REPORT TO THE SECRETARY OF THE TREASURY 


FROM THE TREASURY BORROWING ADVISORY COMMITTEE 


OF THE PUBLIC SECURITIES ASSOCIATION 


January 31, 1990 


Dear Mr. Secretary: 


Since the Committeets last meeting in November, three 


factors have dominated changes in the U.S. Treasury market. First, 


there have been shifting opinions regarding the economyts current 


growth momentum and the likelihood that further Federal Reserve 


policy easing measures will be needed to bolster business activity. 


Second, market participants have grown increasingly concerned that 


tightness in labor markets and gains in world oil prices will keep 


inflation stubbornly strong through this year. And third, recent 


increases in bond yields abroad have given rise to worries that 


foreign investorst appetite for U.S. securities will be curtailed. 


With many economic statistics experiencing distortions from natural 


disasters, strikes, and volatile weather conditions, Treasury issue 


yields have lately been pressured upward as dealers and investors 


have tended to focus more on perceived inflation dangers and the 


substantial narrowing of international interest rate differentials. 


Since mid-November, discount yields on six-month Treasury bills 


have risen by about 30 basis points (from 7.45 percent to around 


7.75 percent), but yields-to-maturity on Treasury notes and bonds 


have increased more substantially, by about 65 to 75 basis points. 


Three-year note yields have increased from 7.69 percent to 8.42 


percent, while 10-year note yields have risen from 7.82 percent to 


8.56 percent, and 30-year bond yields have gone from 7.87 percent 


to 8.60 percent. 


The direction of changes in bond market yields over coming 


months will likely depend importantly on whether the U.S. economy 


experiences a re-acceleration in growth or slips closer to the edge 


of an outright downturn. At this juncture, it would appear that 


continued solid gains in consumer spending will be needed to 


maintain the expansion through this year. Fortunately, consumers 


would appear to have both the wherewithal and the desire to 


continue adding to outlays, based on solid real disposable income 


gains during 1989 and relatively high consumer confidence readings 


at year-end. But given the unusually precarious business outlook, 


the Federal Reserve is likely to continue the easing process that 


it began last spring as the year unfolds. This would probably lead 


to some additional steepening of the Treasury yield curve. 


Moreover, a further drop in U.S. short-term yields could tend to 


depress the dollar exchange rate, and this could cause some further 


erosion in foreign demand for dollar-denominated bonds. It is 


against this background that we have produced our recommendations fo 


the February refunding. 

The Committee unanimously recommends that the following new 


securities be sold at yield auctions to refund $18.1 billion of 


maturing securities and raise $11.9 billion of new cash: 


-- $10.0 billion 3-year notes due 

2/15/93 ; 

-- $10.0 billion 10-year notes due 

2/15/2000 ; 

-- $10.0 billion 30-year bonds due 

2/15/2020. 


For the remainder of the quarter, the Committee recommends: 


-- Sell $10.0 billion 2-year notes 

raising $.2 billion new cash; 


-- Sell $8.0 billion 5-year notes 

raising all new cash; 


-- Sell $9.5 billion 52-week bills at 

two remaining auctions, raising $.9 


billion new cash; 


-- Sell $7.0 billion cash management 

bills for payment March 2 due April 


26, raising all new cash; 


-- Sell $15.2 billion at each remaining 

3- and 6-month bill auction, raising 


$.5 billion. 


Summary of New Cash for Quarter 


Refunding $11.9 billion 


3- and 6-month bill .5 


52-week bills .9 


Cash management bills 7.0 


2-year notes .2 


5-year notes 8.0 


Total additional 


market borrowing $28.5 


Already raised 12.0 


Estimated Foreign Add-ons 1.0 


Net Market Borrowing $41.5 billion 


The Committee recommends a cash balance of $10.0 billion on 


March 31. 

For the April/June quarter, the Committee suggests 


maintaining auctions for coupon securities, 1-year bills, and the 


refunding at the same levels as proposed for the January/March 


quarter. The appropriate cash balance for June 30 is $35.0 


billion. 


In order to meet the $35 billion cash balance at the end of 


the quarter, the Committee recommended paying down $11 billion in 


regular 3- and 6-month bill auctions by reducing the auction size 


to $14.5 billion at the start of the quarter and paying off all 


maturing cash management bills. The paydowns on the weekly series 


should be adjusted as the uncertainties associated with April tax 


receipts and the timing of RTC working capital demands become more 


certain. The Committee believes the size of coupon offerings 


should be adjusted as a last option; the Committee believes it is 


relatively more unsettling to the market than adjusting the bills. 


Finally, to cover a cash low point in early April, a short-dated 


cash management bill of up to $10 billion may be necessary. 


With respect to the question "on the way in which Treasury 


should fund the working capital needs of the R.T.C. if they are 


financed through the F.F.B.", the Committee, after much discussion, 


considered two generalized options. The options are generic in 


nature since answers to questions about the timing of the need for 


the working capital and for the duration of that need might shape 


other responses. 


The first option discussed could be labeled the ntT-Billnn 


approach. This option would emphasize the pure working capital or 


short-term nature of the financing need, as well as its general 


character of substituting one short-term financing vehicle for 


another. That is, Treasury bills would replace existing short-term 


Home Loan Bank advances, brokered deposits, etc. This approach 


would have the quality of more clearly earmarking the funds for the 


working capital project. Many committee members felt this approach 


could be disruptive in certain circumstances because of the heavy 


pressure it could place on short-term markets. This was a 


particular concern when framed in a context of uncertainty about 


the timing of the need. They foresaw the potential for periods of 


serious market congestion. 


The second option could be labeled the "blendedu approach. 


This option would blend the working capital need into the regular 


pattern of Treasury financing with a strong bias or tilt toward 


bills and short coupons. This suggestion acknowledges the reality 


that all Treasury debt issuance for practical purposes is fungible. 


The result of this proposal would lead to a marginal decline in the 


average maturity of the debt, but not as drastically as the T-bill 


option. The blended approach more realistically assumes that a 


portion of the financing need will be beyond the maturity structure 


of the Treasury bills. 

The Committee voted 14 members to 3 in favor of the 


"blended8# approach. 


Lastly, the Committee would like to take this opportunity to 


strongly recommend that the REFCORP financing be included as a part 


of the regularly announced and auctioned Treasury debt schedule. 


Predictability is an important element of successful government 


finance. The Committee suggests, as we did in our previous report 


in November, that the REFCORP financing should be announced in the 


first week of the quarter and auctioned in the same week as the 


regular seven-year note. An early commitment to this schedule 


should improve the investor reception of the REFCORP financing. We 


also believe greater discussion of REFCORP as a credit by 


appropriate Government officials will enhance its market 


acceptance. 


The Committee also would strongly endorse the continuation 


of the 40-year bond for REFCORP. While the Committee acknowledges 


the difficultly of its initial market reception, we believe that it 


is an attractive vehicle which will grow in market acceptance. 


That acceptance will lead to additional savings for the issuer. 


Mr. Secretary, that concludes our report and we welcome 


questions and discussion. 


Jon S. C&uhe 


Chairman