April 30

The Committee reconvened at 8:30 a.m. at the Treasury in
closed session. All members were present, except Messrs.
Horowitz, Kessenich, McKnew, Mortara, Napoli and Roberts.

The Chairman presented the Committee report (copy attached)
to Under Secretary Hawke and Deputy Assistant Secretary Anderson.
A brief discussion ensued concerning the uncertainty risk to
Treasury regarding the methodology for determining the CPI. It
was noted that the uncertainty referred to in yesterday’s
discussion had to do with the magnitude of a yield premium
bidders may incorporate in the bidding process for IIS to account
for the risk that the CPI will be adjusted downward sometime in
the future.

The meeting adjourned at 8:55 a.m.

hG.
Paul F. Malvey
Associate Direc

Office of Market Finance
Domestic Finance
April 30, 1997

Attachments

Certified by: cL el IN Ie
Richard Kelly, Chajkman

of the Public Securities Association
April 30, 1997 :


MINUTES OF THE MEETING OF THE

TREASURY BORROWING ADVISORY COMMITTEE

OF THE PUBLIC SECURITIES ASSOCIATION
April 29 and 30, 1997

April 29

The Committee convened at 11:30 a.m. at the Treasury
Department for the portion of the meeting that was open to the
public. All members were present, except Messrs. Horowitz,
Kessenich, McKnew, Mortara, and Roberts. The Eederal Register
announcement of the meeting and a list of Committee members are
attached.

Deputy Assistant Secretary for Federal Finance Roger
Anderson welcomed the Committee and the public to the meeting.
John Auten, Director, Office of Financial Analysis, summarized
the current state of the U.S. economy. Paul Malvey, Associate
Director, Office of Market Finance, presented the chart show,
which had been released to the public on April 28, updating
Treasury borrowing estimates and providing statistical
information on recent Treasury borrowing and market interest
rates.

The public meeting ended at 12:05 a.m.
May refunding

The Committee reconvened in closed session at the Madison
Hotel at 2:15 p.m. The members were present who had attended the
public briefing. Deputy Assistant Secretary Anderson gave the
Committee its Charge, which is also attached.

The Committee began by considering the attached proforma
financing plan for the April-June quarter that had been prepared
in advance by one of the members, using the market borrowing
estimates that were released by the Treasury on April 28. The
committee voted to recommend that the Treasury issue $17.00
billion 3-year notes and $12.0 billion 10-year notes. This
recommendation represents a $0.75 billion reduction in the 3-year
note size from the February refunding and a maintaining of the
10-year note size relative to the February refunding, although it
is an increase from what is contained in the attached proforma.
In the Committee’s view, a slightly larger 10-year note may help
maintain needed liquidity in this sector. Also, the reduction in
the size of the 3-year note offering combined with a $2.0 billion
reduction in the May 8 weekly bills, which was announced while
the Committee was in closed session, would more than offset the


2

impact of maintaining the 10-year note auction at its previous
level.

The Committee also voted against recommending that Treasury
reopen the February 10-year note, given that there are no signs
of market dislocations and the fact that at the current price of
about 96 3/8 such a prospect would not be concordant with OID
rules.

As noted previously, most recently at the February Committee
meeting, given the appearance of a downward trend in deficits, it
is the consensus of the Committee that the Treasury should
maintain flexibility in the size of coupon issues, with modest
downward adjustments when appropriate. In line with this, the
Committee recommended that the Treasury cut back on coupon
financing for the remainder of this quarter and through the July-
September quarter, given the much larger-than-expected inflows of
tax receipts, the recent very low offering volumes at weekly bill
auctions, and the general expectation that the deficit for the
year will be much lower than forecasted only a month ago.

The Committee voted unanimously that the current sizes of
the 2- and 5-year note auctions be cut by $1/2 billion each,
starting in May and continuing through the next quarter.

Instead of proceeding directly to its recommendation for the
July-September quarter, the Committee decided to address the
issue of how best to proceed with the development of the
inflation-indexed securities (IIS) program. To open the
discussion, the Chairman outlined the cash raising potential of
several approaches. (See attached.

The subsequent discussion focused on two basic approaches to
further developing the program. One would be to continue the
quarterly cycle for 10-year IIS, with issuance in the first month
of each quarter. Then introduce another IIS maturity cycle, most
likely next year, at either 5-years or 30-years. The other
approach placed emphasis on using the current quarterly IIS cycle
to introduce new maturities in an orderly manner. This view
suggested that it is more important now to gradually build up a
range of maturities on the current quarterly IIS cycle before
approaching a decision regarding the integration of IIS with
conventional securities in regular, predictable cycles.

According to this view, there would be more flexibility going


3

forward while monitoring progress in the development of the IIS
program.

Independently of the alternative implementation choices
mentioned above, discussion also focused on what maturity would
be introduced next, either shorter (e.g., a 5-year) or
longer(e.g., a 30-year). In this context, a number of members
raised the issue of “Boskin Effect,” or the risk that the CPI
will be substantially altered in the future. If it were to
occur, particularly over a short horizon, then the Treasury would
be more exposed by committing to a 30-year IIS rather than a 5-
year IIS. Members also noted that the 5-year maturity is a

deeper, more liquid market for both conventional and synthetic
securities.

At the conclusion of discussion, one member voted in favor
of issuing another 10-year IIS in mid July, while 16 members
voted in favor of issuing another maturity. In deciding what
maturity to recommend, 10 members voted for recommending a 5-year
IIS, and 7 members voted for a 30-year IIS.

On the closely related topic of how best to proceed with
planning cycles in the face of a downward trend in deficits, the
issue of the “off-cycle” (July and October) 10-year conventional
note auctions was discussed. They had been introduced in
addition to the regular mid-quarter 10-year auction cycle in the
Spring of 1996 when projected deficits for 1996 and 1997 were
much higher. July and October are also months that IIS are
scheduled to be offered. Put to a vote, only four members
recommended continuing the July and October 10-year auctions,
while 13 voted to eliminate them now and partially compensate by
doing larger traditional 10-year mid quarter auctions.

Marketable financing for the July-September quarter

For the July-September quarter, given the Treasury's
forecasted funding needs, the Committee recommended keeping the
2-year and 5-year notes at the same lower levels as in May and
June. For July’s IIS auction, the Committee recommended issuing
$8-10 billion of 5-year notes. And for the August refunding, the
Committee recommended keeping the 3-year notes at $17 billion and
the 30-year bonds at the $10 billion level that had been offered
in February. However, if the Treasury decides to eliminate the
off-cycle July/October 10-year note auctions, the Committee
recommends issuing $13 billion of 10-year notes.

The meeting adjourned at 4:05 p.m.