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Agence France Trésor Sébastien BOITREAUD, Deputy Chief Executive, AgenceFrance Trésor Europlace Stockholm – 29 March 2007.

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Presentation on theme: "Agence France Trésor Sébastien BOITREAUD, Deputy Chief Executive, AgenceFrance Trésor Europlace Stockholm – 29 March 2007."— Presentation transcript:

1 Agence France Trésor Sébastien BOITREAUD, Deputy Chief Executive, AgenceFrance Trésor Europlace Stockholm – 29 March 2007

2  AFT Funding Strategy  Focus on Inflation-linked Bonds

3 Funding requirement in €bn2007 Long-term debt redemption31.9 Medium-term debt redemption37.2 Budget deficit42.0 Total financing requirement111.0 2007 Funding Requirement and Sources Funding sources in €bn2007 Medium- and long-term issuance (OAT/BTAN) net of buybacks 102.5 Cancellation of State Securities by the CDP8.1 Net change in T-bills (BTF)24.5 Change in Treasury correspondents’ deposits-8.4 Change in the Treasury account-15.9 Total financing sources111.0

4 AFT Mandate and Strategy Agence France Trésor manages central government debt and cash under the most secure conditions in the best interest of the taxpayer. In order to minimise debt costs over time, AFT sets priority to stability and predictability. AFT does not aim at beating the market through opportunistic transactions. AFT seeks the highest liquidity standard, is committed to transparency, and aims at relevance and innovation in the management of the French Republic debt.

5 OATs and BTANs Outstanding as of 28 February, 2007

6 Sustained Interest from Non-French Investors Source: Banque de France Round 24.2% of non euro holdings, end of 2004, CPIS IMF

7  AFT Funding Strategy  Focus on Inflation-linked Bonds

8 A Structural Demand Index-linked bonds provide: Ability to invest on a real-yield basis Diversification for portfolio managers –Improved efficient frontier –Good performance record Better asset and liability matching –Evolution of regulatory and accounting framework will increase demand Market expectations of future inflation, through inflation break-evens –Valuable indicators for central banks

9 Why Issue Inflation-Linked Bonds? Optimizing the State’s Balance Sheet –Asset-liability management: Revenues are correlated with inflation, directly or indirectly –Budget smoothing: Inflation is negatively correlated with fiscal deficits –Diversification of the State’s liability portfolio Meeting Strong Demand –And diversifying the investor base Providing a Public Good –Expanding the hedging opportunities of private agents –Providing policymakers with a market measure of expected inflation Is it Cost-Efficient? –In an efficient market, inflation is fairly priced and nominal and real bonds are equivalent –Additionally, the inflation- risk premium is eliminated  Theoretical studies to support these assertions (see next page)

10 A Risk Management Framework for Government Debt Strategies: Results with cost measure = average debt cost : classic cost-risk curve, i.e. issuance of ILBs decreases cost but increases volatility of debt interest cost with cost measure = average fiscal balance : U- shaped cost-risk curve, i.e. there exists an optimum in inflation share of the debt portfolio. Depending on parameters, optimum varies between 10% and 20%.

11 Building the Real Curve 1998: 10yr French LinkerOATi 2009 First ever euro-denominated linker 1999:30yr French LinkerOATi 2029 2001: 10yr Euro LinkerOAT€i 2012 First euro-zone linker 2002: 30yr Euro LinkerOAT€i 2032 2003:10yr French LinkerOATi 2013 2004:15yr Euro LinkerOAT€i 2020 7yr French LinkerOATi 2011 10yr Euro LinkerOAT€i 2015 2005:10yr French LinkerOATi 2017 2006:5yr Euro Linker BTAN€i 2010 2007: 30yr Euro LinkerOAT€i 2040 N.B. 2003: 22yr Greek linker, 5yr Italian linker 2004: 10yr, 30yr Italian linkers 2006: 10yr German linker

12 Key Figures for French Index-Linked Bonds Face value as of 23 March 2007: French Inflation (OATi):€56.4bn –OATi 3% 2009: €13.8bn –OATi 1.6% 2011: €11.0bn –OATi 2.5% 2013: €13.9bn –OATi 1% 2017: €11.2bn –OATi 3.4% 2029: €6.4bn Euro Area Inflation (OAT€i): €54.0bn –BTAN€i 1.25% 2010: €5.8bn –OAT€i 3% 2012: €14.5bn –OAT€i 1.6% 2015: €10.0bn –OAT€i 2.25% 2020: €11.0bn –OAT€i 3.15% 2032: €8.7bn –OAT€I 1.80% 2040: €4.0bn Total (inflated) as of 28 February 2007: €114bn –12.6% of Total Marketable Debt –13.6% of Medium- and Long-Term Debt (OATs and BTANs)

13 AFT Commitments Regarding ILBs Regularity: Monthly issuance since 2004 (excluding August and December) Predictability: ILB auction on 3rd Thursday of the month, 11:50 am, Paris time Relevance: AFT is committed to issuing at least 10% of its financing program in linkers and significantly more if justified by demand (17.5% in 2006) Ensuring liquidity through primary issuance and through primary dealers’ market making Building two real curves: French & European inflation, and ensuring their liquidity

14 €bn Volumes Bid and Served at OATi/€i Auctions A Sustained Demand …

15 €m Volumes issued … for both OATis and OAT€is

16 Foreign Holdings of OATi and OAT€i 20022003200420052006- Q2 OATi 31.9%31%37.2%44.1%47.3% OAT€i 56.3%64.1%69.1%73.5%69.5% OAT 34.2%39%40.6%49.7%50.9% Notes and bonds 41.9%47.3%49.1%56.5%57.9% Source: Banque de France

17 Turnover on ILBs: OATi & OAT€i Total Turnover (buy+sell) Net buyer over 2004 - 2005 Net seller over 2004 – 2005 Source AFT, based on monthly reporting by primary dealers 2004 – 2005 20042005

18 Market Turnover in French Government Inflation-Linked Bonds (in € bn per month) Strong Liquidity in Index-linked Government Bonds Source: AFT OATi-29 OATei-12 OATi-13 OATei-32 OATei-20 OATi-11 OATi-17 OATei-15 BTANei-10

19 Comparable Turnover in TIPS and French ILBs Trading Turnover of French Government Inflation-Linked Bonds Weekly Trading Volume Relative to Outstanding Debt Source: AFT Source: NY Fed 2005: Monthly average trading volume relative to outstanding debt: Total debt: 37,3% Inflation-linked bonds: 49,03% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 1998199920002001 200220032004 Total

20 More Information on… Reuters: Bloomberg: TRESOR

21 21 Stockholm, Thursday, March 29, 2007 Paris, Gateway to Euro Capital Markets

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