REPORT TO THE SECRETARY OF THE TREASURY 

FROM THE U.S. GOVERNMENT AND FEDERAL 

AGENCIES SECURITIES COMMITTEE OF THE 

PUBLIC SECURITIES ASSOCIATION 

FEBRUARY 1, 1989 

Dear Mr. Secretary: 

During most of the period since our last meeting, the U.S. 

Treasury market has had to contend with the perception that the 

domestic economy was continuing to grow at a higher rate than 

that with which the Federal Reserve would be comfortable. 

Moreover, this growth was occurring despite an apparent end to 

the export boom, as a revival in consumer spending was replacing 

at least some of the stimulus that had been provided by the trade 

sector. Not surprisingly, then, this was also a period in which 

the dollar was generally under downward pressure, beginning with 

a sharp selloff almost immediately after the elections. The 

combination of continued above-trend economic growth and a 

falling dollar revived concerns over inflation. These were 

further reinforced by the very sharp runup in oil prices 

following the OPEC accord. Actual inflation numbers, however, 

continued to run at about the same rate at which they had for 

most of 1987 and 1988, and the sluggish behavior of precious 

metals prices suggested that the true extent of inflation 

concerns was much more limited than sometimes indicated by the 

commentaries of bond market participants. 

Nonetheless, the Fed responded to the potential inflationary 

consequences of continued strong employment growth by raising the 

federal funds rate from around 8 1/4%-to-8 3/8% at the time of 

our last meeting to around 9%-to-9 1/8% by early January. Partly 

as a result, the dollar turned around rapidly, and has since 

shown impressive strength in the face of concerted intervention, 

interest rate increases in Europe, and another disappointing 

trade report. At the same time, perceptions regarding the 

economy have begun to shift as it now finally appears that the 

long-awaited deceleration in real growth is starting to occur. 

The net result of all of these forces has been an increase 

from November 1 to today of about 75-to-80 basis points in yields 

on Treasury debt out to around 2-year maturities. Thus, 3-month 

bills have gone from 7.34%-to-8.37%, while 2-year notes have 

moved from 8.25-to-9.07%. But yields on the longer maturities 

have increased by much less and actually decreased in the case 

of the 30-year bond, leading to an inversion of the curve from 

2-years on out. (The yield on the long-bond is currently only 

up by about 1/2% from the lows of last year, despite the roughly 

250 basis point rise in the funds rate.) 
It is #ossible to cite several technical factors which have 

helped to stabilize the long-end. One is the shift out of longer 

corporate paper due to heightened fears of event risk. Another 

is the alteration in investment policy on the part of some 

pension managers to more closely match the durations of their 

assets and liabilities. But perhaps more fundamentally there is 

a sense that real interest rates are fairly high around recent 

levels and that the risks of them increasing further do not seem 

very great. 

Looking ahead, there is a broad consensus that the economy 

will grow at a lower rate in 1989 than in 1988. As noted above, 

the key to this deceleration is likely to be the sharply reduced 

stimulus from exports. And while consumption might continue 

fairly strong for a few more months in response to recent 

employment growth, it is not expected to be able to make up for 

the reduced rate of export gains, given the debt-burden on the 

average household. Furthermore, survey data indicate that plant 

and equipment spending should grow by only about one-half the 

rate in 1989 that it did in 1988. And with housing levels under 

pressure to retrench, it is hard to find any sector that looks 

exceptionally strong. But even if real growth does slow to 2%- 

to-2 1/2% this year, low unemployment and high capacity 

utilization should lead to some further acceleration in the 

inflation rate. And at least at the moment, it is still far from 

clear what progress will be made on the federal deficit. It is 

against that background that we have produced our recommendations 

for the refunding. 

The Committee recommends that the following securities be 

sold at yield auctions to refund $15.1 billion maturing 

securities and raise $14.9 billion of new cash: 

-- $9 1/2 billion 3-year notes due 2/15/92; 

-- $9 1/2 billion 10-year notes due 2/15/99; and 

-- $11 billion 30-year bonds due 2/15/2019. 

