REPORT TO THE SECRETARY OF THE TREASURY

FROM THE

TREASURY ADVISORY COMMITTEE

OF THE

BOND MARKET ASSOCIATION

August 2, 2000 

Dear Mr. Secretary: 

Since the Committee’s last meeting on May 3, the US economy has remained quite strong, 

with the Commerce Department recently reporting that GDP posted a 5.2% annualized growth 

rate in the second quarter. Over the past year, the GDP has expanded at a 6% pace. While 

there have been some signs of moderation in consumer demand, business capital spending 

remains extremely strong, and the global economy appears to be on the upswing, which could 

eventually provide a boost to US exports. 

On the inflation front, higher oil prices have helped push up CPI and PPI in recent months. 

However, quotes for energy-related items appear to have peaked at this point, so headline 

readings should be somewhat better behaved going forward. Meanwhile, core inflation 

continues to show a very modest gradual acceleration. The CPI excluding food, energy and 

tobacco is running at a 2.2% pace – about 0.5 percentage points above the trough that was hit 

in the second half of 1999. Finally, labor markets remain very tight, and employment costs 

appear to be trending a bit higher, but productivity is expanding at a very rapid rate, which is 

helping to keep a lid on overall unit labor costs. 

Since the FOMC announced a 50 basis point rate hike on May 16 – two weeks after our last 

meeting – Treasury yields have trended lower. This move appeared to largely reflect an 

expectation that the economy was cooling and future Fed tightening would be limited. The 

federal funds futures market now appears to be pricing in about a 30% chance of a 25bp rate 

hike at the August 22 FOMC meeting. The rally in the Treasury market during the past few 

months has been evident across the spectrum of maturities. The yield on 2-year Treasury 

notes has dipped about 60 bp since the May rate hike. Yields on longer-term maturities have 

declined almost as much over the same interval. Announcements of upward revisions to longrun official budget surplus forecasts in recent weeks seemed to reinforce the market’s focus 

on dwindling Treasury supply. 

Although there has continued to be high levels of credit market volatility and spread levels are 

still significantly wider than at the start of the year, spread levels for most investment grade 

fixed income markets are currently close to the levels that prevailed at the time of our last 

meeting. 
-2-

Against this backdrop, the Committee considered the composition of a financing to refund 

$25.1 billion of privately held notes maturing on August 15, and to pay down approximately 

$100 million of cash. 

The Committee unanimously recommends a total financing of $25 billion consisting of the 

following offerings: 

• $10 billion of the 6-3/4% note due May 15, 2005, 

• $10 billion of 10-year notes due August 15, 2010, and 

• $5 billion of the 6-1/4% bond due February 15, 2030. 

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

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

manner: 

• A 2-year note of $10.0 billion, 

• A 1-year bill of $10.0 billion, 

• Weekly issuance of 3- and 6-month bills through the remainder of the quarter, 

• Two cash management bills totaling $45 billion to mature during the quarter, and 

• Buybacks totaling $3.5 billion. 

For the October-December quarter, the Treasury estimates a net market paydown of $10 

billion with a cash balance target of $30 billion on December 31. To accomplish this 

requirement, the Committee preliminarily recommends the financing schedule in the attached 

table. 

At the Treasury’s request, the Committee reviewed the current status of the buyback program, 

updating its views based on the experience of the ten operations that have already been 

executed. The operations to date have run smoothly, with minimal market disruption. The 

announcement in May by the Treasury that buyback operations would take place on the third 

and fourth Thursdays of the month over the next three months helped regularize the 

operations and reduce market uncertainty. The Committee reiterated its support for the 

announcement of a quarterly schedule and suggested that a target total for the quarter also be 

included in the announcement. The one-day notice period for each specific operation 

accommodates the need to inform potential foreign participants of the specifics of each 

operation. The Committee continues to believe that for any given operation, a two to five year 

range of maturities is preferable, with the specific size of the range depending on the size of 

the operation. Although cover ratios for the operations have been at comfortable levels so far, 

the Committee expressed the view that at some point the willingness to offer securities to the 

Treasury in the 15 to 25 year maturity range will begin to fall off, and ultimately be 

exhausted. The Committee suggested that the Treasury continue to monitor investor 

participation closely, and be willing to consider buying callable securities and issues outside 

the 15 to 25 year maturity range at an appropriate time in the future. 
-3-

Since the Committee last convened, the Administration’s Midsession Review and CBO’s 

Budget Update were released showing significantly higher surpluses and greater debt 

reduction than was projected earlier this year. The Committee considered whether it would 

recommend any further changes to the Treasury’s financing plans as a result of these new 

projections. 

While acknowledging that increasing surplus projections had raised anxiety over the future of 

long-term debt offerings generally, and the 30-year bond offering specifically, the Committee 

sees no immediate need to make further changes to the Treasury’s financing schedule. It 

would be helpful to all market participants for Treasury to clarify its view on the future role of 

long-term government debt. However, this clarification needs to be made within the context 

of potential fiscal policy changes and an assessment of the value of maintaining a liquid 

government yield curve in a period of sustained surpluses. 

Finally, the Treasury sought the Committee’s views on the desirability of allowing for the 

stripping of outstanding 5-year notes issued prior to September 1997. In September of 1997, 

the Treasury announced that all new marketable fixed rate coupons would be eligible for 

stripping. Securities issued prior to 1997 that were not already eligible for stripping were not 

made eligible. At present, this specifically means that 5-year notes issued prior to 1997 are 

not eligible for stripping. The Committee suggested that making these issues eligible for 

stripping would enhance market liquidity in the shorter dated zero coupon sector. The 

Committee went on to suggest that in an environment in which the Treasury is buying back 

longer term debt, any effort to improve zero coupon liquidity would enhance market 

participants’ efforts to reconstitute longer dated issues and increase the potential pool of debt 

that could be offered in the buyback program. In that context, Committee members 

recommended that the Treasury consider making coupon and principal strips fungible, 

recognizing that there may be technical debt accounting and tax issues that have to be 

resolved before such a change could be executed. 

Respectfully submitted, 

Kenneth M. deRegt