2E:PORT TO THE SECRETARY (?F TiiE 'TREASURY 

FROM THE U. S, GOVERNMENT AND FEDERAL 

AGENCIES SECURITIES COMMITTEE OF THE 

PUHLIC SECUR'ITIES ASSOCIATlON 

Peburary 1, 1984 

Dear Yr, Secretary: 

Since our last. meeting in Late October, interest rat,.es 

have fluctuated sporadically in a narrow range with very 

little change on balance, Given the overall short term 

economic outlook we would expect this to continue during the 

present quarter, 

Treasury coupon auctions are now so large and frequent 

that the market has little chance to digest and rehound from 

*2ne auction to the next, As soon as one refunding passes 

investors will express caution over making new commitments 

prior to the next semi-quacterly coupon financing, 

'This has been mit.i.gated to some extent. by a substantial 

reduction of floating supply of Treasury bonds by coupon 

stripping or its equivalent, Suck stripping has created the 

oppori:unily for the Treasury t:o sell more long honds than 

otherwise would be possible. On the other hand, it night put 

some upward pressure on short intt?rmediatc notes, 

A degree of volatility could he introduced in the short >- - cerm area by the advent of contemporaneous reserve requirements 

and the change in the reserve period, This could he especially 

'rue Pt the Federal Reserve were to immediately hegin to 

reemphasize reliance on MI. as it.s primary monetary policy 

determinant.. 

With this backgrounrl; we recommend that the Treasury 

continue to emphasize coupon issues to raise new cash and 

that t~he 3 and 6 month bills he used as sparingly as pssib1.e 

Our specific recommendat ions for the Felxuary 15th 

refunding arc as follows: 

Sell $5=5 billion notes due 2/15/87 

Reopen id25 billion 11 3/4X notes due 11/1,5/93 

Sell 4-75 billion bonds dire 2/1.5/1 4 

3u-r Committee v?ted unanimously in Favor of a total siz;. 

Of the refunding of S16,i hill.ion., !4owcver, foiir i~t our 

members would have preferred to re(-Juce the 30 year issue to 

$4.5 billion arid increase the 9 3/4 year note to $5-5 billion. 

7'ili.s package would raise 51.2 billion in cast? leaving $17 billion 

to be raised over the balance of the quarter. 
To raise the $17 billion we recommend the FoLl.owinq; 

Feh 23 two year note 58-2 v S5-3 $2-3 billion 

Mar 2 five year note 6,3 

Continue weekly bills at Sl2.R 2.3 

Raise 1 year hill to $8-5 2 -0 

Forf2iqn add ons plus 

cash mqmt hills as needed 3.5 

Total $173 

As you may recall our comnittee has previously recommended 

some restraint on the size of the two year note. We still 

feel that it is 1.arge in relation to the one year hill* We 

are not recommending a reduction in the present size of the 

two year note hut feel that the proposed increase in the 

size of the 1 year hill is in keepinn with the 58.2 hillion 

size oE the note, 

I am attaching a schedule that sets forth some possihi1.ities 

for financinq the cash needs in the second quarter, 

Our qroup considered the chanqe in the announcement day 

for noney supp1.y tiqures,and a substantial majority Feels that 

it would he in the Treasury" best interest to eliminate the 

Thursday auction. We reeonnend starting with the next quarter 

end financinq, You coulc-1 consider scl.linq the I! year note on 

Honday, the seven year on Tuesday and the ZO year bond on 

Wednesday, 

This concludes our report hut we would he happy to 

elaborate or answer questions at this time, 
Cash Manaqement 7 

B 11 1 s : 

(Aprsl Maturity) S 3.5 

2-Year Notes: -- 

(3/31 rnat~urity)* S 5,5 

(4/30 maturity) S 5.0 

(5/31 matlrrrity) S 5-5 

f F~rst half of -0- 

June) 

7-Year Notes: 