After a lengthy discussion, the Committee voted for the 

above plan by 15-to-3 with 2 abstentions. Our discussions 

focused importantly on the size of the bond. All of the 

Committee felt that a significant increase in the long bond 

offering was warranted due to the strong retail demand in that 

area of the market. It was noted that there is an especially 

strong demand for longer term STRIPS from foreigners, individual 

savers and pension funds and that this demand is likely to 

cont inue . 
In arrfving at the $11 billion number we noted that a $2 

billion increase from the previous auction is not unprecedented, 

(it had been done before in 1986) and it was natural to favor 

the 30-year bond over the 10-year because the yield curve is 

inverted. Therefore it is cheaper for the Treasury to borrow in 

the long end. The minority felt that $1/4-to-$1/2 billion less 

of bonds might be more in keeping with tradition and perhaps the 

Treasury. 

For the remainder of the quarter the Committee recommends: 

-- Sell $9.5 billion 2-year notes at 2 remaining 

auctions paying down $2.2 billion. 

-- Sell $7.5 billion 5-year notes raising all new 

cash. 

-- Sell $7.5 billion 4-year notes raising $1.5 

billion. 

-- Sell $9.25 billion 52-week bills at 2 remaining 

auctions paying down $.6 billion. 

-- Sell $15.1 billion at each of the remaining 3- and 

6-month Treasury bill auctions raising $3.8 billion 

new cash. 

Summary of new cash needed for the Quarter 

Refunding 

3- and 6-month bills 

52-week bills 

2-year notes 

4-year notes 

5-year notes 

Total 

Already raised 

Estimated Foreign Add-ons 

Net Market Borrowing 

$14.9 billion 

3.8 

( -6) 

( 2.2) 

1.5 

7.5 

6.0 

$36.7 billion 

The Committee recommends a cash balance of $10 billion or 

3/31/89. 

For the second quarter, the Committee recommends continuing 

the coupon offerings at current levels that is: 

7-year notes at $7.0 billion 

2-year notes at $9.25 billion 

5-year notes at $7.5 billion 

4-year notes at $7.25 billion 
The refunding is projected at $29 billion one-year bills 

held at $9.25 billion and weekly bills phased down to the $14.4 

billion level. The cash balance at June 30, 1989 would be $20 

billion.' 

Mr. Secretary this Committee has traditionally held special 

meetings to consider longer term financing strategies for the 

Treasury. In view of the questions raised by the market demand 

for STRIPS and long-term securities such a meeting may well be 

in order. If you so desire, we would be pleased to do so in 

conjunction with the PSA's Spring Meeting at the Greenbrier in 

late April. This concludes our report and we welcome questions 

and discussion. 

Donald B. Riefler 

Chairman 
REPORT TO THE SECRETARY OF THE TREASURY 

FROM THE U.S. GOVERNMENT AND FEDERAL 

AGENCIES SECURITIES COMMITTEE OF THE 

PUBLIC SECURITIES ASSOCIATION 

May 2, 1989 

Dear Mr. Secretary: 

In the period since our last meeting, inflation -- 

especially at the producer level -- has accelerated even more 

than market pessimists had been expecting at the start of this 

year. Only in recent weeks have the resulting inflationary 

concerns been offset by a growing conviction that the longawaited economic slowdown is finally occurring. 

The surge in oil prices has obviously been a major 

contributor to the pickup in inflation, but it is not the only 

one. Prices of raw industrial materials in general have been 

quite strong in the past few months. Moreover, there has been 

increasing speculation that wages could begin to drive inflation 

later this year rather than merely respond to it. So far, 

however, there has been no real evidence that this has started to 

happen, despite the new lows registered by the unemployment rate. 

Indeed, the March CPI increase of 0.5% suggested that the 

acceleration in inflation has been largely contained within the 

food and energy sectors. 

At the same time, the economic data for February and March 

have shown widespread evidence of slowing in real economic growth 

from the strong January reports. The significance of the slowing 

in employment is still subject to debate, given the accompanying 

drop in the unemployment rate in the most recent figures. But 

the pattern in retail sales (particularly autos), durable goods 

orders, housing starts, and industrial production has clearly 

been one of deceleration. As a result, the Federal Reserve seems 

content for now to maintain the federal funds rate at around 

9 7/8% and to leave the discount rate at 7%. This attitude on 

the part of the Fed is presumably reinforced by the dollar's 

continued firmness in the face of both concerted central bank 

intervention and the recent increase in official German interest 

rates. 

