Tài chính doanh nghiệp - The treasury in the financial markets

Money and Capital Markets19C h a p t e rEighth EditionFinancial Institutions and Instruments in a Global MarketplacePeter S. RoseMcGraw Hill / IrwinSlides by Yee-Tien (Ted) FuThe Treasury InThe Financial Markets Learning Objectives To examine the many important roles played by the government’s Treasury Department.To identify how the government raises new funds and how it spends the funds raised.To understand how the activities of the Treasury Department impact the money and capital markets and the economy.To explore two key government policy tools – fiscal policy and debt management.IntroductionThe U.S. Treasury Department exerts a potent impact on the financial system through its fiscal policy – the taxing and spending programs of the federal government designed to promote various economic goals, anddebt management policy – the refunding or refinancing of the federal government’s debt in a way that contributes to its economic goals and minimizes the debt burden.The Fiscal Policy Activities ofThe U.S. TreasuryCongress dictates the amount of funds the federal government will spend each year on programs like welfare and national defense, and also determines the sources of tax revenue and tax rates.When tax revenues are not sufficient to cover expenditures, a budget deficit occurs.A budget surplus occurs when government revenues exceed expenditures.The Fiscal Policy Activities ofThe U.S. TreasuryFederal GovernmentRevenues, Expenditures, and Net Budget Surplus/DeficitFiscalYears$ BillionsReceiptsOutlaysSurplus or Deficit (-)Data Source: U.S. Office of Management and BudgetThe Fiscal Policy Activities ofThe U.S. TreasurySource: U.S. Office of Management and BudgetFederal GovernmentRevenues, Expenditures, & Net Budget Surplus/DeficitThe Fiscal Policy Activities ofThe U.S. TreasuryRecent Tax and Expenditure LegislationThe Economic Recovery Tax Act (1981) aimed to simulate savings and business investment in order to reduce inflationary pressures in the economy.The Gramm-Rudman-Hollings Balanced Budget and Emergency Deficit Control Act (1985) mandated reduced budget deficits.The Economic Growth and Tax Relief Reconciliation Act (2001) was designed to encourage the public to save more.The Fiscal Policy Activities ofThe U.S. TreasuryEffects of Government BorrowingBorrowing from the nonbank publichigher incomes, spending, and interest ratesBorrowing from depository institutionsno change in the money supply or total reserves; total income, spending, and interest rates riseBorrowing from the Federal Reserve banksmoney supply increases; total reserves are unchanged, but excess reserves fall; total income, spending and interest rates riseThe Fiscal Policy Activities ofThe U.S. TreasuryEffects of the Retirement of Government DebtRetiring debt held by the nonbank publiclower incomes, spending, and interest ratesRetiring debt held by depository institutionsno change in the money supply or total reserves; total income, spending, and interest rates fallRetiring debt held by Federal Reserve banksmoney supply decreases; total reserves are unchanged, but excess reserves increase; total income, spending and interest rates fallThe Fiscal Policy Activities ofThe U.S. TreasuryThe conventional view of government borrowing adding to income and possibly driving up interest rates and inflation has been challenged in recent years.It was pointed out that interest rates and prices may not rise if an equal amount of private borrowing and spending are crowded out, or if the added government borrowing has already been anticipated and discounted by the market.Management of the Federal DebtCorporations, commercial banks, and other institutional investors rely heavily on government securities as a readily marketable reserve to be drawn upon when cash is needed quickly.Today, the U.S. public debt is the largest single collection of securities available in the financial system.The Size and Growth of the U.S. Public Debt$ billionsThe U.S. Public DebtData Source: Bureau of the Public DebtThe Size and Growth of the U.S. Public DebtOn a per capita basis, the U.S. public debt amounts to more than $20,000 for every man, woman and child living in the U.S.How did the federal debt become so large? Wars, economic depressions, and the rapid expansion of military expenditures and social programs have been among the principal causes.Source: Bureau of the Public Debt19 - 14The Composition of the Public DebtInvestors in U.S. Government Securities19 - 15Data Source: Treasury Bulletin, Department of the Treasury (U.S.)Investor Group Dec 2000 Jun 2001Federal Reserve & Government accounts 2,781.8 3,004.2Privately held: Depository institutions 198.9 190.1 U.S. savings bonds 184.8 185.5 Pension funds Private 137.7 127.5 State and local governments 195.7 197.1 Insurance companies 110.2 94.8 Mutual funds 312.5 333.2 State and local governments 236.2 216.5 Foreign and international 1,201.3 1,167.4 Other investors 303.1 210.5Total privately held 2,880.4 2,722.6Total public debt 5,662.2 5,726.8(In billions of dollars)Methods of Offering Treasury SecuritiesTreasury debt managers are called on continually to make decisions about raising new money and refunding maturing securities.They must decide what kinds of securities to issue, which maturities will appeal to investors, and the form in which an offering of securities should be made.Methods of Offering Treasury SecuritiesThe auction method is the principal means of selling Treasury notes, bonds, and bills today.Examples of auction methods used include the yield auction, uniform price auction, and “reverse auction.”Today, the marketable public debt is issued in book-entry form only .Methods of Offering Treasury SecuritiesNew Treasury bills, notes, and bonds can be bought directly from the Treasury Department or from the Treasury’s agents – the Federal Reserve banks.Many investors also place orders for new Treasury issues through a security broker or dealer, bank, or nonbank financial institution.The Goals of Federal Debt ManagementHousekeeping goals pertain to the cost and composition of the public debt, such as minimizing interest costs and reducing the frequency of refundings.Stabilization goals relate to the impact of the debt on the economy and the financial markets.The goal of economic stabilization often conflicts with other debt management goals.The Impact of Federal Debt ManagementMost experts agree that in the short run, the financial markets become more agitated and interest rates tend to rise when the Treasury is borrowing.There is also some evidence that lengthening debt maturities increases long-term interest rates relative to short rates.The Impact of Federal Debt ManagementHowever, most authorities are convinced that the debt management activities of the Treasury do not have a major impact on economic conditions.The effects of debt management operations appear to be secondary compared to the impact of monetary and fiscal policy on the economy and the financial markets.Money and Capital Markets in CyberspaceFind out more about the Treasury by visiting: ReviewIntroductionThe Fiscal Policy Activities of the U.S. TreasurySources of Federal Government FundsFederal Government ExpendituresRecent Tax and Expenditure LegislationEffects of Government Borrowing on the Financial System and the EconomyEffects of the Retirement of Government DebtChapter ReviewManagement of the Federal DebtThe Size and Growth of the Public DebtThe Composition of the Public DebtMarketable Public DebtNonmarketable Public DebtInvestors in U.S. Government SecuritiesMethods of Offering Treasury SecuritiesThe Goals of Federal Debt ManagementThe Impact of Federal Debt Management on the Financial Markets and the Economy