REPORT TO THE SECRETARY OF THE TREASURY 

FROM THE TREASURY 

BORECOWING ADVISORY COMMITTEE 

OF THE 

PUBLIC SECURITIES ASSOCIATION 

FEBRUARY 2, 1994 

Dear Mr. Secretary: 

Since the Committee's last meeting with the Treasury three months 

ago in November 1993, data for the economy have revealed a 

marked acceleration in activity. A sustainable expansion now seems 

firmly in place. At the same time, the rate of inflation appears to 

have stabilized near its low point for the cycle with few signs yet of 

resurgence. 

From the levels that prevailed at the time of the last meeting, yields 

an Treasury securities have moved in divergent directions. Yields on 

maturities of one year and under and have fallen by 5 to 20 basis 

points, while those on maturities of 10 years and over have 

increased by 5 to 15 basis points. For securities of intermediate 

maturity, yields are little changed. As a consequence of these 

movements, the yield curve has steepened at its most extreme by 

approximately 35 basis points. 

Within this context, to refund the $24.0 billion of the securities 

maturing on February 15, 1994 that are privately held and to raise 

additional cash of $16.0 billion, the Committee recommends that 

Treasury auction $40.0 billion of the following securities: 

$17.0 billion 3-year notes due February 15, 1997; 

. $12.0 billion 10-year notes due February 15, 2004; and, 

. $11.0 billion 6 114% 29 112-year bonds due August 15, 

2023. 

The 16 members of the Committee present for the meeting voted 
unanimously in favor of the total size and composition of the 

refunding. 

On the question of whether to reopen the 6 114% bond due August 

15, 2023 which was auctioned six months ago in August 1993 or to 

issue, as the main alternative discussed, a new 29 314-year bond due 

November 15, 2023, the vote was ten in favor of reopening the 

outstanding issue, with four in favor of a new issue and two 

abstaining on the basis that either alternative was equally 

acceptable. 

The principal reasons cited by the majority in support of a reopening 

were the evident protracted shortage of the outstanding issue in the 

collateral market and its relative expensiveness compared to 

surrounding issues, which together appear to have diminished its 

liquidity. These members believed that the benefits associated with 

the improved liquidity of a reopened issue outweighed the possible, 

but not certain, interest savings that might result from issuing a new 

bond. It was also noted that a reopening of the outstanding issue 

was clearly the predomin.ant market expectation. 

Members who favored offering a new 29 314-year security noted 

that there was developing, as result of the Treasury's new cycle for 

issuing long bonds, a relative scarcity of May and November 

maturities available for stripping. These Committee members argued 

that the added attraction of a new long bond with a November 

corpus and May and November coupons, when combined with a 

possible premium associated with a new benchmark issue, could 

result in a material though difficult to quantify saving to the 

Treasury. The potential saving, it was acknowledged, wuld likely be 

realized later in August when the Treasury next issues long-term 

debt. 

In any event, Committee members noted that the decision to reduce 

the issuance of long bonds and resultant concentration of offerings in 

the February and August refundings seems likely to effect adversely 

the liquidity of stripped components which are due in May and 

November. Some expressed the view that the Treasury should take 

this consideration into account as it develops its longer term 

financing strategy. 
For the remainder of the quarter, with the aim of achieving a cash 

balance of $20 billion on March 31, the Committee unanimously 

recommends that the Treasury auction: 

Two 5-year notes of $1 1.0 billion each, to raise $22 

billion of new cash; 

Two 2-year notes of $17.0 billion each, to raise $3.5 

billion of new cash; 

One 1-year bill of $16.5 billion, to raise $1.7 billion of 

new cash; 

Weekly 3- and 6- month bills totaling approximately 

$25.2 per week, to reduce cash by $1.3 billion; and, 

A cash management bill to mature April 21, 1994, to 

raise $10.0 billion of new cash. 

The net new cash raised in the quarter by this recommendation 

would be as follows: 

Refunding $ 16.0 billion 

Five-year notes 22.0 

Two-year notes 3.5 

One-year bill 1.7 

Three- and six-month bills (1.3) 

Cash management bill 1 0.0 

Estimated foreign add-ons 3aQ 

Subtotal $ 56.9 billion 

Less: Four-year note maturity (8.2) 

Already issued or announced 

Total Net Market Borrowing $ 46.0 billion 

For the April-June quarter, the Committee felt that a cash balance 

modestly in excess of $30 billion on June 30, 1994 would help 

redistribute the uneven financing requirements of the second and 

third calendar quarters. Assuming nevertheless a end-of-quarter 
cash balance of $30 billion, the Committee recommends the following 

financing schedule for the period: 

