REPORT TO THE SECRETARY OF THE TREASURY 

FROM THE 

TREASURY BORROWING ADVISORY COMMITTEE 

OF THE 

PUBLIC SECURITIES ASSOCIATION 

AUGUST 3, 1994 

Dear Mr. Secretary: 

During the three months since the Committee's last meeting with the 

Treasury in May 1994, the economy has continued to expand at a solid pace. 

Though faint so far, evidence of some cyclical acceleration of inflation is 

growing. Monetary policy has continued to become less simulative, and the 

Federal funds rate was raised a further 0.50% during the period to the present 

level of 4.25%. 

Over the three-month interval, yields on Treasury securities have 

increased by approximately 5 to 35 basis points. The largest increases have 

been for maturities under one year, and as a consequence the yield curve has 

flattened. Along with forward prices for various fixed-income instruments, the 

present shape of the yield curve indicates that market participants expect 

additional increases in interest rates in the coming months. 

Within this context, to refund the $29.6 billion of securities maturing on 

August 15, 1994 that are privately held and to raise additional cash of $10.9 

billion, the Committee recommends that the Treasury auction $40.5 billion of the 

following securities: 

$1 7.0 billion 3-year notes due August 15, 1997; 

$1 2.0 billion 7 114% notes due May 15, 2004; and, 

$1 1.5 billion of 30 114 year bonds due November 15,2024. 

Fourteen of the 20 Committee members present for the meeting favored this 

recommendation. Five members favored a composition of $17.0, $12.0, and 

$11.0 billion for the respective three offerings, and one member favored a 

composition of $17.5, $12.0, and $1 1.0 billion. 

Given the composition favored by the majority, the Committee 

unanimously recommends the reopening of the 10-year note issued in the last 

refunding. The recommendation is based on the premium the current 10-year 

issue commands in both the secondary market and the repurchase agreement 

market. 

With respect to the bond, the Committee by a vote of 16 to 4 recommends 

that the Treasury auction an issue that matures either in May or in November 

because of the relatively greater demand currently for the components of 

stripped securities maturing in these two months. In considering the 

consequent choice between a 29 314 year and 30 114 year issue, a majority of 

the Committee believes that, on the margin, there may be somewhat greater 
demand for the longer alternative that would mature in November 2024. The 

principal reason for this view is the prospect that when stripped the lower dollar 

price would make the longer issue more attractive to defeasance programs, 

thereby maximizing its premium in comparison to surrounding issues. In 

addition, looking ahead to February 1995 when the next 30-year bond is 

scheduled to be auctioned, the Treasury would be able to assess the relative 

attractiveness of reopening and thus enlarging the issue. 

With the aim of achieving a cash balance of $40 billion on September 30, 

the Committee unanimously recommends that for the remainder of the quarter, 

the Treasury meet its borrowing requirements in the following manner: 

Two 5-year notes of $1 1.0 billion each, to raise $22 billion of new 

cash; 

Two 2-year notes of $1 7.25 billion each, to raise $3.6 billion of 

new cash; 

* Two 1 -year bills of $1 7.0 billion and $1 7.25 billion respectively, 

to raise $3.7 billion of new cash; 

+ Weekly 3- and 6-month bills totaling $25.2 billion for each week 

during the remainder of the quarter, to reduce cash by $1.2 

billion; 

Redemption of the outstanding cash management bills maturing 

September 22, to reduce cash by $6.0 billion; and, 

Redemption of the outstanding 4-year note maturing September 

30, to reduce cash by $8.3 billion. 

Including the $10.9 billion raised in the mid-quarter refunding as well as 

anticipated foreign add-ons of $5.2 billion, the proposed financing schedule will 

raise a total of $29.9 billion. When added to the $15.1 billion of net borrowing 

already raised or announced during quarter, this amount will accomplish the 

total net borrowing requirement of $45.0 billion. The Committee also 

recommends that additional intra-quarter cash management bills totaling 

approximately $16.0 billion be issued to cover the cash low points in midAugust and early September. 

