REPORT TO THE SECRETARYOF THE:TREASURY 

FROM THE 

TREASURYBORROWING ADVISORY COMMITTEE 

OF THE 

PUBLIC SECURITIES ASSOCIATION 

JANUARY 31,1996 

Dear Mr. Secretary: 

At the outset of this report, the Committee would again urge in its most forceful 

terms that legislative action to incnease the statutory debt limit be taken promptly. In the 

Committee 's judgment, raising the specter of default by failure to act on the debt limit as 

a means to support the political agenda o*f any constituency is inappropriate and 

counterproductive. 

Since the Committee 's last meeting in November 1995, the Secretary has taken a 

series of extraordinary actions to enable the Treasury to borrow the funds needed to meet 

the financial obligations of the Federal Government in a timely manner. These necessary 

measures were taken in the absence of an increase in the debt limit. Further, the Secretary 

has recently unveiled additional measures. if needed, to enable the Treasury to finance 

Government operations until February 29 or March 1. Thus, in the absence of action to 

increase the debt limit, the financial markets will once again confront the uncertainty and 

risk of the Treasury 's inability to fulfill all of its financial obligations. 

In our last report, dated November 1, 1995, the Committee addressed these risks, 

uncertainties and potential effects of default. It is our strong and unanimous view that there 

should never be any reason for the financial integrity of the United States Government to 

be questioned or doubted. Our Nation 's creditworthiness is a precious asset which benefits 

all of us; it should not be bargain& or compromised. 

Also, since the Committee's last meeting in November. 1995, the economy has 

continued to expand although at a somewhat slower pace than the third quarter. 

Inflationary pressures have remained generally subdued. As a result of some improvement 

in inflationary prospects, monetary policy was eased slightly in December. 

Yields on Treasury securities extended the decline begun early last year. Short and 

intermediate-term ratcs declined 40 - 60 basis points, reflecting market perceptions of 

somewhat slower economic growth as well as the Fed's modest easing step. Currently, yield 

levels for short and intermediate maturities anticipate further easing moves by the monetary 

authorities. Yields for 30-year bonds fell about 25 basis points as the yield curve steepened. 

The more limited yield decline for longer-term securities reflected the cyclical nature of 
slower economic growth, as well as some disappointment on the inability to reach agreement 

on balancing the budget in seven years. 

Within this context, to refund the $31.3 billion of privately-held notes maturing on 

February 15, 1996 and to raise $2 1.2 billion of cash, the Committee recommends that the 

Treasury auction $52.5 billion of the following securities: 

$18.5 billion 3-year notes due February 15, 1999; 

a $14.0 billion 10-year notes due February 15,2006; 

$12.0 billion 30-year bonds due February 15,2026; and, 

a $8.0 billion cash management bills due February 29, 1996. 

The 16 Committee members present for the meeting were unanimous in their support 

of the composition of the refunding package. 

In considering whether to recommend issuing a new 10-year note or reopening the 

5 718 percent notes due November 15,2005, Committee members observed that though the 

outstanding issue has recently tiem in short supply in the repurchase agreement market, 

there was no compelling evidence that the shortage was unusual. It seems likely that the 

shortage should be alleviated once a new 10-year note is auctioned. On this basis, the 

Committee voted 15 to 1 in favor of a new issue. 

The Committee also considered whether to recommend issuing a new 30-year bond 

or reopening the 6 718 percent bonds due August 15,2025. Generally, Committee members 

remain supportive of bond reopenings for the purpose of enhancing liquidity, particularly 

in view of the diminished level of activity in the secondary market for Treasury bonds which 

has occurred since the Tnasury 's reduced issuance in this maturity sector. However, the 

11 point premium of the current myear bond, was viewed as a significant impediment to 

broad-based investor interest in a reopening. On this basis, the Committee voted 

unanimously in favor of a new myear bond. 

With the aim of achieving a cash balance of $20 billion on March 31, the Committee 

unanimously recommends that for the remainder of the quarter, the Treasury meet its 

borrowing requirement in the following manner: 
One 5-year note totaling $12.5 billion, to raise $4.1 billion of new cash; 

One 2-year note totaling $18.75 billion, to raise $0.3 billion of new cash; 

One I-year bill totaling $ 19.25 billion, to raise $1.9 billion of new cash; 

Weekly issuance of 3- and &month bills through the remairwier of the quarter, 

to raise $20.8 billion of new cash; and 

Cash management bills totaling S36.Obillion to mature in late April to refund 

the cash management bills which mature on February 29 as well as to meet 

the seasonal cash need in early March. 

Including the $2 1.2 billion raised in the midquarter refunding, the proposed financing 

schedule will raise a total of $76.3 billion. This amount, when added to the $9.0 billion 

already raised or announced in the quarter, will accomplish the total net borrowing 

requirement of $85.3 billion. 

In considering the Treasury S financing composition for the remainder of the January 

to March quarter, the Committee noted an abnormally large amount of uncertainty with 

respect to the timing of Federal expenditures. 1t'is possible that the Treasury S borrowing 

requirement in the current quarter will be less than the estimated $85.3 billion. In this 

circumstance, the Committee feels that heavy reliance on cash management bills with late 

April maturities will afford the Treasury maximum flexibility. 

For the April-June quarter, the Treasury estimates a net borrowing requirement in 

the range of $0 - 5 billion with a cash balance of $35 billion at the end of June. To 

accomplish the anticipated net borrowing requirement, the Committee recommends the 

provisional financing schedule attached to this report. 

In developing its financing recommendations, the Committee was mindful that the 

cash raising potential of the 5-year note has been substantially diminished. For this reason, 

and consistent with our last report, the Committee recommends mdest increases in all 

coupon cycle offerings each quarter during 1996. However, even with modest and steady 

increases in the size of coupon issues this year, more than 50 percent of the Treasury 's net 

market borrowing requirement will be achieved through the issuance of Treasury bills. This 

increased concentration of short-term financing, if continued, will ultimately become 

worrisome to investors. Thus, the Committee continues to advocate a debt management 

policy which avoids undue reliance on short-term financing and arrests the decline in the 

average length of the debt. Specifically. and as outlined in our last report, the Committee 

again recommends more frequent issuance of longer dated securities. 
In response to a request for its views, the Committee considered the Treasury 's role 

in overseeing and coordinating the scheduling of securities issues by Government sponsored 

agenci&. However usehl and necessary such a role might have been in the early stages of 

development of the Agency securities market, the Committee members generally felt that 

such a role was no longer needed at least insofar as the stability of the Treasury and Federal 

Agency securities markets was concerned. Moreover, with the advent of new financing 

techniques, including the development of medium-term note programs, there is some 

evidence that the requirements for prior review are contributing to inefficiencies, including 

artificial distortions of issue sizes. Finally, such a review process might be mistakenly viewed 

as connoting Treasury approval of the structural features of the debt being issued, the 

adequacy of information being provided to investors, or even the credit standing of the 

issuer. Accordingly, the Committee felt that the Treasury should consider procedural steps 

it might take, within the framework of the existing law, to streamline the process and 

minimize the Treasury S role as a reviewer. 

Respectfully submitted, 

Richard M. Kelly 

Chairman