REPORT TO THE SECRETARY OF THE TREASURY 


FROM THE TREASURY BORROWING ADVISORY COMMITTEE OF THE 


PUBLIC SECURITIES ASSOCIATION 


- January 30, 1991 

Dear Mr. Secretary: 


Both economic and international political developments have 


impacted U.S. financial markets in the months since our October 


meeting. A relatively sudden and sharp contraction in economic 


activity during the fourth quarter prompted the Federal Reserve 


to adopt a more aggressive strategy of monetary easing. Fed 


actions over the past quarter have included four separate easing 


moves, plus a half-point reduction of the discount rate and a cut 


in bank reserve requirements. These policy moves, combined with 


growing investor worries about the health of the banking system, 


caused Treasury bills and other short-maturity Treasury yields to 


decline steadily over the period. Yet until mid-January, 


concerns that a Persian Gulf war might disrupt either the 


production or transportation of petroleum inhibited long-dated 


note and bond yields from declining in tandem with short-term 


rates. Those fears diminished substantially, however, when early 


reports following the initiation of hostilities indicated 


considerable success on the part of the U.S.-allied forces. On 


balance since late October, discount yields on 3-month Treasury 


bills have fallen from 7.13 percent to 6.17 percent, while 3-year 


note yields have eased from 7.90 percent to 7.30 percent, and 30- 


year bond yields have declined from 8.75 percent to 8.20 percent. 


Developments in the Middle East will likely continue to 


overshadow other factors affecting world financial markets during 


the weeks ahead. In particular, the duration and final outcome 


of the war against Iraq can be expected to remain a strong 


influence on consumer and business attitudes, while the necessary 


costs of the allied military effort will tend to push up both the 


Federal budget deficit and Treasury financing needs. For the 


longer term, U.S. yields may be affected especially strongly by 


changes in consumer confidence, which could alter perceptions 


about the recession's potential depth and the need for further 


Fed policy easing. It is against this backdrop that the 


Committee makes its recommendations for the February refunding. 


The Committee recommends that the following securities be 


sold at yield auctions to refund $17.35 billion maturing 


securities and raise $17.65 billion of new cash: 


-- $12.50 billion 3-year notes due 2/15/94; 

-- $11.25 billion lo-year notes due 2/15/2001; 

-- $11.25 billion 30-year bonds due 2/15/2021. 
For the remainder of the current quarter, the Committee 


recommends: 
- -- Sell $12.5 billion 2-year notes, raising $2.5 billion 

of new cash; 


-- Sell $9.0 billion 5-year notes raising all new cash; 

-- Sell $11.75 billion 52-week bills at two remaining 

auctions, raising $4.0 billion new cash; 


-- Maintain weekly 3- and 6-month bill auction size at $20 

billion for the remainder of the quarter, raising a 


total of $5.0 billion. 


Summary of New Cash for the January/March Quarter 1991 


Refunding $17.65 billion 


3- and 6-month bills 5.0 


52-week bills 4.0 


2-year notes 2.5 


5-year notes 9.0 

Total to be raised $38.15 


Already raised 


Estimated Foreign Add-ons 


Net Market Borrowing $65.70 billion 


for the Quarter 


The Committee recommends a cash balance of $21.7 billion on 


March 31. Finally, at this point the Committee does not see a 


need for a late March cash management-bill. 


For the April/June quarter, the Committee suggests that 


increases be made to monthly year bills, coupon cycles and the 


refunding auctions. Weekly bills should continue to perform the 


adjusting or flexing role the Treasury needs to provide for 


changing circumstances. Given the great uncertainty as to the 


timing and amount of Treasury funding needs in the 


April/Septaber period, the Committee recommends a June quarter- 


end balance of approximately $50 billion. The Committee 


acknowledges the resorvo management problems this balance might 


pose, but finds the implications of financing $100 billion plus 


in the July/September period equally undesirable. The Committee 


also feels there is a possibility that the cash needs for the 


April/June quarter may exceed current Treasury estimates. In any 


case, the weekly bill schedule provides significant flexibility 


for this uncertain environment, while the suggested balance 


allows for market participants to plan for steady, routine 


increases in longer dated cycles. 

In summary, the Committee recommends the following 


incremental new cash schedule for the April/June Quarter. 


Summary of New Cash for the April/June Quarter 1991 


Coupon cycles $31.0 billion 


Refunding 17.2 


52-week bills 6.7 


3- and 6-month bills 5.1 


Foreign Add-ons 2.0 


Paydown of April CMBs (12.0)

Net market borrowing $50.0 billion 


As a final point of comment, the committee strongly endorses 


the incrementally larger weighting of 30-year bonds in the 


recommended February refinancing package. The substantial 


diminution of long-term paper in prospect following the 


completion of the REFCORP funding program, plus a commitment to 


on-going debt extension in a period of heavy financing 


requirements, is an important point of emphasis for the 


Committee. The group has a nearly unanimous sentiment on this 


score. The Committee also believes the market welcomes this 


stretching out of maturities and recognizes that the Treasury has 


very few competitors in this sector of the capital markets. 


Mr. Secretary, that concludes our report, and we welcome 


questions .and discussion. 


~6n
 S. C+Z 

Chairman