REPORT TO THE SECRETARY OF THE TREASURY 

FROM THE U.S, GOVERNMENT AND FEDERAL 

AGENCIES SECURITIES COMMITTEE OF THE 

PUBLIC SECURITIES ASSOCIATION 

January 28, 1987 

Dear Mr. Secretary: 

Since the Committee last met in Washington in late October, 

interest rates have moved over a relatively narrow range. Following 

unusually large year-end demands for short-term bank credit, 

much of which was inspired by impending tax reform, money 

market rates have risen on balance by a quarter of a percentage 

point, Despite rising oil prices and continued weakness of 

the dollar in foreign exchange markets, long-term interest 

rates have been essentially trendless over this period, as 

investors appear to be convinced that the economy will remain 

in a moderate growth pattern. 

The most recent evidence of the economy's performance 

underscores the view that although an imminent recession is 

highly unlikely, fully satisfactory growth remains elusive. 

Preliminary fourth-quarter real Gross National Product (GNP) 

expanded at a rate of only 1.78, capping a second straight 

year of roughly 2.5% growth. Indeed, measured on a fourthquarter to fourth-quarter basis, real GNP slowed from about 

38 in 1985 to 2-28 in the year just ended. 

This relative sluggishness and the immediate prospects 

for more of the same, reflect two key interrelated developments -- 

persistently large trade deficits that have siphoned off strong 

domestic demands to foreign producers and a slowing in income 

gains necessary to support continued spending growth. 

Despite the sharp slide in the dollar over the past two years, 

the trade deficit may experience only limited improvement in the 

coming year, That depends importantly on a shift in relative growth 

rates of domestic demand in the U,S. vis-a-vis that overseas, 

The reluctance of key trading partners to stimulate demand, 

however, contributes to uncertainty on this score. Moreover, 

relative prices of tradeable goods have not shifted perceptibly, 

because of the wil.lingness of foreign exporters to absorb currency 

losses or, as in some cases because currencies of important 

trading partners have not strengthened against the dollar, 

Finally, structural aspects of the trade deficit -- particularly 

in agricultural products and manufacturing industries, where 

competitiveness is still lagging - also constrain the chances for 

improvement in net exports. 
Although consumer spending has been maintained at a fairly 

strong pace in the past year, slowing income gains have crimped 

savings and discretionary income has actually been declining for 

several months. Despite continued gains in consumer wealth, 

aided by a rising stock market, these factors and record debt 

service requirements relative to income may constrain this largest 

segment of the economy near-term. Together with slowing investment 

in nonresidential construction now in train, and a modest move 

towards fiscal restraint, these developments signal an overall 

moderation in the pace of final demands, 

Against this background of disappointing economic momentum 

and a falling dollar, monetary policy has remained accommodative, 

holdiny short-term rates steady through a period of intense money 

demands that has revealed itself in part in heading expansion in 

the monetary aggregates. Gradually, however, bond investors find 

themselves caught in the middle between opposing concerns: The 

maintenance of accommodating monetary policy amidst a declining 

dollar and persistently high trade imbalances, has raised concerns 

about potentially rising inflation and a reluctance of foreign 

investors to readily place dollars in our markets. While such 

prospects could increase pressure on interest rates, offsetting 

concerns that failed trade improvement may lock us into sluggish 

economic growth, imply weak private credit demands and further 

interest rate declines, 

Before proceeding with the Committee" recommendations with 

respect to financing needs for this quarter, let me first earnestly 

repeat a request made at the last few meetings, Because of the 

ancertainty of both receipts and expenditures and the possibility 

that the budget deficit will continue to decline, the Committee 

deems it essential that a special meeting be called by the 

Secretary so that the Committee can consider what recommendat' ions 

it would make as to future financings. The special meeting is 

needed so that a recommendation can be made when not under the 

constraints of half a quarter" financing already done as planned 

and so that the Committee can receive technical assistance from 

professionals in their firms. It would be most difficult to 

recommend the elimination of a cycle note in the middle of a 

quarter or to recommend any other major financing change at that 

time, We remain ready, willing and able to meet at your request. 

