. Although accommodative monetary policy is expected to provide an important offset to this drag, policy rates are already close to zero. The Fed has limited tools to employ should growth disappoint or inflation expectations fall precipitously.      

Against this economic backdrop, the Committee's first charge was to examine what adjustments to debt issuance, if any, Treasury should make in consideration of its financing needs. In the near term, the Committee felt a continued reduction in nominal coupon issuance was appropriate. However, coupon issuance sizes will likely stabilize at or about the end of calendar year 2010. Given the uncertain economic and fiscal backdrop, the Committee felt that maintaining maximum flexibility was necessary.

The bulk of the reduction in coupon issuance should continue to be in the two-year, three-year, five-year and seven-year maturities. Although this is broadly consistent with the Committee's desire to increase the average maturity of the outstanding debt, some felt that given the meaningful progress thus far, reductions in ten-year notes and thirty-year bonds could be justified.

The Committee discussed both the relative and absolute size of the Treasury bill market. One member commented that bills should not drop below twenty percent of marketable Treasury debt outstanding. However, the Committee concluded that more work needed to be done to better understand the evolution of Treasury bill demand dynamics. Finally, the Committee felt that growing TIPS from roughly $80 billion gross issuance in fiscal year 2010, to over $100 billion in fiscal year 2011, was still appropriate.

The second charge was an examination of the current state of the municipal bond market. The member looked at municipal market dynamics, the ability of issuers to access the markets, risk factors, and the impact of municipals on fixed income markets more broadly.

The presentation (see attached) highlights that municipal bonds outstanding rose over the last decade by $1 trillion to $2.8 trillion. Despite some of the recent headline risks and the challenging economic outlook, the member concluded the municipal market appears to be in reasonably good condition. Broadly, municipalities still have a low probability of default, historically high recoveries, low absolute cost of funds, access to a broader investor base via the Build America Bonds program, and a largely unlevered existing retail investor base. Implicit in this analysis is the Federal government's willingness to intervene in the event the municipal market ceases to function.

The third charge was to examine the demand for long duration fixed income assets amidst the backdrop of a gradual increase in the average maturity of debt outstanding. The member focused on the impact of the Federal Reserve's asset purchase program. In particular, the presentation (see attached) highlights the absence of mortgage hedging needs as a stabilizing force underpinning long term yields. In addition, the member referenced the secular increase in demand for long duration assets from asset managers, insurance companies, and pension funds. Furthermore, cyclically, the member showed that investor confidence in the path of central bank policy rates tends to anchor long term yields.

In the final charge, the Committee considered the composition of marketable financing for the remainder of the July-September quarter and the October-December quarter. The Committee's recommendations are attached.



Matthew E. Zames

Ashok Varadhan
Vice Chairman

U.S. Department of the Treasury : Minutes of the Meeting of the Treasury Borrowing Advisory Committee. August 4th., 2010

Minutes of the Meeting of the Treasury Borrowing Advisory Committee
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®.
August 4, 2010

Minutes of the Meeting of the Treasury Borrowing Advisory Committee
Minutes of the Meeting of the Treasury Borrowing Advisory Committee
Of the Securities Industry and Financial Markets Association
August 3, 2010

The Committee convened in closed session at the Sofitel Hotel at 10:03 a.m. All Committee members were present.   Assistant Secretary for Financial Markets Mary Miller, Deputy Assistant Secretary (DAS) for Federal Finance Matthew Rutherford and Director of the Office of Debt Management Colin Kim welcomed the Committee.  Other members of Treasury staff included Fred Pietrangeli, Nathan Struemph, Alfred Johnson, and Veena Ramaswamy.  Federal Reserve Bank of New York members Richard Dzina and Fabiola Ravazzolo were also present.  The Chairman of the Committee introduced one new member, Ruth Porat.

DAS Rutherford opened the discussion with a presentation to the Committee that highlighted current fiscal conditions and financing needs. The presentation began with a review of the near term budget outlook and projections for the upcoming year. DAS Rutherford noted that the economy continues to grow at a moderate pace, with economic activity expanding at a 2.4 percent annualized pace in the second quarter.

He also stated that tax receipts continued to gradually improve, led by robust increases in the corporate figures.  There was a brief discussion about the evolution of tax receipts following recessions.  DAS Rutherford indicated that the recovery of the receipt base following the trough in GDP in the current recession was similar to previous downturns.  However, he underscored that the economy contracted much more sharply in the current recession, leading to a lower base level of receipts.  He noted that the Administration is expecting receipts to total 14.7 percent of GDP in FY 2010, below the 50-year average of approximately 18 percent.  