In response to all of these developments, the yield curve in 

the Treasury market has become even more inverted than it was 

when we last met (although the inversion is currently less 

extreme that it was just a few weeks ago). Since January 31, 

3-month bills have gone from 8.37% to 8.55%; 2-year notes, from 

9.11% to 9.20%; and long-term bonds, from 8.84% to 8.97%. At no 

time during this period did long-term bond yields reach their 

peaks of last August despite the sharp jump in inflation. 
Expectations for real growth during the rest of 1989 remain 

essentially as they were in January, i.e., around 2% to 2.5%. 

However, recent trends indicate that exports may run a bit 

stronger than expected while there are clearly downside risks in 

the construction area. As for inflation, the latest rise in oil 

prices effectively guarantees that it will be higher than 

projected, at least for the next few months. But with the oil 

market still volatile and supply disruptions in both the North 

Sea and Alaska presumably temporary, consumer price inflation 

could still be in the 5% to 6% range in the latter part of this 

year. 

The big uncertainty regarding supply in the Treasury market 

for the remainder of this year relates to the funding of the 

thrift industry rescue package currently working its way through 

Congress. It is against this background that we have produced 

our recommendations for the May refunding. 

The Committee recommends a refunding similar in composition 

to the February borrowing. This is importantly appropriate due 

to the uncertainties surrounding the REFCORP financing. The 

Treasury might give the wrong signal if the composition were 

changed. Nevertheless, we would reiterate that the market 

continues to have a better appetite for 30-year bonds than 

shorter term securities due to a continuation of stripping 

activity that is concentrated in long term issues. 

The Committee recommends that the following securities be 

sold at auction to refund $17.3 billion maturing securities and 

raise $11.5 billion of new cash: 

-- $9.75 billion 3-year notes due 5/15/92; 

-- $9.5 billion 10-year notes due 5/15/99: and 

-- $9.5 billion 29 3/4-year bonds due 2/15/2019 

The reopening of the 8 7/8 due 2/15/2019 is appropriate 

because it would help liquidity by raising the size of the issue. 

Furthermore, its proximity to par at current market prices would 

make a reopening attractive to investors. 

For the remainder of the quarter, the Committee recommends: 

-- Sell $9.25 billion 2-year notes at each of 2 remaining 

auctions, paying down $2.4 billion. 

-- Sell $7.75 billion 5-year notes, raising all new cash. 

-- Sell $7.5 billion 4-year notes, raising $.6 billion. 
- - Sell $9 billion of 52-week bills at each of 2 rema 

auctions raising $.4 billion new cash. 

ining 

- - Sell $13.0 billion at each of the remaining 3- and 

6-month bill auctions paying down $14.7 billion. 

Summary of New Cash Needed for Quarter 

Refunding 

3- and 6-month bills 

52-week bills 

2-year notes 

4-year notes 

5-year notes 

Total 

Already paid down 

Estimated Foreiqn Add-ons 

Net Market -Borrowing 

$11.5 billion 

(14.7) 

.4 

(2 4) 

.6 

7.7 

3.3 

(3.3) 

- 6.0 

$6.0 

The Committee recommends a cash balance of $34 billion on 

6/30/89. 

For the July/September quarter, the Committee recommends a 

continuation of coupon offerings at the same level as are 

contemplated in the April/June quarter. Regular weekly bills 

would be increased back to the $14 billion level, as needed. The 

cash balance at 9/30/89 would be targeted at $24 billion. 

Our projections for both quarters assume that the cash need 

projections outlined in the Treasury presentation are maintained. 

If the higher revenues indicated by the most recent data prove to 

be long lasting, the Committee suggests that coupon offerings in 

coming months should be reduced by 1/4 to 1/2 billion dollars 

each and that the projected increase in Treasury bill offerings 

in the July/September quarter be delayed, in order to prevent 

cash balances from escalating to unneeded levels. 

Mr. Secretary, let's turn to the REFCORP financing 

recommendations. The Committee feels that to get the lowest cost 

financing for REFCORP bond sales, the securities should be 

designed and merchandised to appear to be similar to Treasury 

bonds. To accomplish this, the following actions are 

recommended: 

-- bonds sold at yield auctions; 

-- a regularized schedule should be planned; 

- - the Federal Reserve should be Fiscal Agent; 
bonds should be stripable on the Fed's book entry 

system; 

the Fed should include REFCORPS when purchasing 

Treasury securities for open market account or repos: 

they should be acceptable for T.T.&L.; 

Treasury bond brokers should be asked to include 

REFCORPS on "Treasury runt* quotes; 

the Treasury should make it clear that interest 

payments are guaranteed by the U.S. Treasury and the 

corpus is defeased with Treasury securities; and 

a ruling should be obtained to allow banks to 

underwrite REFCORPS. 

