REPORT TO THE SECRETARY OF THE TREASURY 

FROM THE 

TREASURY ADVISORY COMMITTEE 

OF THE 

BOND MARKET ASSOCIATION 

August 3,1999 

Dear Mr. Secretary: 

Since the Committee’s last meeting on May 4, 1999, economic activity in the U.S. has continued 

to expand at a relatively brisk pace. Indeed, even though the Commerce Department recently 

reported that GDP growth moderated in the second quarter, much of the downshift was 

attributable to a reduced pace of inventory growth and a surprising decline in government 

spending. There are few signs of slowing in the underlying pace of growth in the economy. 

Strength in consumer demand and ongoing momentum in business capital spending continue to 

drive the economy, with some offset from the trade sector. 

Shortly after our last meeting, the Federal Reserve announced a shift to a tightening policy bias, 

and subsequently the Fed hiked the target federal hnds rate by 25 bp to 5%. Treasury market 

yields have moved sharply higher since early May, reflecting the current economic environment 

and the outlook for monetary policy, as the markets anticipate additional tightening moves by the 

Fed over the next few months. 

In this environment, credit market spreads have widened significantly, and secondary market 

liquidity conditions have deteriorated as corporate and agency debt issuance have increased 

dramatically, driven by extraordinary merger activity, and at least in part, by a desire to complete 

fbnding activities in advance of any potential disruptions surrounding the millennium change. 

Within this context, the Committee considered the composition of a financing to rehnd 

approximately $29.0 billion of privately held notes maturing on August 15, and to raise 

approximately $8.0 billion. The Committee unanimously recommends a total financing size of 

$37.0 billion consisting of the following offerings: 

$15.0 billion 5-year notes due August 15,2004 

$12.0 billion 10-year notes due August 15,2009 

$10.0 billion 30-year bonds due August 15,2029 

The Committee did not feel that reopenings of current 5-year, 10-year, or 30-year securities were 

warranted by current market conditions, given current original issue discount (OD) restrictions. 

In regard to the composition of Treasury market financing for the remainder of the current 

quarter, the Committee recommends that the Treasury meet its borrowing requirement in the 

following manner: 
-2- 

Two 2-year notes of $15.0 billion each, 

0 Two 1-year bills of $10.0 billion each, 

0 Weekly issuance of $16.0 billion of 3- and 6-month bills through the remainder of the 

quarter, and 

Two cash management bills totaling $40.0 billion to mature within the quarter. 

At the Treasury’s request, the Committee addressed the question of the optimal financing plan in 

the fourth quarter, given the Treasury’s desire to maintain a higher than normal cash balance 

related to Year 2000 planning. The Committee recommends that the Treasury use a combination 

of an increase in the weekly bill offerings and cash management bills to finance the higher yearend cash balance. The Committee noted the likelihood of increased investor demand for 

Treasury bills in the fourth quarter, and felt that the Treasury could lower its borrowing costs by 

meeting some of this demand in a more predictable manner through an increase in the weekly 

bill offerings. The additional fourth quarter fbnding requirements can be met with cash 

management bills. 

At the Treasury’s request, the Committee revisited and refined spmewhat its views on potential 

changes in debt management practices and debt issuance in light of the continued improved 

fiscal situation. It has been the Committee’s view for some time that, with the exception of 

inflation indexed securities, individual issues are now near a minimum size that would allow 

sufficient liquidity to maintain benchmark status. In fact, some members expressed the belief 

that the benchmark status of Treasuries is already threatened by the increasing size of issuance 

by agencies and corporations. Most members continue to believe that over the long run the 

concentration of Treasury offerings in large, benchmark issues would minimize the cost of debt 

issuance for the Treasury by enhancing market liquidity and the efficiency of the debt markets. 

Changes in debt management practices continue to be the Committee’s first preference as a 

means of addressing the current fiscal situation, and for enhancing the liquidity and benchmark 

status of Treasury issues. Primary among the changes currently recommended by the Committee 

is the institution of a debt buyback program. A buyback program is appropriate at this time with 

current Treasury new issue sizes close to their perceived minimum level. More importantly, a 

buyback program can be used to enhance the benchmark status of new Treasury offerings by 

allowing for the possibility of increased issuance. Also, debt buybacks can be used as a shortterm cost saving measure when significant price anomalies develop. 

The Committee refined its views on another potential change to debt management practices. 

Previously, the Committee recommended changes to original issue discount (OID) rules that 

would give the Treasury more flexibility to reopen issues. The Committee now unanimously 

believes that the Treasury should seek a permanent change in, or waiver of the On> rules, that 

would allow for a regular schedule of reopenings for coupon offerings. 

The Committee strongly believes that it is in the long-run best interest of the Treasury to enhance 

market liquidity through an emphasis on large benchmark offerings and that this consideration 

generally will offset potential short-run cost savings from issuing new securities. The Treasury 
should still maintain the flexibility to vary from a regular schedule if circumstances, or market 

conditions, warranted such a decision. 

Specifically, the Committee would prioritize two new issues of 5-year and 10-year securities per 

year, would suggest one new 2-year security each quarter, and recommend the adoption of a 

standardized pattern of reopenings for 30-year bonds. The Treasury needs to consider in its 

planning the possibility of alternating the reopenings of 5-year and 10-year securities in the 

quarterly refbndings in order to avoid a concentration of maturities in fbture years. 

On the subject of potential additional changes to the debt issuance schedule, the Committee 

discussed possible adjustments in the frequency of 1-year bill and 2-year note offerings. 

Members unanimously agreed that the next significant change in the issuance calendar should be 

the reduction in the frequency of 1-year bill offerings, with some sentiment expressed in favor of 

the eventual elimination of the issue. As suggested in the Committee’s May report, the reduction 

in the frequency of 1-year bill offerings could be used to accommodate the improving fiscal 

situation as well as to increase the issue sizes for weekly bills and Treasury coupons. 

The Committee recognizes that the reduction or elimination of the 1-year bill would cause the 

current buyers of that instrument to seek alternative investments, but members believe that the 

market for short dated coupons has sufficient liquidity to accommodate investor needs. In 

addition, members believe that the reduction of the 1 -year bill, from the perspectives of Treasury 

monthly cash flows and market liquidity, is preferable to the alternative of reducing or 

eliminating 2-year note issues. 

In considering the potential elimination of the 1-year bill offering, some members suggested that 

the effect on other markets, such as that for adjustable rate mortgages, should be examined. 

Members generally believe that the impact would likely be limited, with most indexing now 

being based on Libor or constant maturity Treasury benchmarks. 

Finally, in addressing the potential for fiuther reduction of Treasury offerings, the Committee 

noted that in its view there remained additional scope for reductions in inflation indexed 

securities, particularly given their size relative to the traditional fixed rate issues. The 

Committee unanimously recommended a reduction from $7 billion to $5 billion for these 

offerings. 

Respectfblly submitted, 

Kenneth M. deRegt