To return to the current quarter, the Commlttee recommends 

by a vote of 19-1, that the following securltles be sold at 

auction to refund $14-6 billion of publlcly held notes due 

February 15 and rarsc $14.4 kllllon of new cash: 

$9-3/4 billion of 3-year notes due 2/15/90; 

9--3/4 billion of 9-314 year notes due 11/15/96; 

9-1/2 billion of 29-3/4 year bonds due 11/15/2016 
This recommendation incorporates the reopening of the 7-114% notes due 11/15/96 

and the 7-1/2% bonds due 11/15/2016. The vote for reopening was unanimous. 

The Committee believes that the additional liquidity provided by larger issues 

is beneficial both to dealers and investors in tlte market and to the United 

Stares Government. We have recently seen considerable buying of corporate 

securities by investors and the resulting reduction in spreads between Governments and corporates. One of the reasons for this buying is that there are 

simply noL enough long Government securities to satisfy this demand. There 1s 

no reason why the Treasury should not be the beneficiary of chis buying. In 

view of the current market prices of the two outstanding issues, we strongly 

recommend their reopening. 

The CammiCree recommended a refunding of the same amount as the last 

quarter's because of the Treasury's lessened cash demands. We do not believe 

that the refunding should be reduced hecause it is the Committee's feeling 

that emphasis should concinue to be placed on quarterly refundings at the expense of other cycle notes, or to a lesser extent Treasury bills. It also 

believes that some debt extension is still desirable and reminds the Treasury 

that the elimination of the 20-year bond left a void in the longer dated 

Treasury market which it is felt should he at least partially filled by reasonably sized 10-year and 30-year issues. We considered the issue of whether there 

would be buyers for those issues and are confident chat the two reopened issues 

would do well at auction. The Treasury must keep its place in the long bond 

market with sizeable, viable issues, 

for the remainder of the quarter, we recommend the following financings: 

-- Sell $10-114 billion of 2-year notes at the two remaining 

auctions, raising $1.55 new cash; 

-- Sell $8-112 billion of 5-year notes, raising all new cash; 

-- Sell $7-314 billion of 4-year notes, raising $1.55 new cash; 

-- Sell $9-314 billion of 52-week bil.ls, raising $1,15 new cash; 

-- Sell $14.3 billion at each of the remaining 3- and 6-month 

Treasury bill auctions, reducing cash borrowing by $9.1 

billion net, 

The Committee discussed the advisability of this net reduction in the 

amount at Treasury bills sold and fell. comfortable with its recommendation 

for two reasons. Firbr, any drift in receipts or change in the budgetary 

picture can quickly be adapted for by an increase in the amount of weekly 

bills. Second we repeat the importantee we place on continued access and 

liquidity in the long bond market. If a special meeting were to be called, 

the Committee might well decide to eliminate one of the non-refunding cycle 

notes and maintain an increase in the bill auctions, but we would need the 

time and data this meeting would provide to do so. 
Summary of Cash Needed -- $45 B~lllon 

Refunding 

3- & 6-month bills 

52-week bllls 

2-year notes 

$-year notes 

5-year notes 

Already raised 5.25 

22.70 

Estimated foreign add-ons 1-30 

Net Market Borrowing 24.00 

Decreasc in Cash Balance 

Cash Needed 

This would produce a projected cash balance on 3/31/87 of $10 

billion which the Committee recommends unanimously. Given the 

uncertainty with receipts and outlays the Committee by a vote of 

17-3 recommends a 6/30/87 cash balance in the $15 billion to 

$20 billion range. 

Mr. Secretary, with the hoped for reduction in the budget 

deficit and unknown effect on receipts of the new tax law, the 

Treasury is entering into a very important era for debt management. 

Changes in what has become a regularized financing schedule will 

surely have to be made, and as noted at the beginning of this 

report, our group stands ready to assist the Treasury in this task, 

Thank you Mr. Secretary. 