For the October-December quarter, the Treasury estimates its net market 

borrowing in the range of $45 to $50 billion with a cash balance of $30 billion at 

the end of December. The Committee notes that this borrowing estimate is 

significantly below most private forecasts. To accomplish the Treasury's 

anticipated market borrowing requirement, the Committee recommends the 

following provisional financing schedule: 

Auctions Raisina (billions) 

Refunding: 3-year note 

10-year note 
5-year notes 

2-year notes 

1 -year bills 

3- and 6-month bills 

Cash management bills (January maturity) 

Estimated foreign add-ons 

Subtotal 

Less: 7-year note maturity 

Total Net Market Borrowing 

The Committee also notes the likely need for the issuance of intra-quarter cash 

management bills to cover cash low points during the quarter. 

In response to the request for its further views on whether to continue the 

single-price auction technique for 2- and 5-year notes after August 1994, the 

Committee reviewed the analysis presented to it by the Treasury staff which 

materially augmented the preliminary data presented at the Committee's 

previous meeting in May. 

The Committee is mindful that conclusions drawn from the analysis need 

to be tempered by the comparatively brief period covered by the data and the 

variability, and thus reduced statistical significance, of much of the data within 

this period. Of particular concern is that throughout most of the period interest 

rates were stable or falling and therefore little experience has been gained 

during episodes when interest rates are rising. Despite the limitations on 

potential significance of the available data, the analysis seemed fully in concert 

with the comments offered in the Committee's last report (an excerpt of the 

pertinent section is appended for reference). Certain points from the analysis 

are worth highlighting: 

Consistent with theory, the single-price auctions seemed to have reduced 

the concentration of awards among dealers and increased awards to 

customers. Though in absolute terms the shift can be seen as small, in 

proportionate terms the shifts are reasonably substantial. Moreover, 

growing familiarity with single-price auctions could lead to additional growth 

in the participation by customers in future auctions. 

While the data do not yet provide a compelling case that single-price 

auctions have lowered the cost of borrowing to the Treasury compared to 

multiple-price auctions, there is no evidence in the data that single-price 

auctions have raised the cost. 

Transaction volumes on days of single-price auctions have increased 

notably, suggesting that the technique has contributed to improved liquidity, 

which in turn should lower the cost of borrowing. 

The dispersion pattern of bids in single-price auctions, as compared to those 

in of multiple-price auctions, suggests that dealers, and perhaps others, 

perceive a potential for underwriting profit in singlsprice auctions. Over 
time as bidding techniques evolve, this perceived opportunity for profit may 

provide greater confidence in the robustness of the single-price auction 

technique during periods of rising interest rates and associated market 

stress. 

On the basis of its review of the analysis and the judgments expressed in 

its May report, the Committee recommends by a vote of 17 to 3 that the Treasury 

continue the single-price auction for 2- and 5-year notes and, furthermore, that it 

extend the experiment with technique to the auction of 10-year notes. The 

choice of the 10-year note for extension of the technique was made on the basis 

that there is now sufficient evidence of success with the technique to warrant a 

trial with a longer maturity. The 10-year was preferred because of its status as a 

global benchmark security and because the 30-year bond is now auctioned just 

twice a year and therefore would afford an inadequate number of observations 

to provide sufficient data for analysis. The Committee recommends that, in 

addition to the 30-year issue, the 3-year note continue to be auctioned on the 

existing multiple-price basis in order to provide a useful standard of comparison 

for continued evaluation of the singleprice auction technique. 

The three Committee members who voted against this recommendation 

favored a continuation of single-price auctions for 2- and 5-year notes but 

opposed at this time extension of the technique to 10-year notes. In their 

reasoning, the members cited the inconciusiveness of the existing data on 

single-price auctions and the desire for an opportunity to evaluate the data 

more rigorously. Further, although they concurred with the majority's view that 

there was no evidence that single-price auctions raised the cost of borrowing in 

the 2- and 5-year notes, these three Committee members were concerned that 

extension of the technique to the longer maturity could have a less successful 

outcome and perhaps be costly to the Treasury. 

The Committee's view on 3-decimal yield bidding was unanimous in 

favor of the change. Consistent with the view expressed in its report of August 

1, 1990, all Committee members thought that smaller yield increments would, 

on the margin, induce some market participants to bid more aggressively in 

coupon auctions, thus potentially lowering slightly the Treasury's financing 

costs. Also, 3-decimal yield bidding would bring auction price increments into 

line with those in the secondary market. The Committee could identify no 

disadvantages to the change. 

Mr. Secretary, that concludes the Committee's report. We welcome any 

questions or comments. 

Respectfully submitted, 

y&&- Stephen C. Francis 

chairman 

Attachment