As to the timing, it is our view that, looking forward, 

regularization could best be achieved by scheduling four issues a 

year -- approximately midway between the quarterly financings. 

This would allow the auctions to take place in the same week as 

the 7-year notes: i.e., the first half of January, April, July, 

and October. Unfortunately, the need for $10 billion in fiscal 

1989 means that some deviation from this schedule will be 

necessary. Therefore, we propose that the first issue be 

auctioned as soon as feasible in July with another issue 

scheduled for September assuming $10 billion is required in 

fiscal 1989. Since this timing may prove unsettling to the 

market, the Treasury should seek authorization to offer bond 

anticipation notes as a temporary measure in order to allow bond 

auctions to be regularized into their quarterly slots as soon as 

possible. 

The Committee considered the optimal size of the issues and 

recommends $5 billion per auction. While there is some concern 

that these auctions will be too large to achieve the narrowest 

possible spread over Treasuries for a new security, the size is 

pretty well mandated by the projected need for $50 billion over a 

2 1/4 year period and by the view that four auctions a year will 

fit neatly into the Treasury's financing schedule. 

We also feel that once the REFCORP name is established in 

the market, the size of these offerings could probably be raised 

to $6 or $7 billion, as needed. The Committee agrees that the 

maturity of the issues should be 30 years. They should be 

noncallable due to clear cost considerations but the Treasury 

should seek authority to repurchase the bonds in the market since 

under certain circumstances, it might be appropriate to retire 

the issues before maturity. 
We believe that the Treasury should do a "road show" in 

order to publicize and explain the new securities to potential 

buyers overseas. The majority feels that this is a good idea in 

order to gain a positive acceptance of these new securities. A 

minority is either unsure about this or feels that it might be 

counter-productive and detract from the idea that REFCORPS are 

just another form of Treasury obligation. 

Finally, the Committee suggests that the Treasury announce 

their intentions as soon as possible -- especially in light of 

the uncertainty about how the securities should be defeased. We 

believe that the Treasury should issue zero coupon securities 

directly to REFCORP in order to defease the principal payment. 

However, if market strips are to be used, it is important to 

permit the use of only Treasury securities with no substitutions 

allowed. 

The Committee also considered but rejected the idea of a 

syndicate underwriting. We concluded that while this might help 

to sell the security, it would make them look more like Federal 

Agency securities and less like Treasury issues. 

Mr. Secretary, this concludes our report and we welcome 

questions and discussion. 

Chairman 
REPORT TO THE SECRETARY OF THE TREASURY 

FROM THE U.S. GOVERNMENT AND FEDERAL 

AGENCIES SECURITIES COMMITTEE OF THE 

PUBLIC SECURITIES ASSOCIATION 

August 2, 1989 

Dear Mr. Secretary 

When we met in early May, the evidence was beginning to 

accumulate that the U.S. economy was truly beginning to slow 

down. Coupled with the surge in the dollar that was then in 

progress, the signs of economic weakness allowed the markets to 

rally as they looked beyond the still-high inflation readings 

that persisted through the spring. And by the time that the 

dollar turned around in June, the economic data had convinced the 

Federal Reserve that a modest easing move was in order, thus 

ratifying the market-led decline in interest rates that had begun 

in March. More recently, the shift in the terms of the economic 

debate has become even more pronounced, as the latest inflation 

numbers have supported the view that pressures on prices may have 

peaked, while Chairman Greenspan spoke openly of the need to 

avoid a recession. 

Since inflation concerns had so dominated the thinking of 

both the markets and the Fed earlier this year, the changing 

perceptions in this area are of particular significance. It now 

seems increasingly clear that goods prices are unlikely to add to 

inflation in the second half of the year: the trend in the 

intermediate-goods component of the PPI is distinctly down, the 

CRB index has continued to slide -- even oil prices have begun to 

decline -- and the dollar has at least temporary stabilized. 