DAS Rutherford explained that the Administration had recently released the mid-session review of the President's budget.   The budget deficit for FY 2010 was revised down to $1.471 trillion, although the FY 2011 deficit was revised up to $1.416 trillion.  Rutherford noted that primary dealer economists anticipate a smaller budget deficit for FY 2010 than the figures given by the Administration in July. The average deficit forecast from the primary dealers for FY 2010 is $1.351 trillion, $120 billion below OMB's forecast.

DAS Rutherford also suggested that the risks to the recovery have risen since the committee last met in May.  As a result, Rutherford indicated that debt managers must remain extremely flexible to respond to changes in borrowing needs. He noted that there was still scope to continue to reduce auction sizes further, but that the reductions would likely occur at a more gradual pace.  DAS Rutherford indicated that once these cuts are complete, Treasury will likely hold auction sizes constant for a period of time to assess the fiscal outlook. 

Rutherford then discussed auction dynamics.  Coverage ratios remain extremely high for bill, note, bond, and TIPS auctions.  DAS Rutherford also highlighted that domestic funds have increasingly become more active in the Treasury market.  There was a brief discussion on bank purchases of Treasuries.  It was noted that banks have more than doubled their holdings of Treasuries in the past 2 years.  This was largely attributed to weak loan demand, as well as potential changes surrounding liquidity requirements in upcoming bank regulation. Rutherford also noted that increased demand for duration has lead to an increase in STRIPS outstanding.

Director Kim then turned to the current state of the Treasury portfolio.  Overall, the bills as a share of the total outstanding portfolio continue to fall.  He noted that bills (including SFP) currently make up 22 percent of the portfolio, compared to the pre-crisis average of around 24 percent.  The decline reflects the transition to coupon financing, as nominal coupons' share has risen to 71 percent.  Treasury inflation-linked securities (TIPS) currently comprise 7 percent of the portfolio and issuance in this program will continue to steadily increase over the next year.   For calendar year 2010, Treasury expects to issue between $80 and $85 billion in TIPS.  Issuance will gradually increase again in 2011 as Treasury expects to increase the frequency of auctions.

Kim noted that the average maturity of the portfolio continues to lengthen.  The average maturity of the debt currently stands at 58 months, directly in line with the average observed since 1980. Going forward, Kim indicated that the average maturity of the debt will gradually extend further, largely due to the fact that Treasury continues to hold monthly coupon auctions across the entire yield curve. However, he noted that any further extension will likely occur at a slower pace than what has been observed over the past year. Ultimately, he underscored that Treasury must retain its flexibility in order to respond to a range of financing scenarios.

Rutherford then briefly concluded with a few comments on the longer-term fiscal challenges facing Treasury.  There was a discussion about the changes made to the President's 2011 budget in the mid-session review.  One member asked about the macro growth assumptions underlying the Administration's forecast.  Rutherford indicated that the real GDP growth assumption was approximately 4 percent over the next several years.  Another member asked about assumptions regarding the extension of the 2001 tax cuts.  Rutherford explained that the Administration used an assumption of eliminating tax cuts for those earners with income over $250,000, and that such an assumption added $37 billion per year to revenue.  Additionally, he indicated that the bipartisan fiscal commission is currently working to identify policies to improve the fiscal situation in the medium term and to achieve fiscal sustainability over the long run.  Rutherford noted that the Administration and Congress await their recommendations, which are due at the end of the year.

The committee then discussed projected auction sizes for nominal coupon securities going forward.  It was noted that given constant levels of coupon issuance, Treasury has cut a cumulative $232 billion of annualized borrowing capacity when compared to April levels.

One member began by noting that given projected financing needs and uncertainty around the economy, the Treasury would probably need to stabilize coupon issuance by January 2011.  The member noted that nominal coupon issue sizes peaked in early 2010 and held steady from February through April 2010.  Further marginal issue-size reductions in nominal coupons could probably continue for the remainder of the calendar year, according to this member. Such a plan would still provide Treasury with capacity and flexibility to address unexpected financing needs, and also extend the average maturity of outstanding debt further.

A lively debate followed. 

A member stated that given the fiscal and economic uncertainty going forward, it may be prudent to pause after some further gradual issuance-size reductions.  The member stated that Treasury should consider making small reductions in 10-year notes and 30-year bonds.  Other members agreed with the idea that 10-year notes and 30-year bonds should be cut slightly, with one member stating that the 10-to 30-year spread has widened and that there is a perception by some market participants that Treasury wants to extend its duration even though term premia appears to be elevated by some metrics. 

Other members challenged this notion, suggesting that small marginal cuts in 10-year notes and 30-year bonds might not be considered to have a substantive purpose and that there was nothing to be gained from doing such cuts at this point.  One member stated that given the long-run fiscal forecast, uncertainty about extension of the 2001 tax cuts, and absent any sort of credible fiscal plan for reducing government borrowing, cutting 10-year notes and 30-year bonds would be imprudent.

