-- 

REPORT TO THE SECRETARY OF THE TREASURY 

FROM THE TREASURY BORROWING ADVISORY COIVMITTEE OF THE 

PUBLIC SECURITIESASSOCIATION 

November 3, 1992 

Dcar Mr. Secretary: 

When we met last, improving productivity, low inflation, and the strengthening 

or' corporate and personal balance sheets all pointed to unwinding the excesses of the 

19805 and, ultimately, a steady expansion of and, hence, a healthier economy. Now, 

notwithstanding six consecutive quarters of positive CDP growth, a decline in initial 

unernploymenr claims, and recent improved statistics for home sales, construction 

spending, the purchasing managers' index, and the prospect for fiscal stimulus, 

caution still dominates. Specific concerns include lack of growth in employment, thc 

slow pace of cuts in European intcrest ratcs, thc prospects of trade wars as a result 

of failed Gatt talks, and the uncertainty of government policy subsequent to today's 

national election. 

Sincc our last meeting, bill races, with the exception of the 3 month maturity, 

arc essentially unchanged, while most coupon issues are 20 basis points higher in 

yield, and the sprclrd bctween the 2 and 30 year maturities has widened 20 basis 

points to 325 basis points. Further, rcflccting the 1% reduction in Fed Funds sincc 

year end, all bills nnd coupons out to 5 years are lower in yield, while rates from 7 

years out to 30 years have either remained relatively unchanged or risen abour 20 

basis points, and the 2 to 30 year yield sprcad has increased by approximately 60 

bnsis points. 

It is within this framework that the Committee recommends that the following 

sccuriries be sold to refund $13.1 billion of maturing privately-held securities and 

r:lise $13.9 billion of new cash for delivery November 15. 

-- $15.250 billion 3-year notes due November 15, 1992 -- $11.750 billion 6 3/8% notes due August 15, 2002 

$10 billion 7 1/4% bonds due August 15, 2022 

The Committee's vote on the sizc and composition of the refunding was 

unanimous and, consistent with past rccommtndations to develop, where possible, a 

smaller number of larger and hence more liquid issues, the Committee was nearly 

unanimous in favoring a reopening of the outstanding 10 and 30 year maturities, 

rarher than the creation of two new issues. 

Present substantive uncertainries, such as tod~ty's national clcction and Friday's 

unemployment data, may cause significant changes in prices between the refunding 

announcement and the auctions of the 10 end 30 year issues. The Committee 

rccognizcs that to qualify undcr 1R.S noticc 92-13 regarding Original Issue Discounts 

(OID),the Secretary of the Treasury may nccd to declare that one or both of the 

issues are being reopened "to allcviatc an acute, protracted shortage". 

At current price levcls, such n dcclsration, ifi the case of the 30 year bond, 

would be neither necessary nor in the Cornmittcc's view required. The Committee 

ncnrly unanimously favored a reopening or this issue. 
Opinion was more divided on the 10 year issue. A modest majority fav~red 

reopening the 10 year issue believing that "an acute, protracted shortagen does now, 

in fact, exist and such a declaration would be warranted as is required at present 

price levels by the IRS notice. Those in support of this position reached their 

judgement following a review of the criteria set forth in our March 11, 1992, report 

as well as other publicly discussed criteria. Those opposcd believed that the extent 

to which the purworted "shortagew exists is insufficient to be termed "acute and 

protracted" and cite as one bit of evidence of the insufficiency the near-even 

division of the Committee itself. 

Given that reopening the 10 year would, at present price levels, require OID 

cxcrnption, an early Treasury declaration is needed so as not to unnecessarily confuse 

the W.I. trading. Absent such a declaration by the Treasury, the Committee would 

recommend a yield auction of $11.750 billion new 10 year notes to mature November 

1.5, 2002. YC the Treasury decides against reopening the outstanding 30 ycar issue, the 

Committee recommends the issuance of $10 billion new 30 year bonds to mature 

November 15, 2022. 

For the remainder of the current quarter, the Committee recommends that the 

Treasury sell at auction: 

-- Two 2 year notes of $15.250 billion, raising $3.9 billion new cash. 

-- Two 5 ycar notes of !§I1 billion, raising $22 billion new cash. 


-- Raising the weekly bill auction sizes to $24.4 billion and the year bills to 


$15.250 billion, raising $15.3 billion new cash. 

-- Three cash management bills, the first of which would be the intra-quarter 

bill of $15 billion already announced for the auction early in November to 

mature December 17, 1992. The second and third would need to be 

auctioned early in December, with $10 billion to mature January 21. 1993 

and $16 billion to mature April 22, 1993, for net new cash of $26 billion. 

$hmmarv of New Cash for the Quarter 

Refunding $13.9 billion 

Cash Management bills 26.0 billion 

3 and 6 month bills 11.0 billion 

52 wcck bills 4.3 billion 

2 year notes 3.9 billion 

5 year notes 22.0 billion 

Less: 4 year note maturity (7.6 billion) 

Total $73.5 billion 

Plus: Already raised 511.5 billion 

Estimated Add-ons 2.0 billion 

Net Market Borrowing $87.0 billion 
Lastly. while the Committee supports the resulting year-end balance of $30 

billion, it notes most private forecasts have the Treasury's cash needs some $10 

billion lowcr this quarter and similarly higher in the following quarter. Should these 

forccasts be borne out, the Committee recommends first reducing the January 21, 1993 

Cash Management bill in order to shift as much new financing as is possible into the 

traditionally light third fiscal quarter. 

For the January-March quarter, the Committee agrees with the targeted $20 

billion end-of-quarter balance. To fund the anticipated 365-70billion net marketable 

borrowing, the Committee sees the need for only modest increases in existing bills, 

coupons, and refunding cycles. Specifically, the Committce recommends increasing 3 

and 6 month bills to $24.8 billion, 1 year bills to $16.250 billion, 2 year notes to $15.5 

billion, 5 year notes to $11.250 billion, the 7 year note to $10 billion, and the 

refunding to $38 billion. 

In response to the question regarding the single price auction, the Committce 

believes thar with only four 2 and 5 year auctions completed under the experiment, 

it is far roo early to reach lasting judgments. That said, the Committee commends 

the extended 12 month experiment which the Treasury has announced. Some 

preliminary observations drawn from the discussions of the experiment include: 

-- Curiously, professional bidders seeking to cover short positions and true 

invcscors "requiring" the issue for their portfolio seem to have been 

prepared to bid lower in yield than existing trading market levels just 

prior to auction to assure their purchases. 

-- Treasury interest savings remain unclear, however, with some believing the 

recent 2 year likely will save the Treasury a few basis points, white the 

prior 5 year may have cost the Treasury a like amount. 

-- Market liquidity for the period from just before the auction through when 

the results are announced appeared somewhat reduced. From these limited 

samples there seems to be a reduction in late "set-up" trading which 

otherwise occurs over the final 30 minutes before an auction. 

-- There seems to be greater uncertainty over the stop price in the single 

price auctions. The market impact can be mitigated by quicker release of 

the results, as is expected from automating the auction process. 

-- Lastly, adding data from Cantor Fitzgerald would usefully augment the data 

from GOVPX. 

Mr. Secretary, that concludes our report, and wc welcome any questions and 

comment. 

fly.+zja& ean B.Stark