REPORT TO THE SECRETARY OF THE TREASURY 

FROM THE 

TREASURY ADVISORY COMMITTEE 

OF THE 

BOND MARKET ASSOCIATION 

May 2,2000 

Dear Mr. Secretary: 

Since the Committee’s last meeting on February 1, the US economy has remained strong, 

with the Commerce Department recently reporting that GDP posted a 5.4% annualized growth 

rate in the first quarter. This is particularly impressive since it follows on the heels of a 7.3% 

gain in GDP in the final quarter of 1999. The consumer continues to provide much of the fbel 

for the expansion, as personal consumption spending registered an impressive 8.3% advance 

in Q1. The strength in consumer demand appears to reflect both a solid underlying pace of 

income growth and the lagged effect of the wealth creation that has occurred during recent 

years. At thls point, there are few signs of any significant underlying moderation in economic 

activity, although the economy is expected to post a somewhat more modest pace of growth in 

the current quarter. 

On the inflation front, higher oil prices have helped push up CPI and PPI in recent months. 

However, quotes for energy-related items appear to have peaked at this point, so headline 

readings should be somewhat better behaved going forward. Still, core inflation seems to 

have ticked up of late. Indeed, the financial markets were unnerved in mid-April by a 

reported +0.4% rise in the CPI excluding food and energy items for March. Moreover, there 

are increased signs that the tightness in labor markets may be finally leading to acceleration in 

wage and benefit costs. The Labor Department recently reported the employment cost index 

jumped +1.4% in QI, the sharpest gain in more than ten years. To be sure, productivity 

appears to be expanding at a rapid rate, which is helping to keep a lid on overall unit labor 

Costs. 

Despite the fact that the FOMC announced 25 basis point rate hikes on February 2 and again 

on March 21, Treasury yields generally trended lower during much of the three-month 

interval since OUT last mxhg. This move appeared to largely reflect an ongoing adjustment 

to shrinking Treasury supply, as well as some portfolio reallocations tied to extreme volatility 

in the equity and private credit markets. Spreads between Treasuries and most other fixed 

income securities have widened over the period since our last meeting. For example, 10-year 

swap spreads moved from about 75 bp in the period leading up to the February refbnding 

announcement to a peak of nearly 140 bp on April 10. During the past couple weeks, 

Treasury yields have reversed course and begun to move higher prompted by inflation 
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concerns and the accompanying possibility of a more aggressive pace of Fed tightening, while 

private credit market spreads have narrowed somewhat. 

Against this backdrop, the Committee considered the composition of a financing to refund 

approximately $30.6 billion of outstanding debt, consisting of $27.8 billion of privately held 

notes and $2.7 billion of bonds to be called on May 15, to pay down approximately $8.6 

billion of cash. 

The Committee unanimously recommends a total financing of $22 billion consisting of the 

following offerings: 

$14.0 billion 5-year notes due May 15,2005, and 

$8.0 billion of the 6.5% notes due February 15,2010. 

In regard to the composition of Treasury marketable financing for the remainder of he current 

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

following manner: 

Two 2-year notes of $12.0 billion each, 

A 1-year bill of $10.0 billion, and 

A cash management bill of $15.0 billion to mature within the quarter. 

For the July-September quarter, the Treasury estimates a net market paydown of $47 billion 

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

Committee preliminarily recommends the financing schedule in the attached table. 

Within the context of evidence of continued improvement in the U.S. fiscal outlook, the 

Committee considered what further adjustments to issuance size and frequency it would 

recommend at this time. While acknowledging uncertainty regarding the necessity for 

immediate change, the Committee reiterated its view that the elimination of the one-year bill 

should be the next step for the Treasury if additional reductions in issuance are required. The 

Committee favored a reduction in the fiequency of two-year notes as the next alternative 

which would be the least disruptive to the goal of preserving liquidity, to the greatest extent 

possible, in benchmark Treasury issues. Importantly, the Committee feels that if a reduction 

in the fiequency of two-year notes becomes necessary, an immediate change to quarterly 

offerings would be the most appropriate decision to attain the goals of providing financing 

flexibility for the Treasury and preserving maximum liquidity in benchmark issues. 

At the Treasury’s request, the Committee considered its views on the buyback program, 

specifically experiences to date, and possible modifications going forward, with particular 

focus on the size, regularity, maturity range, and notice period for buyback operations. 
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Based on experience to date, Committee members believe that the program has been very 

effective with large and broad-based domestic participation. Participation by offshore entities 

appears to have been small in early operations. 

With respect to fbture operations, the sense of the Committee was that the Treasury would be 

best served by pre-announcing a regular schedule for buybacks at least one quarter in 

advance. The Committee believes that such a schedule would reduce market disruptions and 

ultimately allow the Treasury to pay lower prices for the securities repurchased. Most 

members favored weekly or biweekly operations, with a majority favoring weekly operations 

of $500 million to $1 billion and a minority favoring biweekly operations of $1 billion to $2 

billion in the current year. A few members expressed a preference for one large operation 

per quarter. It was unanimously agreed that a one-day notice period between the 

announcement of the specific size and maturity range of an operation and the actual operation 

would be sufficient for participants. On maturity ranges, the Committee believes that a 3-year 

to 5-year maturity band is preferable if the Treasury were to choose to do smaller, weekly 

operations and a maturity band with more issues, probably closer to the 5-year band, would be 

preferable under the biweekly alternative. Finally, members noted that at some point, the 

Treasury should consider extending the program beyond the 15 to 25-year maturities, to 

include 10-year issues and debt callable in the 10-year sector as well as some issues in the 25 

to 30-year maturity range. 

Some Committee members suggested that the Treasury consider, as a supplement to the 

buyback program, an exchange operation. This would allow investors to exchange older, 

seasoned issues for newly issued current coupons. Committee members felt the Treasury 

ought to begin exploring the feasibility and mechanics of such an operation. If budget 

surpluses continue to build and Treasury buybacks continue, an exchange operation or 

ultimately a facility, could serve to enhance liquidity of seasoned issues and benchmark 

securities. 

Respecthlly submitted, 

Kenneth M. deRegt