That leaves labor costs as the major potential source of 

inflationary pressures. Yet the second quarter figures for 

employment costs still show no signs of any acceleration. And 

with labor markets likely to become at least somewhat less tight, 

the risks of a flare-up in wages appear considerably smaller 

than it did just a few months ago. 

As for the economic data, the most recent figures have 

ironically been somewhat mixed just as discussions have been 

shifting from whether there is a slowdown in progress to how 

great are the dangers of a recession. All of the sectors that 

have generated the most concern -- autos, housing, and capital 

goods -- have in fact posted modest gains or at least shown some 

signs of stabilizing. Auto sales have responded positively to 

incentives in the first two 10-day periods of July; housing 

starts rebounded in June while sales of existing single-family 

homes rose as well; and durable goods orders eked out a small 

increase in June. That having been said, the outlook for the 

remainder of 1989 is still for growth of only around 2 percent 

with the risks still on the downside. With tax receipts coming 

in higher than expected, fiscal policy is, if anything, producing 
more of a drag than originally anticipated. That leaves monetary 

policy as the only likely source of any additional policy 

stimulus for the economy between now and year-end. Whether 

growth stays around 2 percent or slips lower will probably turn 

on the balance between consumer spending, which has been on a 

continuing downtrend, and exports, which have held up so far this 

year better than had generally been expected. 

The combination of a peaking in inflation and belowpotential, real growth is likely to elicit further Fed ease over 

the coming months. In any event, that is what the markets are 

anticipating, as is clear from the current levels of rates. 

Although federal funds have slipped below 9.00 percent only in 

the past week, 3-month Treasury bills are currently trading at 

around 7.75 percent down from around 8.55 percent at the time of 

our last meeting. The yield on 2-year notes is currently 

7.53 percent (vs. about 9.30 percent at the start of May), and 

that on long-term bonds, 7.83 percent (vs. 8.95 percent). 

Additional Fed ease would in all likelihood lead to some further 

steepening of the yield curve, especially since the market impact 

of the thrift-industry legislation is likely to lead to an 

increase in the supply of longer term securities. It is against 

this background that we have produced our recommendations for the 

August refunding. 

Assuming the financing of the RTC is off-budget, the 

Committee recommends that the following securities be sold at 

yield auctions to refund $15.9 billion maturing securities and 

raise $13.5 billion of new cash. 

-- $10 billion 3-year notes due 8/15/92; 

-- $9.75 billion 10-year notes due 8/15/99; and 

-- $9.75 billion 30-year bonds due 8/15/2019 

For the remainder of the quarter the Committee recommends: 

-- Sell $9.75 billion 2-year notes paying down 5.85 

billion. 

-- Sell $8.25 billion 5-year notes raising all new cash. 

-- Sell $9.75 billion and then $10 billion 52-week bills 

at two remaining auctions raising $1.3 billion new 

cash. 

-- Sell $14.4 billion at each of the next four and then 

$14.6 billion at the following three weekly bill 

auctions raising $2.7 billion new cash. 
Summary of Cash Needs for Quarter 

Refunding $13.5 billion 

3- and 6-month bills 2.7 

52-week bills 1.3 

2-year notes (-9) 

5-year notes 8.3 

Total $24.9 billion 

Already paid down 6.0 

$18.9 

Estimated Foreign Add-ons 3.1 

Net Market Borrowing $22.0 billion 

The Committee recommends a cash balance of $25 billion on 

September 30. 

The cash balance of $25 billion assumes a $5 billion 

additional cash need due to RTC borrowing from the Treasury. 

For the October/December quarter, the Committee recommends 

raising the weekly bills to $15 billion each, the 1-year bills to 

$10 billion each, the regular coupon issues by $1/4 to $1/2 

billion each and a long dated cash management bill due around the 

April tax date if needed. The appropriate cash balance for 

December 31 is $20 billion. 

If the thrift legislation provides for on-budget financing 

and RTC needs $15 billion this quarter, it will be necessary to 

raise only another $10 billion over the earlier recommendation. 

This is because that proposal assumed a $5 billion RTC borrowing 

from the Treasury in the July/September quarter. The additional 

$10 billion should be raised by increasing weekly bills to $15 

billion for the rest of the quarter; raising another $1 billion 

from the two remaining 52-week bill auctions; borrow an 

additional $1.25 billion in the 2- and 5-year note auctions; 

sell $4.35 billion long dated cash management bills. 