Respectfully submitted, 
REPORT TO TNE SECRETARY OF THE TRFaSURY 

FROM THE U.S, GOVERNPENT AND FEDERAL, 

AGFNCIES PFCURITTFS CONMTTTEF OF THE 

PUBLIC SECURITIES ASSOCIATION 

April 29, 1987 

Dear Yr, Secretary: 

Since the Committee last met in Rashington in ,January, 

interest rates have risen dramatically, breaking out of a 

nearly year-long trading range, 1ntermedi.ate and longterm interest rates have increased between one and one half 

percentage points in the past several weeks as investors 

appear to be concerned about a renewed acceleration in 

inflation. The move higher in short-term interest rates has 

been relatively modest as monetary policy has remained, for 

the most parL caautiously accommodating in a period of 

uncertain economic momentum, ~orldwi.de credit Eragilities 

and continuing currency instability, 

F number of related developments have been responsible 

for the tremendous setback in bond prices, Most important 

among these is the unremitting pressure on the dollar in 

foreign exchange markets and the fear that a major confrontation is brewing among key trading nations over trade 

and economic policy, Fven heavy reported intervention in 

foreign exchange markets by the Federal Reserve and other 

central banks has been unable to arrest the dollar's slide. 

Although the Federal Reserve appears to be moving in the 

di.rection of a modest tightenihg, efforts to steady the doll.ar 

thus far have failed because market participants do not believe 

that the fundamental. policy changes reuuired both here and 

abroad to stabilize currencies will be forthcoming promptly, 

A number of related devel o~ments have been responsib1.e 

for the tremendous setback in bond prices. Most impor,tant 

among these is the unremitting pressure on the dollar in 

foreign exchange markets and the fear that a major confrontation is brewing among key trading nations over trade anl 

economic policy. Even heavy reported intervention in foreign 

exchange markets by the Federal. Reserve and other central 

banks has been unable to arrest the dollar's slide, Although 

the Federal Reserve appears to be moving in the direction of 

a modest tiyhteningi efforts to steady the dollar thus far 

have failed because market participants do not believe 

that tho fundamental policy changes required both here and 

ahroad to stabilize currencies will be fartbcoming promptly. 
The dollark decline has begun to raise inflation fears 

and concerns about higher interest rates, Investors believe 

that a falling dollar will lead to a sharp increase in import 

prices, which will feed through to prices of domestic goods, 

particularly if U.5, businesses respond to higher import prices 

by raising their own quotes. In addition, the dollaris continuing weakness has fostered the perception that private foreign 

investors will no longer be attracted to our markets. Tndeed, 

there is evi.dence that such inflows, particularly from Japan, 

have slowed recently. In this context, the painfuLly slow 

progress in redressing large budget deficits increases the 

chances of renewed credit market pressures and weakness in 

domestic investment. 

To underscore the current apprehension in financial 

markets, reported inflation has been higher in recent months 

Consumer prices rose at an annual rate of nore than 6% 

in the first quarter, And even if the substantial rise 

in enerqy costs is renovec?, remaining items have risen 

by a nearly 5% rate compared with the 3 l/2%-4% increases 

of the past .three years. Strong increases in apparel 

prices seem to highlight the risks of the impact of 

higher import prices on inflation, Despiie these negative 

developments, however, other inflation fundamentals remain 

somewhat favorable as evidenced by continuing low wage 

growth and rather modest collective bargaining settlements. 

The hesitant pattern of economic growth of the past 

two vea.rs has continued into 1987. blthnugh real economic 

activity appears to have accelerated in the .first quarter, 

tbe strength was reflected primarily in buildup in nonfarm 

inventories, Final demands, especially from consumers were 

weaker, as households contin~?e to retrench aFter a rapid 

spending pace l.ast year in the face of slowing real income 

C1: ,atns an3 growing debt burdens, That mix of strong production 

and slowing demands proaises a much reduced pace cE activity 

in the current quarter as demand slow1.y revives, while 

businesses attempt to pare unwanted stocks, 

Longer economic considerati.ons continue to hinge on progress 

in rediicing the large trade deficit. Apart from the increasing 

competitiveness of American firms ad the beginnings of a shift 

in the relative prices of tradeable goods, the key to progress 

in this area lies in the pace of growth among some of cur key 

trading partners, In recent months, however, economic growth 

projec%i.ons for the largest surplus nations, West Germany and 

Japan, have been fading with optimistic estimates bordering 

npar 2Hor this year- Rising currency values have hurt export 

industries in these countries, while the pace of doziestic demands 

rema-ins modest, nlthouqh there have been some efforts at 
stimulating growth, foreign exchange markets remain doubtful that 

policies will quickly reduce Large internal payments imbalances. 

