REPORT TO THE SECRETARY OF THE TREASURY 


FROM THE TREASURY BORROWING ADVISORY COMMITTEE OF THE 


PUBLIC BECURITIES ASBOCIATION 


May 5, 1993 

Dear Mr. Secretary: 


Since the Committee's last meeting with Treasury in early 


February, the then steady stream of improving economic statistics 


and associated growing confidence in a sustainable recovery has 


recently given way to renewed caution and old concerns. First 


quarter GDP, though positive, was below expectations and sharply 


behind the fourth quarter pace. Shrinking military spending, 


unseasonably severe winter weather, low income tax.refunds already 


spent because of reduced withholding, a prospect of significant tax 


increases, uncertain health care costs, continuing slow job growth, 


and further corporate down-sizing have joined to offset the initial 


enthusiasm for change under a new Administration, the stated goal 


of deficit reduction, and the eventual benefits of the continuing 


move to lower interest rates. Importantly, current views still 


favor positive GDP growth in the 2% range, with steady gains in 


productivity constraining core inflation to approximately 3%. 


Interest rate declines have been meaningful: 50 and 40 basis 


points for the two and thirty-year maturities, respectively, since 


the last refunding announcement, and even more impressively 81 and 


53 basis points for the same two maturity sectors since year end. 


Disturbingly, however, the yield curve has continued to steepen 


between two year and ten year and ten year and thirty-year 


maturities. 


More than the usual economic, budgetary, market and financing 


uncertainties, to which it is accustomed, confronted the committee 


when it met yesterday to deliberate. Because the results of the 


Treasury's review of its debt management strategy will not be made 


public until this afternoon, . the Committee met without the 

knowledge of the framework within which the Treasury plans to 


conduct its borrowing activities over the remainder of this quarter 


and beyond. Given this unfortunate timing, the Committee felt 


constrained in its ability to offer recommendations in the detail 


normally provided. The Committee's best thinking on debt 


management was extensively set forth in the report of its March 15, 


1993 meeting. Our thoughts remain the same and therefore no useful 


purpose would be served by reiterating those views. 


Given this circumstance, the Committee felt the most helpful 


course would be to assume a total refunding size consistent with 


recent quarterly refundings, current projections of cash needs, and 


market expectations. The Committee favored by a vote of 19-0 a 


total refunding amount of between $35.5 and $36.5 billion, and used 


$36 billion as its working assumption. Further, if the Treasury 

were to continue its traditional composition of three, ten and 


thirty-year offerings, the Committee favored, again by a vote of 


19-0, reopening the existing ten and thirty-year issues. The 


recent reductions in the size of the longer-dated offerings -- cumulate some $3 billion per quarter for the thirty-year alone -- has contributed to financing "squeezesN and widening spreads 


between "active1' and "seasonedw issues. Trading has become less 


orderly with occasional price discontinuities as risk capital and 


dealer and investor sponsorship has shifted elsewhere. 


Particularly true for the thirty-year, there is a growing concern 


that this erosion of trading patterns could spread to the ten year, 


the evolving new long bond, and a key capital markets hedging 


instrument. The Committee continues to believe that the quarterly 


refundings should be viewed as the center piece of all Treasury 


financing and, in fact, should grow in size relative to other cycle 


offerings. 
 - With the announced $37 billion quarterly Treasury financing 


requirement and a net pay down of $750 million to date, $37.750 


billion remains to be financed in the current quarter. Assuming a 


$36 billion refunding, net new cash raised in the quarter could be 


accomplished as follows: 


Auctions Date Size Raisinq 


Refunding $36 billion $12.1 billion 


2-year notes May


June 


5-year notes May


June 


4-year note June Maturity 


1-year bill June 


3- & 6-month bills 7 auctions of 22.4, 

23.4, 24.0, 24.4 & 

3 x 25.0 


Foreign Add-ons 


Total net market borrowing: 


The Committee sees the need for an intra-quarter cash 


management bill of approximately $15 billion to be auctioned in 


mid-May and to mature June 17. The Committee concurs with 


Treasury's quarter-end balance targets of $35 billion for June 30 


and $40 billion for September 30. A higher June balance might be 


considered given the anticipated fourth fiscal quarter needs. 

Mr. Secretary, the Committee recognizes the incomplete nature 


of this report. In common with financial market participants every 


where, the Committee awaits the release this afternoon of the 


results of the Treasury's review of its debt management strategy 


with the hope that the uncertainty of the past few months and the 


associated increased market volatility, and ultimately increased 


financing costs to the Treasury, will be brought to an end as its 


borrowing again assumes a more regular and predictable pattern. 


The Committee stands ready not only to respond to questions this 


morning, but also to reconvene if so asked to complete or modify 


its recommendations within the framework of the Treasury's new debt 


management strategy. 


Morgan B. Stark 


Chairman of the Treasury Borrowing 


Advisory Committee of the 


Public Securities Association