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REPORT TO THE SECRETARY OF THE TREASURY 

FROM THE TREASURY BORROWING ADVISORY COMMITTEE OF THE 

PUBLIC SECURITIES ASSOCIATION 

May 1, 1991 

Dear Mr. Secretary: 

Recessionary business conditions and substantial additional Federal Reserve monetary 

easing measures have been the primary economic factors setting the tone in the market since 

our meeting in January. Declining personal consumption spending and factory orders last 

quarter encouraged business firms to aggressively cut their production and shed workers. As 

a consequence, personal income has been virtually stagnant for the past six months. In 

response to this weak economic tone, Fed officials have lowered both the Federal funds rate 

and the discount rate. Not surprisingly, these fresh policy steps by the central bank have 

helped pull down discount yields on 3-month Treasury bills since late January, from 6.20 

percent to 5.60 percent. Yields on longer-maturity Treasuries have not fallen by as much over 

the period, however; 3-year note yields have dipped only from 7.34 percent to 7.30 percent, 

while 30-year bond yields have been flat at about 8.25 percent. To a large degree, the relative 

stickiness of yields on long-term issues can be traced to improving assessments of U.S. 

economic prospects among financial market participants. Falling energy prices and heavy 

individual income tax refunds have bolstered consumers finances since mid-January, which 

encouraged consumers to increase their volume of purchases as confidence surged following 

the successful conclusion of the Gulf war. In addition, a more upbeat reading of the U.S. 

economic outlook triggered a sharp rise in the dollar against other G-7 currencies, and that in 

turn led to some liquidation of Treasury note holdings by foreign central banks and official 

institutions as part of their coordinated foreign exchange intervention activities. Over the ' 

period ahead, information and developments relating to the economy's health will undoubtedly 

remain the key factor in determining the direction of Treasury market yields. Should business 

activity stage an early recovery, as the Administration and many private analysts believe, then 

market yields would probably come under some moderate upward pressure from the unusually -

high market financing needs that are expected for the balance of this fiscal year. With this 

perspective as background: 

The Committee unanimously recommends that the following securities be sold at yield 

auctions to refund $19.0 billion maturing securities and raise $18.0 billion of new cash: 

$13.0 billion 3-year notes due 5/15/94; 

$12.0 billion 10-year notes due 5/15/2001; 

$12.0 billion 30-year bonds due 5/ 15/202 1. 

For the remainder of the quarter, the Committee recommends that the Treasury: 

Sell $12.5 billion 2-year notes raising $2.3 billion of new cash; 

Sell $9.25 billion 5-year notes, raising all new cash; 

-- Sell $12.25 billion 52-week bills, raising $1.6 billion new cash; 

Raise weekly 3- and 6-month bill auction sizes to $20.0 billion by 

early June, leaving a paydown in bills of $850 million; 
-- Sell $10 billion cash management bills, to mature April 1992; 

-- Sell $11 billion cash management bills due June 20, 1991, with intention of 

extending all or part into a June 1992 maturity as necessary to reach the 

targeted end-of-quarter cash balance. 

Summary of New Cash for Quarter 

To be done: 

Refunding $1 8.0 billion 

3- and 6-month bill (0.85) 

52-week bills 1.6 

Cash management bills (2 series) 2 1 .O 

2-year note 2.3 

5-year notes 9.25 

Total $5 1.3 billion 

Already done (3.5) 

Estimated Foreign Add-on 2.2 

Net Market Borrowing $40.0 billion 

The Committee recommends and the schedule provides for a cash balance of $35 billion on 

June 30. 

The Committee's April/June schedule contemplates two substantial offerings of cash 

management bills to tide the Treasury over low points in the cash balances in late May and 

early June. The first cash management bill would be a short-dated bill maturing in June 1991, 

followed as cash needs dictate with a cash management bill maturing in April 1992. The 

short-dated June bill could then be rolled at its maturity into an April 1992 cash management 

bill or, more likely, a June 1992 cash management bill to top up the cash balance to the 

targeted end-of-quarter level. This last cash management bill should be flexible to take into 

account cash flow contingencies brought on by uncertain "Desert Storm" payments, RTC 

demands, or tax receipt shortfalls. 

The Committee unanimously believes the refunding size should be as large as possible 

to release as much pressure from future bill issuance as practical, given the large forward 

borrowing needs. We again emphasize the Committee's preference to use a full measure of 

long bonds. We are comfortable that the current market will readily accept the increase of $1 

billion from the February refunding. Two points are particularly supportive of this view. 