Fonetary policies in these countries have shown varying degrees 

of flexibili.ty, while fiscal policies apear TarqeLy straightjacketedhn an environment of currency instability and nervousness, 

these developments have placed the Federal. Reserve in a particularly difficult situation, blot only would an overt policy 

move, such a discount rate hike, jeopardize the U,S, economic 

expansion, it wou1.d also temper the prod of a lower dollar on 

our trading allies to stimulate their own economies, And without 

policy changes abroad, such a move may only temporarily stehilize 

the currency. Should the Federa3 Reserve be forced to act 

unilaterally, it would heighten the risks of global economic 

slowdown. 

The Cormittee considered the general state of the economy and 

the state of the current market for the United States Government 

and other securities in deciding what recommendations to make 

in this report, Being market participants we are well aware 

of the unsettled state the rnar?<et is in, We also took in to consickration tke financing needs of the Treasury in ,the next two 

calendar quarters, needs which, will not be much arCected by 

whatever resolution occurs in the continuing budget discussion 

between Congress and the ndministrati.on. We also discussed at 

length posslble buyers for the Treasury's offerings and the 

chance that some recent buyers could not be participanks in this 

quarter, 

Raving taken all of the factors into account we reconmend 

unanimously that the fol.1owing securities be sold at yield auction 

to refund $1.2-6 bill.ien of pub]-icly he1.d notes matluring k?ay 15, 

raising $16.4 billion new cash: 

Sl? billion of 3.-year n0tt.s due 5/15/90 

9 3/4 billion oE LO-year no,tes due 5/15/37 

9 l/$ billion of 30-year bonds due 5/15/2917 

This is exactly the same size and amount of various issues 's the 

January refunding. One important factor in our discussion was 

the needs of the Treasury in the next two quarters, A refunding 

OF Like size wil,l he necessary in the third quarter calendar and 

a larger one will probably be necessary in the fourth quarter. 

The market has gotten accustomed to these size refundings and tc 

change now would not be beneficial. There was absolutely no 

question in any Committee member's inind that the recommended 

refunding would he underwritten without problem., While some 
buyers may disappear we feel that the major change in interest 

rates will bring in many buyers at a coupon rate ?????? 

higher than that of three months ago, We believe that, in spite 

of all pension funds and insurance companies which have held 

considerable cash in anticipation of higher rates, will commit 

some of the cash. Final-ly, we bel-ieve that reducing the 1'3- and 

30-year issues by a small amount (up to $1 billion) woule not 

greatly lower the Treasury's interest cost and wou1d deliver 

the wrong signal to the market, A nominal reduction would get 

a great deal of attention and eight be interpreted as a sign of 

weakness. We are convinced that the debt of the United States 

can be underwritten as it always has been, The only change that 

could have a substantial effect in interest cost would be a truly 

substantial reduction in 10- and 30-year issues, but we believe 

that this short term beneEit would be more than offset iijr the 

appearance of weakness on the part of tbe Treasury and the 

uncertainty it would create as to future financings. 