Ultimately, the Committee thought it was important for Treasury to maintain the flexibility to cut across the curve in the future.  There was general consensus around the idea of pausing issue size reductions at some point in the future until more clarity forms around the economic and fiscal outlook.

A brief discussion followed regarding the optimal size of the T-bill market.  One member stated that once bills as a percentage of the overall portfolio drops below 20 percent, dislocations and poor liquidity become more problematic in the bill market.  Another member stated that if the Fed starts to reinvest cash flows from their MBS portfolio in the front end of the curve, shortages in the bill markets may be further exacerbated.   Another member commented that bill issuance should be skewed more toward the short end of the bill curve to accommodate the demand from 2a-7 money market funds which are under new WAM constraints; many investment vehicles that money funds used to invest in are in shorter supply, including ABS paper and SIVs.           
The committee next turned to the question in the charge concerning state and municipal debt markets and the ability of municipal issuers to access the capital markets.  The committee focused its response on current market dynamics, including overall financing costs and strategies, as well as implications for the Treasury market and fixed income markets more broadly.   
The presenting member began by describing general municipal market conditions, noting that the municipal bond market has grown dramatically over the past few decades, totaling $2.8 trillion at the end of 2009.  The member noted that the municipal bond market has a higher average credit rating than the corporate bond market, which can be attributed to municipal taxing authority, low historical default rates and conservative debt profiles.  Seventy percent of municipal bond holders are retail or retail equivalent buyers, including households, mutual funds, ETFs and money market mutual funds.  Life insurers are large purchasers of taxable Build America Bonds (BABs), owning over 50 percent of many BABs deals.
The presenting member then went into a discussion on the municipal credit default swap (CDS) market, noting that the market is small and relatively illiquid.  The market has only a handful of actively traded issuers, including the States of California, Illinois, New Jersey, Florida and Texas.  As of the end of July, only 6 out of the top 1,000 CDS reference entities were state or local governments, and only $105 million of single-name municipal CDS was traded during the last week of July.  In comparison, $144 billion of CDS was traded for the top 1,000 reference entities. 
The member then discussed the MCDX index, which is an index containing 50 equally weighted state and local government and revenue issuers.  The MCDX has approximately $3.8 billion of net notional outstanding, significantly below the $300 billion for the investment grade corporate index.  The member noted that the MCDX is a poor indicator of perceived risk in the municipal market given that the index is subject to inconsistent market making and unpredictable investor participation. 
The presenting member then went into a discussion of current cash market conditions and concerns going forward.  It was noted that the largest municipal issuers have had continuous access to the market.  This is evidenced by municipal issuance, which is at $232 billion year-to-date, a 13 percent increase from 2009. In absolute terms, municipal rates are at multi-decade lows.  However, municipal bond yields remain elevated relative to Treasury yields.  The yield on the Bond Buyer 11 index is currently 110 percent of Treasuries compared to a long-term average of 86 percent. 
The member then discussed overall municipal market structure changes, highlighting the BABs program, which was introduced in 2009.  Under the BABs program there has been $120 billion of taxable bond new issuance.  The dramatic decline in municipal bond insurance was also highlighted. Five years ago, 50 percent of issuance was insured, compared to below 10 percent today.   The member noted that the use of bond insurance is unlikely to return to previous highs given increased investor focus on the underlying credit quality of issuers as well as the health of the bond insurers. 
The importance of the short-term market was also highlighted.  Short-term offerings are generally used by issuers to smooth cash flow timing mismatches.  They are used more frequently during recessionary times when budget deficits increase.  
The presenting member then went into a discussion of current municipal market investor concerns. State budget imbalances are among the top concerns for investors.  Although most states have balanced budget requirements, budget solutions are often one-time in nature and credible revenue and expense solutions are not evident for the largest general-obligation issuers.  In addition, liquidity access and management was highlighted as a concern given roll-over risk for letters of credit for the variable rate market.  Approximately $200 billion of letters of credit are maturating in 2010 and 2011, of which $30 billion may be difficult to renew.  The result will likely be more restrictive terms, higher costs and less availability for lower-rated issuers.
The member then discussed the major risks to municipal issuers, which fall into two categories: market access and new issue pricing.  In terms of market access, the member noted while a state GO default seems unlikely, if it were to occur, it would result in significant dislocation in the new issuance market.  However, this risk is mitigated by a number of factors, including: state taxing authority, low debt/GDP ratios, low debt servicing costs, high debt payment priority, expense reductions, alternate sources of funding (asset sales, revenue stream securitizations), as well as rainy day reserve funds. 
With respect to new issue pricing, the member suggested that municipal issuers would likely face higher financing costs if the BABs program is not extended.  Other concerns included worsening credit quality of issuers and regulatory reform, which could affect banks providing letters of credit for variable rate issues.
The member concluded that in the near term the likelihood of a major default is low.  However, a long-term deterioration in credit fundamentals is possible and funding costs are likely to increase. 
The members then discussed the dramatic increase in municipal bond issuance over the last few decades. One member wondered how GDP growth over this time period had been affected by the sharp increase in municipal debt, where proceeds are typically used to finance state and local infrastructure projects. 