(Fxrst half of -0- 

Aprll 

PRa?ECTED 

SIZE 

S 12-8 

$ 123 

$ 12.8 

$ 12,8 

$ 12-8 

S 12-8 

$ 12.8 

S 12-9 

$ 12,R 

$ 12.9 

S 12-8 

S 12A 

$ 12-8 

$ 8.5 

8-5 

$ 8-5 

-0 - 

NE33 CRSH 

RAISED 
REPORT TO THE SECRETARY OF THE TREASURY 

FROM THE U.S, GOVERNMENT AND FEDERAL 

AGENCIES SECURTTTES COMMITTEE OF THE 

PUBLIC SECURITIES ASSOCIATION 

May 2, 1984 

Dear Mr, Secretary: 

Since the last refunding was announced on February 1, 

interest rates have increased an average OF about I percentage 

point for all Treasury securities. The economy proved to be 

stronger than had been anticipated, the Federal Reserve 

tightened monetary policy, and investors became increasingly 

cautious in the face of continuing high deficits coupled with 

growlng private credit demands, 

In recent years, and particularly the last two, market 

psychology has pleyed an increasingly important role in 

determining interest .rate levels and volatility, During the 

most recent recession and first year of recoveryi interest 

rates could have gone considerably lower had it not been for 

the fear concerning the magnitude of the federal deficit. 

This could have happened without necessarily providing further 

stimulus to the economy, 

b51 figures and other money supply related statistics, 

along with economic data, have been the basis for short term 

psychologically driven swings in markets, The point is that 

it is perception and anticipation of future results of the 

statistics, rather than real economic impact aFfect:ing supply 

and demand for credit, that seems to be driving the markets. 

This increased impartarici? of psychology in the bond and 

money markets in largely the result of strl~ctural changes in 

financial markets ant3 ins ti tutions, There are many more 

professional trading operations active today than there were 

just a few years ago and most emphasize position as opposed 

to integrated tradi.nq arid retail distrihution. Even many 

I.ong term irivestors have adopted a short tenn trading approach 

as their investment technique, These market developments 

have taken place at a time when Federal Reserve control ovelhank lending has been suhst-antially diminished. With the 

high level of liquidity in the banking system the Fed can no 

lunger bring about lotin iieclinations and direct credit rationing 

but can merely affect the cost of the loans and their funding. 

if xeaninyful steps are taken to reduce the federal 

deticit.., the markets could stabilize and lower rates wauid i>e 

quite poss ihle Otherwise we would anticipate flt~ctuati ny 

markets on a day ta day basis leading to graduaiiy higher 

rates over time. 
In this market atmosphere we make the following recommendations: 

for the May 15 refunding: 

1, Auction $6-5 billion 3 year notes 

due 5/15/87 

2, Auction 55.25 billion 10 year notes 

due 5/15/94 

3, Auction 34-5 billion 30 year bonds 

flue 5/15/09-14 

The Commi ttee also recommends that foreign add-ons be permitted 

on t.hese issues even if it means forther reductions of bills 

to stay below the debt limit, 

If there is additional leeway to raise another $500 rnllliori 

wlthin the deht limit, 14 of our members would add this amount 

to the 30 year bond. 6 members would add to the 10 year note. 

Attached to this report is a schedule setting forth our 

recommendations for financing during the balance of the second 

quarter. This schedule provides for reductions in week1.y 

hills of $7-0 billion, raising the Level of the one year bill 

to $8-3 billion raising $1.0 billion, wit-h the 2 year note 

also at S8-3 billion raising $2,9 billion including $.2 billion 

of add ons. Tt also contemplates reopening the two paid down 

bill issues for Sh-0 billion each. 

We have inciuded a preliminary schedule for the third 

quarter financings, This would raise 546-9 billion, In 

looking to future financings we feel that we should take into 

consideration the quarterly interest payments as well as the 

maturing issues, This is particularly true for November when 

interest payments will. exceed $13 billion, These payments 

are usually heavier in May and November. If these are not 

financed along with the refunding they increase other cash 

Financinys, 

We will be happy to try to answer any qucstlonb that you 

may have, 

Respect fully submrtreii, 

H, Jack Runnrnn, LTr 

Cha i man 
ISSUE PUWYSIS OF APRIL - JUNE QU!URITI'ER NEN MCINFY FINANCING TO RF WE --- 

($ Billions) 