For the remainder of the quarter we recommend the following 

Einancings: 

- - Sell $10 billion OF 2-year notes at the two 

remaining auctions raising S25C of new cash; 

- - cell $8 1/4 billion of 5-year rotes raisinn 

q1.65 billion neM cash; 

- - Sell $9 3/6 nillion of 52-wcek bills at two 

remaiqjng avctions rnisinq $9'30 million new cash; 

- - Sell $13.2 and 13-6 billion at the remaining 3- 

and 6-month Treasury bill auctions reducing cash 

korrowirgs by '$6-2 billion net, 

Sumrrary of Cash Weeded -- $25-5 Eillion 

Ref undrmy 

3- & 6-month bills 

52-week bills 

2-year notes 

4-year note9 

5-year notes 

Already reused (net) 

estimated Foreign Pdd-om 

Ne.t Market Borrowing 
This would produce a projected cash, balance of $20 billion on 

6/30/87 whi.ch the Committee recommends. The borrowiog needs are 

high in the third calendar quarter And any slippage in ,asset 

sales could create a higher cash ne&, 

The Committee also recommends a cash balance of 20 billion 

for the uuarter ended 9/30/87, 

The Committee, while reali.sts, encourages a quick decision 

on the debt ceiling and, if asked, will assist in whatcver it 

can do to obtain passage of the legislation, n temporery extension is helpful, but market uncertainties affecting both supply 

and interest cost can result from uncertainty and dislocations, 

Mr, Secretary, your charge asked the Committee for any 

comments we wished to make on related matters, With this in mind 

we spent considerable time discussing non-dollar financiny by the 

U,S, Treasilry, particul.arly a yen denominated financing, as a 

result of our discussions, we concluded that it was not within 

the purview of the Committee to nake a recommendation on a matter 

that transcended fiscal policy, There are many areas of pol-icy 

away from the fiscal arena involved in determining whether or not 

to do such a financing and we therefore felt that our elected 

officials were the ones to make such a decision, Iet me say, 

however, that two conclusions did result, If, for policy reasons 

the U,S* Government determines that a one shot financing in ven 

should be done, we would ask that the Committee at least be consulted on the method use6 to eFEect this financing, In addition, 

it was the general feeling of the individl~als on the Committee 

that ttw idea of the Unitee States financing on a regular basi:? 

in non-dollar securities was not a good one, because we should 

repay our deficit in doll-ars and not have to concern ourselves 

with the ability to earn foreign currencies to repay the 

indebtedness, 

Mr, Secretary, while we have given only sketchy outline 

to the foreign denominated debt questions we would be happy, if 

you desire, to respond orally, as individuals, to any quest.ions 

in this area, 

Thank you Mr, Secretary, 

Kcspectf ul Ly submitted, 
REPORT TO THE SECRETARY OF THE TREASURY 

FROM THE U.S. GOVERNMENT AND FEDERAL 

AGENCIES SECDRITIES COMMITTEE OF THE 

PUBLIC SECURTTIES ASSOCIATION 

October 28, 1987 

Dear Mr, Secretary r 

During the past several months, financial markets in the United 

States and elsewhere have witnessed dramatic, and in many cases, 

unprecedented volatility, The onset of rising interest rates in the 

spring was fed by concerns about rising inflation, a declining value 

of the dollar in foreign exchange markets, and evidence of a resurgent 

economy. In the short span of six months, long-term U,S, interest 

rates rose by roughly three percentage points to their highest levels 

in two years, And policy's response to inflation fears prompted 

significant, though less dramatic, increases in short-term rates, as 

the Federal Reserve first tightened reserve availability and later 

raised its djscount rate. 

The events of the past week, however, have substantially altered 

the perceptions and expectations of financial market participants, 

Indeed, the sharp retreat and subsequent volatile pattern of stock 

prices have cast a cloud over an otherwise improving pace of economic 

growth, Important questions have been raised about consumer and 

business confidence and the potential impact of sudden retrenchment on 

the overall economy. That shift, in turn, has had a favorable impact 

on interest rates, erasing nearly half of the previous setback in just 

a few days. 