Auction& Size Raising 

Refunding: Three-year note 

Ten-year note $ (0.2) billion 

Five-year notes 33.0 

Two-year notes 5.9 

One-year bill 7.2 

Three- and six-month bills (9.4) 

Estimated foreign add-ons u 

Subtotal $ 42.3 billion 

Less: 

Cash management bill (April 

Seven-year note maturity 

Four-year note maturity 

Net Total Market Borrowing $17.5 billion 

The Committee notes the likely need for the issuance of a cash 

management bill to mature in late June to cover the May 15 coupon 

payments in the absence of a 30-year bond in the quarterly 

refunding. Additional intra-quarter cash management bills will 

likely be needed to cover the cash low points in early April and June. 

Finally, in the category of other topics, the Committee is pleased to 

have been asked to discuss further the proposal to the Treasury that 

it consider the issuance of floating rate notes which the Committee 

first advanced in the special meeting held on June 24, 1993. Given 

the reduced reliance on longer-term borrowing, the Treasury will 

face in the coming years substantial growth in the amount of shortand intermediate-term debt which it will need to issue. Floating rate 

notes may afford the Treasury access to substantial amounts of funds 

from investors who prefer this investment vehicle but are limited to 

the floating rate instruments offered by private borrowers and 

government sponsored enterprises. Furthermore, by issuing floating 

rate notes with final maturities of 5 to 7 years, the Treasury would 

be able to mitigate the effect its current debt management strategy 

will have on shortening the average life of the debt, which some 

believe could become a matter of serious concern in the future as on 
occasions it has in the past. At the same time, floating rate notes 

could enable the Treasury to capture the interest rate savings it 

seeks in its current strategy from the tendency over time of the yield 

curve to have a positive slope. Additional savings may also be 

gained from apparent further tendency of the yield curve to be the 

steepest for maturities under 90 days, at present the shortest 

maturity offered by the Treasury. 

The specific terms of floating rate securities, as is evident in the draft 

terms provided by the Treasury, are typically complex. Substantial 

technical input from both dealers and investors active in these 

instruments will clearly be useful to the Treasury as it contemplates 

the range of choices and the possible consequences of each. The 

Committee would be pleased to offer its views on the attractiveness 

to the Treasury of the detailed elements of the various alternatives 

which might be considered, but given the brief time available and 

the technical complexity involved, Committee members did not 

believe that at this stage they could adequately analyze and evaluate 

the specific terms of the draft pr~posal . With additional time and 

the opportunity for careful consideration, the Committee would be 

pleased to offer its views on the full range of issues that are 

associated with the issuance of floating rate notes. 

Committee members did express the conviction that, whatever the 

specific terms, sufficient liquidity to sustain a viable market in 

Treasury floating rate notes would be assured as long as the 

Treasury issues the securities in sufficient volume and on a regular 

and predictable basis. A clear indication of the Treasury's issuance 

plans would be certain, in the minds of most Committee members, to 

attract an adequate number of dealers and investors to sustain a 

liquid market. 

The Committee urges the Treasury, as part of its announcement later 

today, to indicate that it would welcome written comment from any 

who are interested in presenting their views to the Treasury on the 

subject. To avoid misleading market participants and risking 

unwarranted speculation about the imminence of a decision to issue 

floating rate notes and the possible impact the decision would have 

on the issuance of other debt, the Committee strongly urges the 

Treasury make clear that considerable further study will be 

undertaken before any decisions are made on whether to issue 
floating rate securities and on what the nature of their terms and the 

frequency and size of their issuance might be. 

In response to the request for comments on effects that might be 

expected from the charges for daylight overdrafts which will 

implemented in stages beginning April 1, 1994, Committee members 

offered the following observations: 

The proportion of repurchase agreements executed on an 

overnight basis is expected to decline, while those 

executed on an open, term, pre-arranged, and tripartite 

basis is expected to increase. 

A tiering in financing according to the time of delivery 

during the day is expected. 

Dealers are likely to become less willing to defer the 

financing of positions securities which previously had 

been held in the hope selling them later in the day for 

cash settlement, including to the Federal Reserve fur the 

open market account and for customers. 

Yield spreads between Treasury securities and competing 

money market instruments with different clearance 

procedures may widen. 

Pre-set delivery times may evolve, and netting 

arrangements may become more common. 

To date investors, as distinguished from dealers, do not 

appear to have focused on the daylight overdrafts 

and it is unclear how they and their custodians will 

eventually respond. 

Mr. Secretary, that concludes the Committee's report. We welcome 

any questions or comments.