WEEKLY BILLS 

PRWECTED 

OUTSTNVDIK, - - SIZE 

1-Year Rills: .- 

(5/17 mzturlty) $ 7.8 S 8,3 ----- +$ -5 

( 6/14 mturi ty S 7.8 S 8-3 ----- is -5 +$ 1,0 

Cash Management -- Hllls: 

(Reopen 5/3, and/ 

or 5/10 issues) -u2-Year Not-es: 

(5/31 maturity) S 5*6 

5-Year Notes: 

(E'irst half of 

June) 

Refunding: 
ISSUE ANALYSIS OF JULY - SEPTEMBER QUARTER NEV MONEY FINANCING REMAINING TO BE DONE 

(6 biliiqrs) 

IJEd CASH 

RAISED 

+$ -7 

+$ .7 

+$ -8 

+$ 1.0 

+$ .8 

+$ -7 

+$ .6 

+$ -4 

+$ -3 

+$ -6 

+$ .5 

+$ e5 

+$ -5 +$ 8.1 

PROJECTED FOREIGN 

WEEKLY BILLS OUTSTANDING SIZE NEW CASH 

I-Year Bills: 

(7/42 maturity) 

(8/9 maturity) 

(9/6 maturity) 

-Year Notes : 

(6/30 maturity)" 

(7/31 maturity) 

(8/31 maturity) 

5-Year Nctes: 

(First half of 

Sept ,) 

4-Year Notes : 

7-Year Notes Y 

(First half of 

July) 

(First naif of 

July) 

" Set'cleme~t of these securities will be on 7/2/84. 
REPORT TO THE SECRETARY OF THE TREASURY 

FROM THE U,S GOVERNMENT AND FEDERAL 

AGENCIES SECURITIES COMMITTEE OF TBE 

PUBLIC SECURITIES ASSOCIATION 

August 1, 1984 

Dedr Mr. Secretary: 

Srnce the May refunding rates have ranged widely, wzth 

short-term rates havlng moved hlgher on balance and longer 

term rates having moved lower, flattensng the yield curve, 

Several conflicting forces are influencing investor attitudes, 

Factors putting upward pressure on rates are as follows: 

1. Stronger than anticipated economic recovery 

and expansion with the accompanying strong 

loan demand across the board. 

2, Stimulative Fiscal pollc~es and deficit 

financing, 

3, Federal Reserve monetary restraint. 

Factors puttlng downward pressure on interest rates are: 

1, Good inflation performance continuing for a 

long time and the market and investors 

somewi~at belated recognition of the iikel~hood 

of its persisting for sornetlme to come, 

2- The termination of the withholding tax has 

already helped to improve market sentiment 

and gradual increases in foreign participation 

should begin to have some real inpact, 

In this election year, changes in opinion as to the probable 

outcome are likely to add to the volat~llty and uncertainty of 

the market, Considering these conflictsng factors, there is d 

reasonable chance that interest rates could work somewhat 

lower over the next few months, but are nut llkely to move 

substantially rn either direction, 

Now, in reply to the charge, we recommend the following 

securities be sold at yield auctson to refund the August 15 

maturities and raise approximately $10 billion in new cash: 

$6.5 billion 3-year note due 8/15/87 

$5.25 billion 10-year note due 8/15/94 

$5.25 billion 30-year bond due 8/15/2014 

(add-ons approximately $,3 billion) 
For the balance of the quarter we recommend raising 

$3-8 blllion through the sale of $12.8 billion of weekly bills 

at each of the next seven sales and $.4 hrllion by selling 

$8-5 billlon 2-year notes with approximately $.4 blllion of 

add-ons. The 5-year note would produce another $6.3 bllllon. 

Summary 

Refunding $10.1 billion 

Weekly bills 3,8 

One-year bill , 4 

Two-year note 2.0 

Five-year note 6.3 

Total $22.6 billlon 

This would result in a quarter end cash balance of $22.1 billion 

including $,7 billion in add ons. 

