. . 

REPORT TO THE SECRETARY OF THE TREASURY 

FROM THE 

TREASURY BORROWING ADVISORY COMMITTEE 

OF THE 

PUBLIC SECURITIES ASSOCIATION 

MAY 4, 1994 

Dear Mr. Secretary: 

Since the Committee's last meeting with the Treasury three 

months ago in February 1994, the economy has continued to expand 

at a solid pace. The cyclical nadir in the rate of inflation almost 

certainly has been passed. Monetary policy has become less 

stimulative; in three separate increments, the Federal funds rate -has 

been raised from- 3.00% to 3.75%, and forward prices for various 

fixed-income instruments indicate market participants expect 

further increases in the coming months. 

Over the three-month interval since early February yields on 

Treasury securities have increased by approximately 90 to 170 basis 

points. The largest increases have been for intermediate maturities 

of two to five years, while the very shortest and very longest 

maturities have increased the least in yield. As a consequence, the 

yield curve has steepened for short and intermediate maturities and 

flattened for longer maturities. 

Within this context, to refund the $28.2 billion of securities 

maturing on May 15, 1994 that are privately held, the Committee 

recommends that the Treasury auction $29.0 billion of the following 

securities: 

$17.0 billion 3-year notes due May 15, 1997; and, 

$12.0 billion 10-year notes due May 15, 2004. 

After extended discussion, 15 of the 18 members of the Committee 

present for the meeting voted in favor of this recommendation, while 

the other three favored reducing the three-year note to $16 billion 

and raising the ten-year note to $13.0 billion. 

A number of arguments were presented in favor of the 

minority's position. Foremost was the concern, add&med by the 

Committee in previous reports, that the Treasury's borrowing 

strategy of reducing the reliance on maturities over seven years and 
increasing commensurately the reliance on maturities of three years 

and under will be judged over the longer run to be ill-advised. The 

significantly greater increase in yields which occurred in recent 

months for intermediate maturities was cited by some members as a 

consequence due in part to the present borrowing strategy. Another 

argument given in support of increasing the proportion of ten-year 

notes in this refunding while reducing the proportion of three-year 

notes was the need to signal to the market the prospective increases 

that will be required later in the year in the sizes of longer-term 

offerings, including both the ten-year and thirty-year issues. 

The majority of the Committee, while sharing fully the view 

that it would have been preferable for the Treasury to rely more 

heavily in its borrowing on the ten- and thirty-year issues, opposed 

reducing the size of the three-year offering in this refunding since 

prospective borrowing needs ensure that the cycle will need to grow, 

perhaps as early as the upcoming refunding in August. The value of 

signaling to the market, through an increase in the size of the tenyear issue, the prospective growth in the size of longer offerings was 

considered minor since most forecasters were already aware of the 

need. 

With the aim of achieving a cash balance of $40 billion on June 

30, the Committee unanimously recommends that for the re m ai nder 

of the quarter, the Treasury meet its borrowing requirements in the 

following manner: 

Two 5-year notes of $11.0 billion each, to raise $22 

billion of new cash; 

Two 2-year notes of $17.0 billion each, to raise $3.9 

billion of new cash; 

Two 1-year bills of $16.5 billion each, to raise $2.9 

billion of new cash; 

Weekly 3- and 6-month bills totaling $24.8 billion for 

settlement on May 19 and then totaling $25.6 billion for 

each week during the remainder of the quarter, to 

reduce cash in aggregate by $7.9 billion; 

Redemption of the 3 112% 1994-1999 bond on May 15, 

1994, to reduce cash by $1.0 billion; and, +.-..-
3 

- Redemption of the outstanding 4-year note on June 30, 

1994, to reduce cash by $7.9 billion. 

Including anticipated foreign add-ons of $5.0 billion and the $800 

million raised in the mid-quarter refunding, this financing schedule 

will raise a total of $17.8 billion. In addition, intra-quarter cash 

management bills totaling approximately $20.0 billion will be needed 

to cover the cash low points in late May and early June. 

For the July-September quarter, assuming an end-of-period 

cash balance of $40 billion, the Committee recommends the following 

provisional financing schedule: 

Auctions Size Raisinq 

Refunding: 3-year note 

IO-~& note 

29 314-year bond 

5-year notes 

2-year notes 

1 -year bill 

3- and 6-month bills 

Estimated foreign add-ons 

Less: 7-year note maturity 

4-year note maturity 

$ 17.0 

12.0 

11.4 

$ 40.0 $ 10.4 billion 

Subtotal $ 73.0 billion 

Subtotal $ (15.5) billion 

Total Net Market Borrowing $ 57.5 billion 

The Committee also notes the likely need for the issuance of intraquarter cash management bills to cover cash low points in late 

August and early September. 

In response to the request for its views on the experiment to 

date with single-price auctions for two- and five-year notes, the 

Committee offers the following comments: ST...& -. 

Anecdotal evidence suggests that compared to the multiple- 
price auctions for three- and ten-year notes, the single-price 

auctions for two- and five-year notes has broadened the base 

of distribution and reduced the concentration of winning 

awards. If this impression is confirmed by further analysis of 

the data available to the Treasury, two important measures of 

success will have been met. 

- Examination of the data presented to the Committee, combined 

with the observations of members from their own experience, 

suggests that while on occasion single-price auctions may have 

led to higher costs to the Treasury than might have occurred in 

multiple-price auctions, these occasions are balanced by others 

where there were apparent savings. The data to date reveal no 

consistent pattern. It is important to note, however, that most 

of the period covered by the data was, until recently, 

comparatively benign. Results for periods of high volatility are 

not yet available. 

In the instances where single-price auctions seemed to have 

resulted in yields materially above the levels prevailing in the 

when-issued market at the time of the auction, the difference 

appears related to the market environment at the time rather 

than to the auction technique. There is no clear basis for 

believing multiple-price auctions would produce systematic 

savings to the Treasury in these same environments. 

- It would be useful to expand the analysis of when-issued 

trading to include not only the period immediately subsequent 

to the auctions but also the period immediately prior. Despite 

the difficulties of comparing auctions of securities of different 

maturities, an analysis of price patterns in the hour or two 

prior to single-price auctions with those in the comparable 

periods for multiple-price auctions may reveal whether there 

exist any significant differences. 

Market liquidity prior to single-price auctions may be greater 

than for multiple-price auctions because sellers have greater 

confidence that their sales can be successfully covered in the 

auctions at market levels prevailing at the time of the auctions. 

In addition, as noted in an earlier report by the Committee, 

there seems to be some evidence that post-auction trading in 

single-price auctions is less volatile. 

3 -. ., 

On the basis of this assessment, which given the comparatively brief 

period is necessarily substantially subjective, the Committee 
recommends that the Treasury: f 

Extend the experiment with single-price auctions for another 

year from August 31, 1994. 

Consider expanding the experiment to one or more additional 

maturities. There was no consensus among Committee 

members which maturity or maturities might be most suitable. 

Some members favored the three-note as being a natural 

extension from the present two- and five-year notes. Others 

expressed the view that since no major negatives with 

multiple-price auctions have been revealed so far, more might 

be learned from longer maturities, such as the ten-year or the 

thirty-year. 

Because it is the principal objective of single-price auctions, 

focus furthi analysis of the auction data on the extent to 

which single-price auctions encourage broader participation 

and less concentration among bidders. 

Mr. Secretary, that concludes the Committee's report. We 

welcome any questions or comments. 

RespeFffully submitted, 

Stephen C. Francis 

Chairman