WASHINGTON (MNI) – The following is the third and final section of
the text of Treasury Assistant Secretary for Financial Markets Mary
Miller’s remarks Tuesday, prepared for the Futures Industry Association:

One consequence of providing this liquidity is a lower average
maturity of our debt than many other countries. Still, this figure has
increased dramatically over the past 18 months from 48 months at the end
of 2008, to approximately 59 months today, a significant change given
the amount of debt outstanding.

At this point, we feel that the composition of the Treasury
portfolio balances our financing needs with demand that we are seeing
from the marketplace. This reduces reinvestment risk, contributes to a
lower cost of borrowing for the American taxpayer, and maintains the
liquidity and safety of Treasury securities.

We have been conscious to maintain this balance while bringing down
auction sizes. Beginning in May, we announced that we would begin
decreasing note and bond issuance to reflect improving fiscal outcomes
and a lower borrowing need than was initially envisioned. We began a
program of gradually decreasing auction sizes at a steady pace. Since
May, we have cut approximately $300 billion on an annualized basis.
More recently we have stated that we expect the level of borrowing to
stabilize in the near- to intermediate-term. The ultimate level of
borrowing over this time horizon will depend on the pace and extent of
the economic recovery, but our current forecast is for net new borrowing
to step down significantly in 2012.

One area where we have increased supply is in the issuance of
Treasury Inflation Protected Securities (TIPS). Feedback from the market
indicated strong interest in more frequent and larger issuance of these
securities, which are issued with a low real interest rate coupon and
are subject to price adjustments tied to the Consumer Price Index. These
bonds have been popular both as a hedge against future inflation as well
as a good portfolio diversifier. Our overall issuance of TIPS has grown
from $58 billion in 2009 to over $80 billion this year, and should reach
over $100 billion next year.

While overall issuance has surged, interest rates have come down
from pre-crisis levels, and as a result interest expense is at less than
1.5 percent of GDP, the lowest level in more than 40 years. As the Fed
keeps short term rates anchored close to zero, Treasury rates have also
remained low. If rates begin to rise because of a growing economy, we
would expect a beneficial impact to revenues, which would offset our
need to borrow.

The important point is that this record level of issuance has been
accomplished at very low interest rates that will be in place over the
life of these bonds. The low cost of borrowing has been driven by a
number of economic factors, but largely by very strong demand.

At the beginning of the past decade, the amount of bids in Treasury
auctions averaged close to two times the amount offered for sale. Over
the past two years, bids have risen to cover Treasury auctions on
average by three times.

Periodic flights to quality as markets react to unsettling news,
the need for greater liquidity and margins of safety have all played a
role in very strong demand for Treasury auctions. There has also been a
reduction of supply from other parts of the bond market, such as asset
backed security issuance and corporate debt. Five years ago, Treasury
debt represented 25 percent of the market as measured by the Barclay’s
Aggregate Index. Today it represents 33 percent.

It is interesting to look at trends in ownership of Treasury
securities. Although the data is imperfect and subject to annual
revision, it appears that domestic ownership has risen over the past two
years. The Federal Reserve data on ownership also shows increasing
holdings by domestic banks, households and other private investors.

All of this supports a higher savings dynamic at work in the U.S.,
along with a desire by financial institutions to carry more and higher
quality capital reserves.

Foreign ownership has also grown in dollar terms if not in market
share. We welcome a broad investor base for U.S. Treasury debt and note
the growing participation of emerging markets as investors with excess
reserves put them work, in a safe and prudent manner.

Finally, I should acknowledge that the Federal Reserve remains a
very large investor in our market. The Fed recently announced that it
will reinvest principal repayments from their large mortgage backed
securities portfolio into Treasury securities. However, I would like to
underscore that their decision to purchase Treasuries in the secondary
market does not, and will not, impact our debt management strategy. As
debt managers, we are focused on the issuance of securities to the
private market at the lowest cost over time. Fed monetary policy
decisions are independent of that calculus.

(3 of 3)

** Market News International Washington Bureau: 202-371-2121 **

[TOPICS: M$U$$$,MFU$$$,MCU$$$,M$$FI$]