Summary of Additional Cash Raised Over Previous Proposal 

Amount Auctioned 

$15 billion weekly bills $3.4 billion 

$10.25 and $10.75 billion 1-year - bills 1.0 

$10.5 billion 2-year note .75 

$8.75 billion 5-year note .5 

$4.35 billion Cash Management Bill $ 4.35 

Total $10.0 billion 

Mr. Secretary, the Committee felt that the uncertainties 

about the method and the timing of financing the thrift 

legislation create an awkward situation in the market. We spent 

a considerable amount of time discussing the issue and we have 

some suggestions. First, assuming off-budget financing: at our 
May meeting, we recommended that the initial REFCORP financing be 

limited to $5 billion in order to allow the market time to adjust 

to the new name. We still feel those concerns and yet are faced 

with the implicit need for $15 billion instead of $10 billion to 

be raised before the end of the quarter. In order to keep the 

initial financing at $5 billion, we suggest that REFCORP use its 

$5 billion line from the Treasury as indicated earlier and in 

addition explore the possibility of the issuance of $5 billion 

Bond Anticipation Notes. To allow for a more timely integration 

of REFCORP securities into the regular Treasury financing 

schedule, the BAN maturities should be phased into a regularized 

schedule of REFCORP bond financing, in fiscal year 1990 allowing 

the size of the auctions to increase as the market becomes more 

familiar with the REFCORP name. 

Secondly, assuming on-budget financing, our recommendation 

is to rely mainly on the bill market for raising the additional 

funds this quarter. In subsequent quarters, we suggest that more 

of this financing be phased into the long-term coupon market 

including the quarterly refundings by raising the size of 

scheduled auctions. The reason for relying on the bill market 

initially is because we believe that in order to reduce 

uncertainties, the composition of the current refunding should 

not be dependent on the off/on-budget decision. After the 

refunding there is no good opportunity to raise significant 

additional amounts of new cash in the coupon market this quarter 

without creating a new coupon cycle. 

Finally, we believe that in the press conference, the 

Treasury should clarify to the extent possible the off/on-budget 

alternatives; announce the fact that projected RTC needs have 

grown from $10 billion to $15 billion for this quarter; and 

finally, discuss the market implications of the pending 

legislation regarding the debt ceiling. 

Mr. Secretary, that concludes our report and we welcome 

questions and discussion. 

Donald B. Riefl 

Chairman 
REPORT TO THE SECRETARY OF THE TREASURY 

FROM THE U.S. GOVERNMENT AND FEDERAL 

AGENCIES SECURITIES ASSOCIATION 

November 1, 1989 

Dear Mr. Secretary: 

In some respects, we have come full circle since we met at 

the start of August. The day of our meeting, the Treasury market 

was experiencing a strong rally fueled by both a growing 

conviction that the U.S. economy was weakening rapidly and by the 

related expectation that further overt ease on the part of the 

Federal Reserve was imminent. As it turned out, however, the 

highs registered by government bond prices that day were not to 

be approached again until October 13, when the stock market 

suffered its worst one-day slide since the 1987 crash. In 

between, yields on long-term government bonds backed up by about 

50 basis points as new economic data indicated real GNP growth in 

the third quarter was much stronger than it had earlier appeared 

to be and that there was therefore little incentive for any 

prompt easing move from the Federal Reserve. More recently, the 

numbers have once again begun to turn soft and it has become 

clear that monetary policy has indeed been eased at least 

modestly. Thus, the federal funds rate, which had been trading 

just marginally below 9.00 percent, when we met in August, has 

recently been hovering around 8.75 percent or slightly lower. 

Three-month Treasury bills were trading at 7.63 percent then vs. 

7.78 percent now; 2-year notes were 7.46 percent vs. 7.85 

percent; and 30-year bonds were 7.83 percent at the close on 

August 1, although they had touched 7.75 percent during the day; 

they are currently around 7.90 percent. 

The dollar is also relatively little changed since our last 

meeting, when it was trading at 136.7 against the yen and at 

1.865 against the deutschemark, having strengthened somewhat 

against the yen and weakened a bit against the mark. Along the 

way, of course, it had surged against both those and other 

currencies, only to be brought back down by some of the most 

intensive central bank intervention ever seen. Its relative 

firmness is all the more impressive given the significant 

increases in money market rates in both Germany and the U.K. 

earlier this month, as well as the sharp deterioration in the 

latest U.S. trade statistics. 

