REPORT TO THE SECRE'I'ARY OF THE TREASURY 

FROM THE U.S. GOVERNMENT AND FEDERAL 

AGENCIES SECURITLES COMiMITTEE OF THE 

PUBLIC SECUKI'TIES ASSOCIATION 

January ?iIi 1985 

Dedr Mr. Secretary: 

When this Committee last met witti you at the end of October, 

there was a great deal of concern as to the status of the economy. 

sone analysts were even forecasting the beginning of a recession 

during fourth calendar quarter, 

It now appears that those forecasts were unduly pessimistic, 

While there was a considerable slowdown in the second half of 1984, 

the fourth quarter GNP growth came in bttter than expected at 3,Y%, 

However, this growth is not spread evenly throughout the various 

sectors of the ecoiiomy. 

Defense and high-tech industries have continued to prospcr 

while agriculture, textile, energy and export businesses are 

depressed. Rut-o sales have held up q~iite well hiit housing has 

been slow to respond to lover interesC rat.es, Recently, merchants 

have had to cut prices to keep goods moving 

News on inflation has he<?n quite good, Rhile the strong dollar 

has made a significant contribution to the lower level of inflation 

and facili.tat:ed t.he financing of the public debt, it has adversely 

affected the cnrnpeti tiveness of domestically produced goods, 

With the economy growing at what appears to be a sustainahie 

rake of 4-58 and the easier monetary policy of recent months, 

interest rates have declined in all maturity ranges over the last 

three mont-hs, Short rat.es have declined about 1 1./2 percentage 

points, intermediates about I pi?rcent;age point and long rates 

112 percentage point. 

Investors eei.iii to iiave lowered their prception a!; to the 

iii?gi"?e r~t fiiiiire inilatioir and ace more willing to extend matilrities. 

While the market continues to be concerned about the size of the 

budget and balance of payments deficits, it should he quite receptive t~o this quarLer1.y financing. 

Built into this Psvorble market: psychology is at least 

some degree of hope tllat some constructi.ve deficit reduction will. 6. a place in the next few months, Tf market participants are 

disappointed on this, it could ,again bring about infiati.on fears 

and hiyi1i.r interest. rates, Given this favorable investmerrt elirndtu 
and the stripping feature we recormend raising $11 l/2 billion in 

cash along with refunding the $8 billion of notes maturing 

February 15th, We would nccornplish &his as follows: 

Auction $7,5 billion 3 ye+- notes 

6,0 billion 10 yetar notes 

6.0 hilliori 30 year bonds 

Far the halance of the yuarter we recommend raising $32-4 billion 

as folloixs: 

raises 

Leave weekly bills at Sl4,O billion $ 3.7 

Increase one year hills to 8-75 billinn .75 

Leave two year note at 9-0 billion 1-5 

Leave five year note at 6-75 billion 6-75 

Refunding 19,s ~iiliori 11,: 

Cash Management hills 8, U $m 

Ta the extent that foreign add-ons ard received, the cash 

management bil1.s could be reduced, This would leave a cash 

balance of $10 ei.llion on March 30, 

We are aLoo including a tentative schedule for possible 

financing of the &pril.-June quarter leaving a cash 5,alance of 

S15 billion, 

Subject to the change of the Under Secretary we have scheduled 

a meeting on March 5th to consider long range strategies to deal 

with the sharp increases in the amounts of maturing Treasuries 

and the appropriate role of! the midquarter refunding issues in 

meeting the Treasury's quarterly cash needs, We wi1.l also consider 

the increasing interest payments on these dates, A Schedule showing 

net cash raised after interest Llayments is attached, 

The Cornnittee strongly endorses the Treasury's program for 

issxling strippable issues, We helieve tI1i.s will increase demand 

for long term securities and will reduce interest cost on financing 

the puhlic debt. 