A sudden jolt to confidence is especially noteworthy at present, 

because the economy" performance in 1987 has been considerably better 

than the sluggish pace of the prior two years, An export-led revival 

in manufacturing activity and capital spending has breathed new life 

into the current expansion, more than offsetting a slowdown in 

domestic demand, Indeed, bolstered job and income growth has, until 

now, been supporting a mild recovery in consumer outlays and the 

highest levels of consumer confidence in more than a decade, 

Nonetheless, the improvement in business attitudes and consumer 

sentiment may now be shaken by the concerns over stock market 

instability. Even in the event that lost wealth is restored by an 

interim recov ry of share prices, the shock effects of the -cent 

setback may alone be enough to noticeably stall spendin3 decisions for 

a time, 

Any cooling in the pace of economic activity would, of course, not 

be without its favorable side effects, Against a backdrop of 

slackening demands, inflation would moderate as business operations 

slow and pressures on tightening labor markets abate, This is of 

particular concern in light of recent evidence that the growth in 
hourly earnings has picked up to 4 percent from its earlier pace of 

2 percent to 2 l/2 percent, And operating rates in key primary 

processing industries have reached levels not seen since the latter 

part of the 197B%s, Against that background, the volume limitations 

imposed by import quotas and restrictions have firmed prices of 

imported goods such as steel and shoes, More rapid import price gains 

would weaken the discipline of strong foreign competition in curbing 

domestic price hikes, 

The U.S,'s persistently high trade imbalance might also benefit 

somewhat from a diminished pace of demands as imports slow, A drop in 

imports would dampen economic growth overseas, most notably in Japan, 

but also among other trading partners, The plunge in foreign stock 

markets and an aura of financial uncertainty might also weaken 

economic prospects abroad, but the effects in the United States may be 

larger, 

Amidst uncertain economic prospects and unprecedented volatility 

in financial markets, the Federal Reserve faces a difficult task. At 

this still somewhat early date, the magnitude of the impact of recent 

events remains unclear at best. Containing the fallout from potential 

financial dislocations and meeting the heightened demand for liquidity 

already evident has thrust the Fed into a more accommodating stance. 

Generous provision of bank reserves has placed renewed downward 

pressure on the key Federal funds rate, Nonetary authorities may be 

reluctant to take more aggressive measures, such as reducing the 

discount rate, until sufficient evidence of economic slowing surfaces, 

Such a posture would serve to buoy financial markets, 

Longer term economic considerations remain vitally dependent on 

the resolution to the twin problems of large budget and external trade 

and current account deficits, Financial market participants around 

the world eagerly await news of progress in current budget 

del iberat ions in the U,S, Without satisfactory deficit reduction now 

and a credible promise of future reductions, it will be difficult to 

meet the financial requirements of a growing economy without the 

continued reliance on foreign savings or the burden of stubbornly 

higher real interest rates, With the foregoing in mind, our committee 

has prepared its recommendations, 

We have made a basic assumption as to the amount of open market 

borrowing to be done by the Treasury, In view of the considerable 

activity in t State and local series Treasury obligations, w- have 

estimated tba reasury recelpts from this activity will be 

a~proximatelg $18 billion, Our recommendations incorporate this 

estimate, 
For the refunding of $13.3 billion of privately held notes 

maturing November 15, we propose that the followinq securities be sold 

raising $18,350 billion of new cash: 

$9 3/4 billion of 3-year notes due 11/15/90 

3 11'4 billion of 10-year notes due 11/15/97 

4 3/4 billion of 30-year bonds due 8/15/2014 

The 3- and 10-year issues should be sold at yield auctions as new 

issues, The 30-year bond incorporates our recommendation that the 

8 7/8% bonds of 8/15/2017 be reopened and that the new bonds be sold 

at yield auction, 

In making this recommendation, the committee took a number of 

factors into consideration. We first decided by a vote of 11-7 to 

propose the selling of a long bond, even in its reduced size, Those 

in favor of selling a long bond cited regularity of issuance and the 

request given in the charge for a refunding to raise $10-11 billion of 

new cash as among their reasons, Those opposed felt that a smaller 

issue proved little, as the market would understand the omission due 

to the 4 1/4 % limitation, and because of their fear that a small 

issue might make market manipulation possible, The latter reason, 

plus the imoortance of added liquidity provided by larger issues, led 

to the recommendation being tied to the reopening of the 8 7/8% bonds, 

An issue of such small size would not mean much without the reopening. 

