REPORT TO THE SECRETARY OF THE TREASURY FROM 

THE TREASURY BORROWING ADVISORY COMMITTEE 

OF THE BOND MARKET ASSOCIATION

May 4, 1999 

Dear Mr. Secretary: 

Since the Committee's last meeting on February 3, 1999, the U.S. economy has performed strongly. The 

Commerce Department recently reported that GDP expanded at a 4.5% pace in the first quarter of 1999. 

Consumer demand, as measured by gross domestic purchases, accelerated to 6.8 percent from the 5.4 

percent rate of the fourth quarter of 1998. Gains in consumption, construction activity and continued 

momentum in business capital spending continue to offset the headwinds from the trade sector. 

Treasury yields have risen significantly and the yield curve is somewhat steeper than at the time of the 

Committee's last meeting. Yields on Treasury bills are 10-30 basis points higher, and for Treasury 

coupons they are 30-50 basis points higher, as the market has adjusted to stronger global growth 

prospects and apparent investor preferences for credit instruments and equity securities. 

Within this context, the Committee considered the composition of a financing to partially refund $28.9 

billion of privately held notes maturing on May 15, and to pay down approximately $2 billion. The 

Committee unanimously recommends a total financing size of $27.0 billion consisting of the following 

offerings: 

• $15.0 billion 5-year notes due May 15, 2004 

• $12.0 billion 10-year notes due May 15, 2009 

The Committee did not feel that a reopening of the 10-year note was warranted due to original issue 

discount (OID) considerations, the size of the existing issue, and a lack of significant tightness in the 

financing market.n regard to the composition of Treasury market financing for the remainder of the 

current quarter, the Committee recommends that the Treasury meet its borrowing requirement in the 

following manner: 

• Two 2-year notes of $15.0 billion each, 

• Two 1-year bills of $10.0 billion each, 

• Weekly issuance of $15.0 billion of 3- and 6-month bills through the remainder of the quarter, 

and 

• One cash management bill of $45.0 billion to be issued June 1 to mature within the quarter. 

For the third quarter of 1999, the Treasury estimates a net market paydown of $10 billion with an 

estimated cash balance of $45 billion on September 30. To accomplish this requirement, the Committee 

preliminarily recommends the financing schedule in the attached table, without making a judgment 

about the optimal mix of coupon offerings in the next refunding. Specifically, in the event of a 

reopening of the 10-year issue, the bias of the Committee would be to look to increase the size of the 5­

year note offering. 
At the Treasury's request, the Committee revisited questions related to the range of tools available to the 

Treasury to help meet its debt management objectives in an environment of continuing, sizable budget 

surpluses. The Committee reaffirmed its views on what those objectives should be, as set out in its 

report of February 3, 1999. The Committee also discussed and reaffirmed its view that the Treasury 

should have available to it a full range of policy options, in order to distribute the impact of its debt 

retirement activity in a way which preserves as much of the cost efficiency and liquidity of the Treasury 

market as is practical. Specifically, the Committee was of the view that the Treasury should pursue 

policy action on two initiatives: greater flexibility in the application of original issue discount (OID) 

rules as it relates to decisions on coupon re-openings, and development and issuance for public comment 

of policies and procedures which would guide the execution of secondary market debt buy-backs. 

With regard to OID rules, the Committee felt that the Treasury would benefit over the long term if it was 

less restricted by secondary market price discount limitations in deciding when it was in Treasury's 

interest to re-open previously issued benchmark coupon securities. While decisions on when to favor reopenings relative to new issues would and should still be made on a case-by-case basis, having greater 

flexibility to carry out more re-openings would be a useful policy adaptation. 

There was especially strong sentiment in the Committee as to the desirability of the Treasury moving 

ahead expeditiously to develop rulemaking proposals to guide execution of a secondary market debt 

buyback program. Those rules should address both the potential to use debt buybacks as a short-term 

cost saving measure when significant market price anomalies develop, as well as rules for its use as a 

longer term tool to manage the impact of debt reduction actions on various maturity sectors of the 

market; to balance the impact of changes to regular offering cycles and sizes on the average maturity 

profile of the debt; and to preserve flexibility should less favorable economic or fiscal policy outcomes 

develop. Recognizing that it would take time to develop those rules and receive and evaluate public 

comment, the Committee felt that it was important to begin the rulemaking process soon, as the use of a 

buyback tool could well be preferable to further cutbacks in the size and frequency of regular bill and 

coupon offerings. 

The Committee then turned to consideration of the trade offs between the potential for reduced issuance 

in the regular 2-year and 30-year coupon offerings, relative to the potential for changes in the pattern of 

regular Treasury bill offerings. The Committee was generally of the view that liquidity had already been 

negatively impacted in the bill sector and that it was important, therefore, to preserve regularity and 

predictability in the size of the weekly three and six-month bill offerings, even if that necessitated 

continued volatility in the size and frequency of cash management bills. The Committee also discussed 

the relative attractiveness of maintaining the existing annual program of 13 offerings of 52-week bills, 

compared to adjustments in other weekly bills or 2-year note offerings. 

In this regard, there was a broad consensus on the Committee that it would be preferable to consider 

moving to four fewer annual offerings of 52-week bills, with a shift in relative issuance to more 3- and 

6-month bills and to maintaining, if possible, monthly offerings of 2-year notes. The timing of any such 

shift would, of course, depend on when debt reduction needs called for further changes in the regular 

issuance program, as well as whether the Treasury had in place, and was inclined to make active use of, 

a secondary market debt buyback program. The preference for fewer 52-week bills relative to 3- and 6­

month bills and 2-year notes reflected the following considerations: (1) the 52-week bill was viewed as 

providing the least utility to the Treasury and the market, relative to other regular offerings; (2) there 

was substantial secondary market alternatives, in terms of the supply of short coupons, to meet investor 

needs in the 1-year maturity; and (3) the timing of the Treasury's monthly cash flow requirements favor 

preserving monthly issuance of 2-year notes to help meet the pattern of sizable early month cash 

drawdowns for regular benefit payments, as well as the monthly retirements of the previously issued 5-
year notes. Moreover, this adjustment to fewer 52-week bill offerings in favor of more 3- and 6-month 

bills and 2-year notes could be accomplished without any material impact on the average maturity of the 

debt. Should the Treasury decide to move to less frequent issuance of 52-week bills, the decision on 

which bills to eliminate should be based on an evaluation of monthly patterns of Treasury cash 

management needs. The Committee recognized that, longer term, it may still prove necessary to 

consider reduced offerings of 2-year notes and 30-year bonds, but felt that the Treasury should first 

pursue these other alternatives. 

Finally, at the Treasury's request, the Committee considered the proposition of shortening the whenissued period for 2-year notes. In this regard, it was noted that the Committee had recently 

recommended, and the Treasury had decided to implement, a shortening of the when-issued period for 

regular Treasury bill offerings. In evaluating this possibility for 2-year notes, there was recognition that 

there was no precise way to determine the optimal length of when-issued periods. Moreover, it was 

probably feasible to shorten those periods slightly, without adversely impacting pre-auction price 

discovery and distribution or post auction re-distribution and settlement preparation. When considering 

instead whether this might be viewed as desirable, there was concern among members of the Committee 

that the message implicit in shortening this period was the higher likelihood that there would be shortterm variability in the size of these coupon offerings, to fine tune them relative to recent cash flows. This 

was viewed as somewhat at odds with other efforts to preserve predictability and regularity in the 

regular coupon offering cycle. For this reason, the Committee was not inclined to recommend this 

change. 

Respectfully submitted, 

Stephen G. Thieke 

Chairman