PinalLy; Mr, Secretary our Committee unanimously commends 

you dnd yoiir shle sllatf tor four years of exceilence in managing 

tktc? Department dnrl the publ.ic debt during the most cliifiicult 

perid in memory, 

Kcspcetfu1l.y suhmi ttedr 
-- LSSUE ANALYbIS OF APRIL - JUNE OUARTEK MEN MONEY FINANCING REMAINING TO BE DONE -. A -- 

($ Rillions) 

'EEKLY BTJ,IdS - OUTSTANDTNG - 

Cash Management Bllls: 

April and/or June 

maturities $ 8,il 

$-Year Notes: 

(Yirst lialt 4E 

June) -0- 

4-Year Notes: 

3/31* $ 3-4 

7-Year Notes: -- (PlrsL hdlf of -11- 

April) 

LO-Year Bonds: 

:First halt of 

Refunding: -- $ 10*8 

hEW CASH 

KAISED 

*Settlement ut these securities will he on 4/1/85, 

Ipeninq cash balance 4/1/85 $1U,O billion 

Closing cash balance 6/28/85 $14,8 billion -- 

Change in cash haiaiice +S 4-8 bll.1ivn 
INTEREST PAYMENT ESTIMATES AND TREASURY NET BORROWING ------ 

DATE INTEREST BORROVINC NET CASII RAISED 

2/75 -11 .% +1O,2 - - 1 ,o 

1/31 - 4.5 +15+4 - +20.9 

5/15 -15,R + 9.5 - - 5,3 

6/30 - 4.5 +16,5 - +1%,O 

9/15 -1 1 -0 c 8-3 - - 2,7 

9/30 - 4-8 il6,6 = 411.8 
REPORT TO THE SFCRFTARY OF THE TREASURY 

FROM THE U,S, GOVERNMENT AND FEDERAL 

AGENCIES SCCURITLES COMMITTEE OF 

THE PUBLIC SECURITIES ASSOCIATION 

April 30, 1485 

Dear Mr- Secretary: 

Since the Committee last met in Washington on January 30th, 

interest rates increased by 50 to 75 basis points; then more 

recently declined to about the same levels that existed at 

the last mid-quarter financing. 

Whi1.e the value of the dollar has come down some from 

its high, its overall strength still keeps demand from resulting in growth in production in many industries, 

The securities markets continue to be volatile and tentative. 

As we reported in our report for the special Cosmittee meeting 

on March 5, given normal circumstances, the market for a while 

can continue to absorb the heavy government securities orferinss, 

nowever, it must be remembered that as note cycles mature, 

cash raised on cach sale is then on top of the roll over of 

the maturing notes, Also the size of the maturities and interest 

payments are growing at increasing rates, 

Market participants are concerned about a number of potertially unscttling matters, First they Ceel that is essential 

that a meaningful reduction in the budget deficrt be enacted by 

the end of September, If this is accompl ished the market could 

improve substantially: if not, market rates could rise to considerably higher levels, 

A sharp decline in the foreign exchange value of the dollar 

could also bring about higher interest rates, Foreign demand 

for dollar investments has been helpful in financing the public 

debt but a change in sentiment could again raise fears of 

crowding out in the domestic financial markets. 

ancertainty about the economy and Federal Reserve monetary 

policy also contribute to the instability of the bond and money 

markets, 

Rny factor that would cause short term interest rates to 

rise substantially could exacerbate the problems of the thrift 

industry and Latin >merican countries, 
In summary the fragility of the worldwide financial 

structure and the magnitude of the 1Jni"Ld States' deficit 

financing leave little room for error in legislative and 

policy actions, 

Nevertheless we feel the market wil~l (and indeed must) 

accept larger cash raising financings at this and future midquarter refundings, We recommend the Eoll.owing for the Kay 15 

financing s 

Sell: $8-0 biZlion 3 year Notes 

6.5 billion 10 vear Notes 

- 6-5 billion 30 year Bond 

$21.0 billion 

(reopen the 10 year and 30 year) 

This would raise $.4 billion more than the upper limit of 

the charge, If the new cash raised is to be kept under $10 

billion, most of our members (11) feltthat the three year 

note should be reduced to $7.5 billion, five would reduce 

10 year to $6 billion and three were for reducing the 

30 year bond by $,5 billion. 

For the rest of the quarter the balance of cash needs 

cog~ld be raised by: 

-- Selling $8,5 billion 1 year bills at each of the 

remaining two auctions, This would raise $-5 billion; 

-- Sell .$9,0 billion 2 year notes raisin9 S.9 billion; 

-- Sell $7-6 billion of 5 year ootcs which would be all 

new cash, 

Summary of Cash Raiscd 

Refunding $10.4 bjllion 

L year bills -5 

2 year notes - 9 

5 year notes 7.0 sm;8- 

Already raised l6*2 

$333- 

Foreign add-ons wosld raise between $,5 billion and 

$1 billion, This would leave a cash balance of at least 

$20 billion at quarter end. In view oE the heavy cash needs 

for the 3rd and the 4th calendar quarters we feel that a 

cash balance of $20 bi.llion is appropriate for both this 

and next quarter end. 
The stripping feature has obviously been quite successEu1. 