The committee then turned to the third question in the charge concerning the drivers of demand for long duration fixed-income assets and the corresponding implications it may have on the gradual extension of the average maturity of Treasury's debt portfolio.

The presenting member began by noting that in contrast to the recent strong price performance in many financial assets, economic fundamentals have continued to weaken.  Real GDP for Q2 came in lower than expected at 2.4 percent annualized pace.  Both market consensus and the FOMC's Central Tendency Forecast for real GDP and inflation have declined.  The subdued economic outlook and decline in inflation expectations have pushed out expectations for policy rate increases and driven yields lower across the curve.

The presenting member next discussed how changes in the mortgage market were affecting fixed income markets more broadly.  The member underscored that the Federal Reserve holds 27 percent of 30-year agency MBS, which has altered the traditional hedging activity observed by mortgage investors.  He also noted that capacity constraints are continuing to weigh on refinancing activities.  It was concluded that agency MBS supply is likely to remain low for some period of time.

The member noted that one sector where supply is picking up is agency callable debt.  At current rate levels, there is the potential that over $50 billion of outstanding agency debt will be called over the next two months, which would boost gross issuance and agency supply.

However, it was reiterated that Treasury still remains the dominant issuer in fixed income markets.  Even if budget deficits decline in the next few years, Treasury will remain the major source of net supply in fixed-income markets. 

The presenting member then discussed sources of demand in fixed income markets. It was noted that banks have been a strong source of demand for Treasuries over the past year.   Corporate pensions continue to be a net buyer of fixed income despite low yield levels.  Mutual Funds and ETFs have also seen significant inflows into fixed-income products throughout the crisis. It was noted that initially this was supportive of government issuance, but more recently, the low absolute level of yields has led some investors to pursue higher-yielding strategies.

The presenting member finished by noting that long-end demand continues to exceed supply. Treasury auctions continue to exhibit strong coverage ratios, and as a result, the member recommended that Treasury continue to lengthen the average maturity of outstanding debt.

The meeting adjourned at 11:45 AM.

The Committee reconvened at the Department of the Treasury at 5:35 p.m. All of the Committee members were present.  The Chairman presented the Committee report to Secretary Geithner.

A brief discussion followed the Chairman's presentation but did not raise significant questions regarding the report's content.

The Committee then reviewed the financing for the remainder of the July through September quarter and the October through December quarter (see attached).  

The meeting adjourned at 6:15 p.m.


Matthew Rutherford
Deputy Assistant Secretary for Federal Finance
United States Department of the Treasury
August 3, 2010

Certified by:


Matthew E. Zames, Chairman
Treasury Borrowing Advisory Committee
Of The Securities Industry and Financial Markets Association
August 3, 2010

Ashok Varadhan, Vice Chairman
Treasury Borrowing Advisory Committee
Of The Securities Industry and Financial Markets Association
August 3, 2010

Treasury Borrowing Advisory Committee Quarterly Meeting
Committee Charge – August 3, 2010

Fiscal Outlook

Taking into consideration Treasury's short, intermediate, and long-term financing requirements, as well as uncertainties about the economy and revenue outlook for the next few quarters, what changes to Treasury's coupon auctions do you recommend at this time, if any?

Municipal Bond Market

We would like the Committee to provide an update on state and municipal debt markets and the ability of municipal issuers to access the capital markets. Please provide detail on current market dynamics, and whether overall financing costs and strategies have changed.  How have these dynamics affected the Treasury market, and fixed income markets more broadly?

Demand for Long-Duration Assets

What are the forces that are underpinning demand for long-duration fixed-income assets?  What factors should Treasury consider as the average maturity of outstanding debt continues to gradually extend?

Financing this Quarter

We would like the Committee's advice on the following:

  • The composition of Treasury notes and bonds to refund approximately $33 billion of privately held notes maturing on August 15, 2010.
  • The composition of Treasury marketable financing for the remainder of the July - September quarter, including cash management bills.
  • The composition of Treasury marketable financing for the October - December quarter, including cash management bills.

 TBAC Recommended Financing Tables: Q4
 TBAC Recommended Financing Tables: Q1