Tt was felt that there was enough room between the current market 

price and the base 92 3/4 point discount permitted to be certain that 

the new bond could sell safely, After the motion to sell a long bond 

carried by the aforementioned 11-7 vote, the committee voted 15-3 to 

propose the refunding discussed above, 

For the remainder of the quarter, we recommend the following 

f inanc ing : 

-- Sell $9 1/4 billion of 2-year notes at the two remaining 

auctions, reducing cash borrowing by $1-2 billion, 

-- Sell $7 l/2 billion of 5-year notes, raising all new cash, 

-- Sell $7 l/4 billion of 4-year notes, raising $l,45 billion 

of new cash, 

-- Sell $13,5 billion of 3- and 5-month bills at the 

remaining auctions, raising $2,3 billion, 

-- Maintam the two remaining 52-week bills at the same 

amounts as are matuzinq, 
Summary of Cash Needed -- 580 l/4 billion 

Refunding 

2-year notes 

&year notes 

5-year notes + 

3- & 6-month bills 

$10,350 billion 

(1,200) 

7.500 

Already raised 26-75 

Estimated foreign add-ons 

Net Market Borrowing 52,85 

SLUGS 

Decrease in cash balance 

Gash raised $84,35 billion 

This would produce a projected cash balance of $19 billion, We 

are recommending a cash balance in excess of $15 billion for two 

reasons, First, in case our estimate of $10 billion of SLGS is too 

high (which we don" believe), the excess cash balance could be used 

to make up the difference, Secondly, you have asked our opinion on 

the scheduling of 7-year notes, and we believe that the increased cash 

balance would be used to alleviate the problem. We recommend that 7- 

year notes in the future be dated on the date the outstanding notes 

mature, This would alleviate a problem for the Federal Reserve by 

permitting it to roll its 7-year holdings at auction, something it 

could not do with a different day of dating and day of maturity, 

Also, it would permit outstanding public holders to roll holdings 

without any inconvenience, There would also be the added advantage, 

particularly in this quarter, of removing the 7-year from auction in 

what is the worst market week ~f the year, the week between Christmas 

and New Year, The committee believes that a sale in this week 

produces higher yields to Treasury than any other time of the year. 

However, moving the dating of the 7-year to the 15th of the month 

creates a cash problem for the Treasury in the beginning of the month, 

a problem that could be solved by use of the larger cash balance or 

alternatively through the sale of a short-dated cash management bill. 

If for any reason our SLG estimate is incorrect, we would 

recommend adding to the 3- and 6-month bills, As the current state of 

the equity and Treasury markets has led to very sizeable bill 

purchasesp we feel that Treasury should take advantage of this 

opportunity. This is the reason that we have recommended an increase 

in 3- and 6-month bills to $13-6 billion weekly. 

You should also note that we have reduced or held steady the next 

- and 5-year note auctions, We have done this in preparation for 

the hopeful decline in Treasury calendar due to a budget deficit 
reduction. As you may remember from the report of our special meeting 

this year, we proposed such a decrease in these issues, leading 

possibly to the elimination of one of the cycle notes altogether. We 

trust we are preparing the way, 

The committee cannot let this meeting go without commenting on the 

PSAvs letter on SLGS, Though we are a committee of PSA, we reject 

this letter out of hand. We are not at all sympathetic to the issue 

raised vis-a-vis state and local governments, as issuers entered into 

these transactions on an economic basis when they were done, They 

should not have the opportunity to profit from the issuance of SLGS at 

above market yields, thereby penalizing all tax payers for the benefit 

of particular taxpayers of a single s t a t e o r municipality, We would 

urge Treasury to move as quickly as possible to daily pricing of SLGS 

to completely eliminate this abuse. 

Finally, as p complete my term as chairman of this committee, let 

me say thank you to you Mr, Secretary and your staff and the committee 

for the opportunity to serve you and the Treasury in what 1 believe is 

a most important and worthwhile endeavor, 

Thank you Mr, Secretary, 

Respectfully submitted, 

Gedale 

Chairman 1