Indeed, it is the possibility that the trade adjustment 

process may have at least temporarily run its course that raises 

the greatest concerns over the economic outlook for the remainder 

of this year and for early 1990. If the net export sector is no 

longer going to provide much stimulus to the economy, then growth 

will have to come from the domestic sectors. Yet none of these 

look particularly robust. Recent figures on durable goods orders 

suggest that the business investment boom of the last two years 
may be over, while residential investment continues to be 

extremely weak. And although consumer spending rebounded 

substantially last quarter, much of the strength appears 

attributable to factors such as auto incentives, which are not 

present so far this quarter. (The very near-term outlook is also 

being affected negatively by the impact of hurricane Hugo and the 

San Francisco earthquake. However, the rebuilding from these 

disasters could produce some offsetting strength early next 

year.) In sum, real growth is likely to continue on the 

decelerating trend on which it has been for well over a year, 

implying quarterly increases in real GNP of only around a 1.5 

percent annual rate beginning with the current quarter. If those 

projections are borne out, then inflation is likely to stabilize 

around the 4.0 percent to 5.0 percent range as measured by the 

CPI, particularly if oil prices retreat somewhat over the next 

few months in the face of slower consumption growth and strong 

OPEC production, 

The risks to the above forecast seem to be on the downside 

as far as real growth is concerned. Last month's employment 

report raises the possibility that the manufacturing sector is 

weakening more rapidly than anticipated. And there is the danger 

that the latest volatility in the stock market will have a 

negative effect on consumer confidence, which could also be hurt 

by the ongoing softness in many real estate markets. Finally, 

the disruptions in the high-yield bond market -- although they 

are unlikely to have any direct effect on economic activity -- 

could become a factor were they to spread in an environment in 

which lower-than-expected real growth began to seriously 

undermine the cash-flow assumptions behind more of these 

securities. It is against this background that we have produced 

our recommendations for the November refunding. 

The Committee recommends that the following securities be 

sold at auctions to refund $20 billion maturing securities and 

raise $10 billion of new cash. 

-- $10 billion 3-year notes due 11/15/92; 

-- $10 billion 9 3/4-year notes due 8/15/99; 

-- $10 billion 29 3/4-year bonds due 8/15/2019. 

We felt strongly that the 9 3/4- and 29 3/4-year issues 

should be reopened for the following reasons: 

(1) The current issues are relatively small in size, in 

short supply, and therefore priced high in the market. 

(2) Larger issues that would be created by reopening are 

needed to allow hedging of large mortgage, municipal, corporate, 

and quasi government issues. 
(3) In view of the uncertainty as to offering dates, whenissued trading, etc., reopenings would allow the market to deal 

more easily with potential postponements of Treasury auctions. 

For the remainder of the quarter the Committee recommends: 

-- Sell $10 billion 2-year notes raising $.4 billion new 

cash. 

- - Sell $7.75 billion 5-year notes raising all new cash. 

-- Sell $9.75 billion 52-week bills at two remaining 

auctions raising $1.3 billion new cash. 

-- Sell $9 billion cash management bills for payment 

November 30 due April 19, 1990, raising all new cash. 

-- Sell $15.6 billion at each remaining 3- and 6-month 

bill auction raising $13.9 billion new cash. 

Summary of New Cash for Quarter 

Refunding 

3- & 6-month bills 

52-week bills 

April 19 Cash Management Bill 

2-year notes 

5-year notes 

Total 

Already raised 

Estimated Foreign Add-ons 

Net Market Borrowing 

$10.0 billion 

13.9 

1.3 

9.0 

.4 

7.8 

$42.4 

13.0 

2.1 

$57.5 billion 

In addition, a $10 billion cash management bill maturing 

December 21, 1989, auctioned for payment November 15 is 

recommended in order to bridge cash balance low points in midNovember and early December. 

For the January/March quarter, the Committee suggests 

maintaining auctions for coupon securities, 1-year bills and the 

refunding at the same level as proposed for the October/December 

quarter. According to our calculations, regular 3- and 6-month 

bill auctions could be phased down to $15 billion as the quarter 

progresses. 

