REPORT TO THE SECRETARY OF THE TREASURY 

FROM THE TREASURY BORROWING ADVISORY COMMITTEE OF THE 

PUBLIC SECURITIES ASSOCIATION 

October 31, 1990 

Dear Mr. Secretary: 

Let me begin today's report by noting that the committee met 

on Monday, October 29, for most of the day to consider long-term 

Treasury finance issues in the context of a growing marketable 

borrowing requirement. The conclusions and recommendations with 

respect to these discussions will be presented, along with the 

Committee's working papers, to the Treasury in approximately 10 

days. In light of the long-term focus taken in the special 

report, our recommendations for financing beyond the current 

quarter are not as relevant in today's report as our forthcoming 

views. After our longer term paper has been submitted, either a 

group from the Committee or I will be happy to respond to 

Treasury with respect to questions the Treasury might have 

concerning our report, including the composition of marketable 

financing for the January-March quarter. 

Moving on to our quarterly report, since our last meeting at 

the beginning of August, the fixed-income securities markets have 

been roiled by shifting perceptions regarding future economic 

prospects and the risk that U.S. forces might become involved in 

a Middle East war. During the first several weeks following the 

Iraqi invasion of Kuwait on August 2, long-term Treasury issue 

yields rose sharply on speculation that hostilities might soon be 

engaged in that region, and in reaction to the inflationary 

implications of a steep rise in world crude oil prices. At the 

same time, anticipation of a further squeeze on real consumer 

incomes and business profitability heightened worries that the 

long economic expansion might soon end. These concerns about 

flagging business.activity buttressed demand for short-dated 

issues and prevented their yields from rising in tandem with 

those on longer maturities. As a consequence, the Treasury yield 

curve assumed a substantially more positive slope. Over recent 

weeks, however, fears of an imminent Persian Gulf conflict have 

gradually eased and crude oil prices have retraced a portion of 

their earlier gains. These developments have permitted an 

increased market focus on signs of economic weakness and 

escalating liquidity strains within the banking system. In 

addition, the successful completion of a long-term budget deficit 

reduction package spurred expectations that Federal Reserve 

monetary policy would be eased to offset a somewhat tighter 

fiscal stance. As a result, while long-term Treasury yields have 

declined back to roughly where they stood three months ago, the 

yield curve has retained its somewhat steeper posture. Since 

early August, discount rates on 3-month Treasury bills have 

fallen from 7.42 percent to 7.13 percent, while yields on 3-year 
notes have inched down from 8.00 percent to 7.92 percent. Over 

the same period, however, 30-year bond yields have risen from 

8.36 percent to 8.75 percent. 

In this financial context, the Committee recommends that the 

following securities be sold at yield auctions to refund $23.5 

billion maturing securities and raise $11.00 billion of new cash: 

-- $12.25 billion 3-year notes due 11/15/93; 

-- $11.25 billion reopening of 9 3/4-year notes due 

8/15/2000; 

-- $11.00 billion reopening of 29 3/4-year bonds due 

8/15/2020. 

For the remainder of the current quarter, the Committee 

recommends: 

-- Sell $12.5 billion and $12.75 billion 2-year notes at two 

remaining auctions, raising $5.2 billion of new cash; 

-- Sell $9.5 billion 5-year notes raising all new cash; 

-- Sell $11.25 billion and $11.75 billion 52-week bills at 

two remaining auctions raising $3.4 billion new cash; 

-- Take the weekly 3- and 6-month bill auction size from 

$19.6 billion to $20.4 billion at the end of the quarter, 

raising a total of $18.3 billion; and 

-- Issue $20 billion of cash management bills in two tranches 

with late April maturities, raising all new cash. = 

Summary of New Cash for the October-December Quarter 

Refunding 

3- and 6-month bills 

52-week bills 

April cash management bills 

2-year notes 

4-year notes 

5-year notes 

Total to be raised 

$11.0 billion 

18.3 

3.4 

20.0 

5.2 

0.5 

9.5 

$67.9 

Already raised 15.75 

Estimated Foreign Add-ons 4.10 

Net Market Borrowing 

for the Quarter 

$87.75 billion 
As an end-of-quarter cash balance, the Committee recommends 

$20 billion. We expect the more probable closing balance will be 

$30 billion given our proposed funding schedule and stated 

expected $105.75 billion cash deficit. The Treasury's cash 

deficit, however, may be lower due to slowed demands from RTC, 

reducing the deficit requirement by nearly $10 billion and 

resulting in a residual build-up of the cash balance. 

With respect to the October-December quarter's financing, 

two specific recommendations should be noted. First, the 

Committee voted 14 to 4 to reopen both the most recently issued 

10-year and 30-year securities. The majority view believes that 

market liquidity and efficiency are promoted by fewer and larger 

issues. These factors are felt to promote long-term savings to 

the Treasury with uncertain economic impact in an on-off 

situation. These long-term factors are more important to 

Treasury now that stripping has had such a successful impact on 

the float of many issues -- particularly in long-dated 

maturities. It is also important to emphasize the reopening of 

the most recent issue as the market looks to the largest and most 

recent issue as its bellwether or benchmark. This should be 

noted currently, as both of the most recently issued long-term 

bonds have 8 3/4 percent coupons. 

Also, the Committee believes two auctions of April cash 

management bills would be better than one, if logistically 

possible, and if more than $13-$15 billion were required. 

Potentially supply imbalances could occur with a one-shot $20 

billion cash management bill, which could, in turn, cost the 

Treasury some additional interest expense. 

For the January-March quarter, assuming $25 billion of RTC 

funding, we're looking for $75 billion in net market financing 

and a $10 billion reduction in the cash balance to an end-ofquarter figure of $10 billion. 

Summary of New Cash 

Refunding 

3-and 6-month bills 

52-week bills 

Cash management bills 

2-year notes 

5-year notes 

7-year notes 

Total 

Foreign Add-ons 

Net market borrowing 

for the January-March Quarter 
As previously noted, the Committee believes our forthcoming 

special report will adjust the schedule for the January-March and 

subsequent quarters1 financing composition. The Committee is 

recommending in both our special report, as well as in today's 

report, a greater emphasis on one-year bills and five-year notes, 

as well as maintaining the quarterly refunding as the centerpiece 

of Treasury finance. The Committee believes both one-year bills 

and five-year notes have wide appeal among investors and hold a 

deep capacity for tapping additional funds. 

Mr. Secretary, this concludes our report and we welcome 

questions and discussion.