First, fifty percent of all long bonds are stripped, which spreads the maturity concentration 

over the yield curve. Second, the market no longer has access to long-dated Refcorp or other 

Treasury bonds in the 20-30 year sector. In sum, the enormous foreseeable Treasury auction 

calendar argues forcefully for both a large and long-duration bias to the refunding structure. 

The Committee believes the Treasury should use the quarterly announcement to 

publicly dispel market concerns about a near-term move to a monthly cycle of 10-year notes. 

A repetition of the stated view that current cycles can readily absorb near-term projected 

needs will clarify lingering market discussions on a monthly 10-year note, and therefore 

improve participation in the current offering. 
For the July/September quarter, the Committee recommends a minimum end-of-quarter 

cash balance of $30 billion, which would produce a marketable borrowing requirement of 

roughly $105 billion. Again, the aforementioned uncertainty of Desert Storm, etc., make the 

latter call speculative. Under most circumstances, however, the Committee would call for a 

minimum August refunding of $39 billion. The Committee also would turn to substantial 

increases in the year bill cycle in the next quarter, as it is currently a relatively untapped 

source of funds. The Committee believes it is logical that, over time, the year bill size could 

be several billion dollars larger than 2-year note offerings. Therefore, in the July/September 

quarter, the group would recommend that auctions of year bills be at least $14 billion. More 

modest increases of $250-500 million should be adequate for the coupon cycles, while weekly 

bills should rise to $21-22 billion. Finally, a long-dated cash management bill will also be 

likely by mid-August. The key recommendations for the quarter, however, are continuing 

emphasis on the refunding and growth in year bill offerings. 

Moving on to other matters --

The Committee unanimously believes it is in the best interests of the Treasury to take 

forceful action to prevent the growth of pre-announcement, when-issued market trading for 

notes and bonds. The Committee believes the Treasury should use its authority to accept or 

reject auction tenders to dissuade participants from developing this activity. 

There are two primary bases for this point of view. First, the Committee believes the 

practice would potentially diminish the full discretion of the Treasury with regard to 

financing options if significant growth in open exposure were to occur in a specific expected 

issue. The concern is that if a systematic credit or market exposure existed because of the WI 

activity, the Treasury might feel a de facto obligation to issue a specific maturity which it 

might otherwise choose not to issue in order to resolve market problems. 

Second, the group sees the potential for a build-up of significant unregulated or 

minimally supervised credit risk. The Committee is concerned that current system checks are 

not organized in a way to permit the Treasury, the Fed, or others to effectively monitor or 

manage this exposure. As opposed to futures and forwards, most OTC markets lack standardized legal remedies for problems which might arise where the security is not available. 

Similarly, effective and consistent mark-to-market rules do not exist for OTC issues, let alone 

for those not yet officially identified. 

With regard to this issue, the Committee also believes the Treasury should be clear with 

the public in making its policy known. The recent market discussion of this issue has made 

very unclear the framework regarding constraints on pre-announcement, WI trading. Frankly, 

the Committee members by institutional memory believed before recent discussions that such 

activity was expressly precluded by the Treasury. Whatever your position may be, and we 

have a clear preference, this issue should be decided and the policy publicly disclosed. 

On the question of an earlier time for the announcement of the quarterly refunding, 

the Committee unanimously supports moving the announcement to a point when maximum 

market liquidity is available. This recommendation assumes that the earlier time frame is a 

matter of operational indifference for Treasury. The Committee believes that the announcement should be arranged so that, when the wire services carry the announcement to the public, 

at least 15 minutes of Chicago futures trading is still available -- 30 minutes would be 

preferable. It is also the sense of the Committee that the Treasury should implement the 

release procedure in subsequent announcements, so that all participants are prepared for the 

change. The group also believes it would be best if the announcement time were standard for 

both refunding and regular auctions. 
On a final matter, the Committee recommends that the Treasury use today's announcement as an opportunity to clarify that it has not foregone by law or policy its option to call 

securities. Each call option should be evaluated in the context of what is best for the 

taxpayers. The Committee feels that the press may not have properly or broadly conveyed this 

view and the consequent risks that might exist in holding callable Treasuries. A clear public 

statement in an official forum would be beneficial for Treasury market participants. 

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