We commend the Treasury for all the hard work that went into 

the development of the program, Since the first quarter of 

the year is the period of strongest demand for stripped coupons 

for IRA accounts you should expect some moderation of demand 

in subsequent quarters, However, there are other uses for 

stripped coupons and the feature will continue to contribute 

to demand for longer dated securities. 

Mr. Secretary this concludes our report and we will 

he happy to respond to your questions, 

Respectfully submittnd, a 

Chairman 
REPORT TO THE SECRETARY UF THE TREASURY 

PROM THE U,S, GOVERNMENT AND FEDERAL 

AGENCIES SECURITIES COMMITTEE OF 'THE 

PUBLIC SECURITIES ASSOCIATLUN 

July 31, 1985 

Dear Mr, Secretary: 

Since our Committee last met in Washington on April 30th, 

Pederal funds have remained at about the same level, but 

other market rates have declined by an average of about 75 

basis points. 

This decline in rates is partially due to expectations that 

a meaningful reduction in the federal deficit would be accomplished. 

However, time is running out end market psychology is changing. 

The breakdown of negotiations has been a major reason for the 

more recent decline in bond prices, 

Given the present level of inflation, real interest rates are 

still high and there is room for modest declines even if the economy 

were to gain momentum. However, tor this tohappen it is essential 

that the deficit be reduced, 

The weakness ot the dollar should eventual.ly help domestic 

production hut, could cause a decline in foreign investment in Treasury 

securities, nopefully the decline i,n the dollar will be gradual 

because a sharp drop could cause serious problems both domestically 

and internationally, 

Many traditional investors are nervous about the market and 

may be on the sidelines for a while. Fixed income fund managers 

have been taking pr0fit.s and shortening maturities, Bank portfolio 

managers do not seem to have much interest at the present time, 

Whjle levels of inflation are quite low, the market perceives 

t-hat the huge federal deficit will inevitably lead to significantly 

higher rates of price increases. If expenditures are not reduced, 

the goods and services must he paid for either through taxes or 

inflation, 

The continued financing of the large deficits and the ekfect 

of compound interest will lead to higher levels of both interest 

rates and inflation, 

While these statements might be debated jn academic circles 

they are nevertheless the perceptions of the market place and as 

such are primary determinants of interest rates, 
To refund the August 15 maturities and raise $9,7 billion in 

cash we recommend the following: 

Sell $9.0 billion 3 year notes 

6.5 billion 10 year notes 

Reopen 6-5 billion 11 1/4% bonds due 2/15/85 

For the rest of the quarter we recommend: 

Sell 58-75 billion I year bills at two auctions 

raising $,5 billion, 

Sell Sl4,4 billion weekly bills at each remaining 

auction raisxng $2,8 billion, 

Sell 59,25 billion 2 year notes at each auction raising 

$1,7 billion, 

Sell $7-25 five year note (all cash), 

Sell $7.00 billion four year notes raising $3.4 billion, 

Summary of Cash Raised 

Re funding $9-7 billion 

1 Year bills "5 

Weekly bills 2-8 

2 year notes 1-7 

5 year notes 7-2 

4 year notes 3.4 

Foreign add-ons .S 

Non-marketables 3,s 

$29.3 billion 

already raised 20 -5 

49.8 

reduced cash 

balance 1-2 

$51 -0 billion 

Cash balance $22-8 billion 

For December 31 we recommend a cash balance of $18-20 billion 

which could involve a $25 billion November refunding raising 

$15-5 billion in cash. 

The Treasury+ STRIPS program has been very successfui in 

broadening the market for long bonds. The generic CUSIPs feature 

will help to further the marketability and liquidity of STRIPS, 

At higher levels of interest rates there is more demand for 

STRZPS by dedicated portfolios and defeasance for pension plans. 

This demand has subsided to a significant degree hecause some 

demand has been filled and locking in reinvestment rates loses 

some appeal as rates get: lower. 
Prlor to A?rll 15th there was strony demand for STRIPS 

by individuals tor IR4s. We would expect that their demand 

w11l continue to he seasonal, 

More recently the Japanese have been the largest buyer of 

STRIPS hut they buy only the corpus and this leaves large 

amounts of coupons in the market, 

Mr, Secretary this concludes our report and we wlll he happy 

to respona to your yuestlons, 

Respectfully submitted, 

Chairman