I am attaching a schedule of tentative recommendations for 

the October-December quarter. This would involve returning to 

$13.2 billion of the weekly bills, continuing other auctions 

at present levels and raising $8.1 billion in the November 

refunding, 

Regarding the questions on call features, there are three 

baslc factors that affect the yield differentlal cost of call 

features. They are as follows: 

1. Loss of futures settlemcnt 

2. Loss of stripabrlity 

3. Call option 

In the judgment of the Committee, these would raise interest 

cost in the following amounts: 

20-Year Bond 

Callable in 

1, 1/8% (at least) 

2. l/4% (at least) 

3, l/8% (approx,) 

5 years 

1/8%~ at least) 

1/48 (at least) 

L/4% (at least) 

Totals 1/2% (at least) 5/8% (at least) 

The above estimates are based on the present levels of interest 

rates and yield curve, 

If the issue were callable at a premium, the premium would 

not affect numbers 1 and 2 above, The cost would only be reduced 

modestly. 
On a zero coupon bond, a principal amountof $35 billion 

would raise $1 billion for a 30-yeapmaturity, $11 billion 

in principal would raise $I billion in a 20-year issue and 

$33 billion would raise $1 billion bn a 10-year, Our Committee 

feels that $1 billion could be raised from a 30-year; $2 billion 

from a 20-year or about $3 billion from a 10-year issue* 

We believe that a minimum purchase price of $1,000 &uld be 

appropriate, although this would cause reconciliation problems 

between the naturlty value offered and the subscript~ons tendered, 

We think that if a zero coupon issue 1s offered, no schedule 

should be announced; rather a one-time offering should be made 

to test the market. After the initial offering, issues in the 

first quarter of the year would be appropriate because of IRA 

accounts, 

Our Committee was divided on its recommendation for sale 

technique: 7 members favored a regular auction; 7 favored a 

Dutch auctlon; and 4 were for a subscription offering. 

At the present time, based on current markets, a zero 

coupon could sell about 40 basis points below the par bond 

yreld curve on thc 30- and 20-year issues, On the 10-year 

Issue, the advantage would be about 20 basrs parnts, On the 

spot yield curve, the 30-year would show no advantage, the 

20-year a 46 hasls point advantage and the 10-year a 25 basls 

polnt advantage. However, we feel that the 30-year is 

distorted by the 25-year call' Wlthout this, the advantage 

would equal the 20-year, 

However, we feel that at least part of this advantage is 

illusory, because st would be offset by a hlgher yield 

on regular issues, due to the competition from the zeroes, 

In other wards, there 1s a certain degree of robbing Peter to 

pay Paul rnvolved In selling zero coupons, 

Under the headlng of additional comments, we would llke to 

say that seliing callable bonds and zero coupons are in basic 

conflict, because one relies on lower rates in the future and 

the other relies on higher rates in the future, 

In thls report, we have attempted to polnt out the cost and 

advantages of offering callable bonds or zero coupons, However, 

it is qulte difficult to recommend how to do something that we 

feel is basreally inadvisable. 

As far as a callable feature 1s concerned, we have serious 

doubts whether the present value of the call feature justifies 
the increased lnterest cost, Regarding the zero coupon, we feel 

that the Treasury is already receiving the bulk of the advantage 

through the demand resulting from stripping and that, if zeroes 

are to be offered at all, the Treasury should wait for a lower 

level of absolute interest rates, 

These are very complex issues and it is difficult to* 

capture the dimensions of our discussions in a written report. 

We therefore stand ready to discuss then further, I call on 

my colleagues to assist me in elaborating on the issues, and to 

answer your questions. * 

Respectfully submitted, 

aek Runnion, Jr, 

Chairman 
4. ISSUE XWLYSIS OF JULY - SEE'EIIZBER WEI? NEW EX3PJEY FIWINCIK mmINING TO BE TXX;IE .akTEKIY BILE 

1-Year ",.."" Bills: 

(9/6 maturity) 

2-Year Notes: -- 

(8/31 mturlty) 

5-Year Notes : 

(F~rst half of 

Sept . 
Jmu;iry and pssibly 

Apr11 m&urlt~es M 

?90JEC'TEi) FOREIGN 

SIZE Ed CASH 
4. ISSUE SIS OF JULY - SE ER FINANCIS 

($ Billions) 

EcmrJ 

SIZE 

(9/6 maturity) $ 7.8 $ 8,25 

2-Year Motes: 

5-Year Notes: 