The Committee recommends cash balances of $30 billion and 

$15 billion for December 31 and March 31, respectively. We 

raised the quarter-end cash balance targets in order to maintain 

a cushion in case the RTC chooses to use its $5 billion line 

from the Treasury. 
The Committee recommends that the next REFCORP issue be sold 

in early January. We feel that it would be best to reopen the 

existing 30-year bond to create a larger, more liquid issue. The 

size should be $5-$7 billion. If it is not feasible to reopen 

because of a large move in price, we believe a 40-year issue 

would be appropriate. The consensus was that market demand would 

cause such an issue to be auctioned at a lower yield than that of 

the existing 30-year at the time of the auction. 

The Committee examined several scenarios that might occur 

due to the debt ceiling problem: 

Scenario No. 1 

Congress raises the debt ceiling immediately. 

Treasury announces financing plans as usual today, whenissued trading begins, coupon auctions are held on November 7, 

November 8, and November 9, with a cash management bill auctioned 

November 9. 

This would minimize market disruption and be least expensive 

for the Treasury. 

Scenario No. 2 

Congress raises debt ceiling Friday, November 3. 

Treasury announces tentative financing plan today (no WI 

trading) confirms schedule outline above Monday morning, 

November 6 when-issued trading can begin. 

Treasury would lose two days of when-issued trading but 

disruption would be minimal. 

Scenario No. 3 

Congress raises debt ceiling Wednesday, November 8 dictates 

two possible courses: 

Solution A. 

Wednesday, November 1 - Treasury announces tentative 

financing plan (no when-issued 

trading) . 

Thursday, November 9 - Treasury announces new schedule (WI 

trading begins) schedule follows. 

Thursday, November 9 - Sell $15.6 billion 3- and 6-month 

Treasury bills for same day 

settlement. 
5 

Friday, November 10 - Sell $10 billion 3-year notes plus 

$10 billion December 21 cash 

management bills. 

Monday, November 13 - Sell $10 billion 10-year notes plus 

$15.6 bill 3- and 6-month bills. 

Tuesday, November 14 - Sell $10 billion 30-year bonds. 

Solution A severely restricts when-issued trading but 

maintains November 15 as a payment date so that current holders 

of maturing issues may roll over into new coupon securities. 

Solution B. 

Wednesday, November 1 - 

Thursday, November 9 - 

Thursday, November 9 - 

Friday, November 10 - 

Monday, November 13 - 

Tuesday, November 14 - 

Wednesday, November 15 - 

Thursday, November 16 - 

Treasury announces tentative plan. 

No WI trading. 

Treasury announces new schedule (WI 

trading begins). 

Sell $15.6 billion 3- and 6-month 

Treasury bills for same day 

delivery. 

Sell $30 billion cash management 

bills payable November 15 due 

November 22. 

Sell $15.6 billion 3- and 6-month 

Treasury Bills. 

Sell $10 billion 3-year notes plus 

$9 billion December 21 cash 

management bills. 

Sell $10 billion 10-year notes. 

Sell $10 billion 30-year bonds plus 

$9.75 billion 52-week bills. 

The last three coupon issues would all be payable on 

November 22 when $30 billion cash management bills mature. 

Solution B would allow for a longer when-issued period but 

would not enable holders of November 15 maturities to roll over 

into new coupon issues. 

As you can see, both solutions require an unprecedented 

amount of financing for such a short period of time and surely 

will have a negative impact on the Treasury securities market. 
The Committee voted 14-4 in favor of Solution A, feeling it 

would be preferable to condense the when-issued trading period 

but enable investors to roll over November 15 maturities rather 

than vice versa which would be contemplated in Solution B. 

Mr. Secretary, this concludes our recommendations but I want 

to express our strong view that the various disruptions 

contemplated in this report will increase the cost of financing 

to the Treasury. The longer the disruptions the greater the 

cost. We believe that the disruptions that have already occurred 

have been costly. There is no way of being precise about these 

costs but 20 basis points in yield on a regular 3- and 6-month 

bill auction is equivalent to $12 million. We have calculated 

that the addition of just five basis points to the cost of coupon 

financing during the month of November would be $250 million or 

about $50 million per basis point. This fails to take into 

account the effect on Treasury bills or associated federal agency 

financing costs which surely would also be affected. We urge you 

to express this view to Congress. We stand ready to answer your 

questions and discuss our recommendations. 

Donald B. ~iefler' 

Chairman