(First half of -0- $ 6-25 

*pt, I 

Ref undin3: $ 9*2 

$120-9 
WPORT TO THE SECRETARY OF THE TREASURY 

FROM THE U,S GOVERNPlfENT AND FEDERAL 

AGENCIES SECURITIES COMMITTEE OF THE 

PURLIT: SECURITIES ASSOCIATION 

October 31, 1984 

Dear Mr, Secretary: 

Since this Commi.ttee was last here on August ].stl interest 

rates have declined across the board, Led by a two percentage 

point decline in the Fed funds rate, other yields have decreased by 75 to 175 basis points, 

The lower interest rates reflect a significant slowdown 

in the economy and probably a degree of ease by the Open 

Market Cornnittee. The continued Low rate oE inflation and 

removal of foreign withholding taxes have also contributed to 

Lower interest rates, 

Economic observers are split in their opinions as to the 

significance of the economic slowdown, Host believe that 

this is just a brief lull in a strong economic expansion and 

that growth will resume shortly, A few believe that if a 

recession has not already begun it is imminent. In either 

case, a Eiirther doywnward adjust.iaent in interest rates would 

be beneficial. 

For the time being, the strong dollar is helping to 

alleviate the burden of financing the heavy Federal deficit, 

Wowever, it is causing serious problems for many manufacturers 

and exporters, 

At the present time, the markets seem to be receptive to 

this quarter's heavy financing. Stripping has reestablished 

bona Eide buyers for long-term securities, Many of the zeros 

are going to dedicated portfolios and other permanent uses 

and wi:,l not be coming hack into the market. Fed book entry 

for coupons will enhance this distribution technique, 

Since any acti-on to reduce the deficit would not affect 

fiscal 1985, we feel that the Treasury should continue to 

finance fully throughout the full spectrum of maturities, 

For the xiid-quarter refunding, we recoinrnenci the follo-wing 

auctions : 

* r 90.5 billion 3 year notes due 11/15/87 

$5-75 billion 10 year notes due 11/15/94 

$5.75 billion 30 year bonds due 11/15/14 
Thcsc sales includinq -3 billion of Foreign add-ons, vmul3 

total $18-3 billion raisrng $9-1 billion of new cash, Our 

Committee feels that with the heavy November coupon payments 

and holiday congestion at the quarter end, the mid-quarter 

financing should be increased relative to the quarter end. 

To raise the remaining $24-9 bildion for the quarter 

we recomnend the following: 

addons new cash 

($billion) 

- - - Increase ll/% oil1 sale to 13,6 . 4 

Increase 7 weekly bill issues in 13-8 8 -4 

Increase l year bills to 9 ,O 1.7 

Increase 2 year notes to 9-0 -6 4-2 

5 year note to 6,5 .2 6.7 

Incre&sc 4 year note to 6.5 -3 3,5 

24-9 

We also recommend the sale of $1 billion of a targeted issue, 

This would leave n cash balance of $15 billion on December 31 

without the targeted issue or $16 billion with it, The Committee 

recommends a cash balance of $10 billion for Narch 31, 

We recommend (17-2) that the three year note be sold along 

with the bills on Monday November 5; the LO year on Wednesday 

Wovembes 7 dnd the year on Thursday, November 8. 

To work arour~cl the December holidays, we recornrzend that the 

O year auctions be delayed until early January, 

Since a sizable portion of the original taryeted i.ssue remains 

to be permanently placed, we feel it is premature to judge its 

specific success, However, the publicity surrounding the issue 

had a definite overall beneficial effect on foreign purchases of 

Treasury securities. 

Given favorable market conditions, we recommend selling another 

targeted issoe in conjunction with the 5 year note, Consideration 

should also he given to targeting $1 billion of the seven year note. 

Coupon honk entry has the potential ot significantly broadening 

the market for stripped issues and our Committee strongly endorses 

the Treasury's plan- If: operating procedures are to be completed 

i.n the reasonably near future, it might be advisable to announce 

that the issues offered in the refunding will be eligible for coupon 

bonk entry when the procedures are completed. 
This completes my report. My associates and I wroold now 

welcome any questions that you may have. 

Chairman