REPORT TO THE SECRETARY OF THE TREASURY 

FROM THE 

TREASURY BORROWING ADVISORY COMMITTEE 

OF THE 

PUBLIC SECURITIES ASSOCIATION 

MAY 3, 1995 

Dear Mr. Secretary: 

Since the Committee's last meeting with the Treasury in February 1995, the 

pace of economic activity has moderated. Price increases for final goods are still 

subdued, although inflationary pressures in raw materials and intermediate goods 

continue to intensify. After raising the Federal funds rate 0.5% to 6.00h early in 

February, the Federal Reserve has made no further changes in monetary policy. 

During the last three months, yields on Treasury securities have declined. 

The drop was only a few basis points on short-term bills but ranged between 60 to 

70 basis points for maturities from two to ten years; the yietd on 3Gyear bonds fell 

less, with a drop of approximatety 40 basis points The present shape of the yield 

curve and forward prices for various fixed-income instruments indicate market 

participants expect modest further increases in interest rates in the coming 

months. 

Within this context, to refund the $32.1 billion of notes and bonds maturing 

on May 15, 1995 that are privately hetd and to raise additional cash of $1 8.9 

billion, the Committee recommends that the Treasury auction $51.0 billion of the 

following securities: 

$1 8.0 billion 3-year notes due May 15, 1 998; 

+ $13.0 billion 10-year notes due May 15,2005; 

+ $1 0.0 billion cash management bills due June 22, 1995; and, 

s $10.0 billion cash management bills due September 21, 1995. 

Of the 18 Committee members present for the meeting, 17 favored the 

issuance of $18.0 billion 3-year notes and $13.0 billion 10-year notes. The 

recommended increase of $1.0 billion fur both offerings from the levels in the last 

refunding was based on the absence of a 30-year bond in this quarterly cyde and 

the belief that, because of the substantial diminution of the cash raising potential 

from the issuance of 5-year notes beginning in 1996, the Treasury should continue 
the gradual building of the sizes of its coupon offerings. The vote of the Committee 

on the sizes and maturities of the cash management bills was unanimous. 

In considering whether to recommend issuing a new 10-year note or 

reopening the 7 1 /2% note due February 1 5, 2005, Committee members observed 

that the tightness of the outstanding issue in the repurchase agreement market 

was neither unusual nor acute. Also, the three point premium in the current market 

price of the outstanding issue materially exceeds the premiums of previously 

reopened issues. Without compelling reason to recommend a break with existing 

precedents, the Committee voted 15 to 3 in favor of a new issue. 

With the aim of achieving a cash balance of $45 billion on June 30, the 

Committee unanimously recommends that for the remainder of the quarter the 

Treasury meet its borrowing requirement in the following manner: 

em Two 5-year notes totaling $11.5 billion each, to raise $23 billion 

of new cash; 

- Two 2-year notes totaling $17.75 billion each, to raise $2.4 

billion of new cash; 

-Two 1 -year bills totaling $17.25 billion each, to raise $1.8 billion 

of new cash; 

Weekly issuance of 3-and &month bills through the remainder 

of the quarter, to raise $1.1 billion of new cash; and, 

-The paydown on June 22 of $10.0 billion of cash management 

bills issued in conjunction with the May refunding. 

Including the $18.9 billion raised in the mid-quarter refunding as well as 

anticipated foreign add-ons of $4.5 billion, the proposed financing schedule will 

raise a total of $41.7 billion. This amount, after subtracting the net paydown of 

$15.9 billion to date in the quarter, will accomplish the total net borrowing 

requirement of $25.8 billion. In addition, an intraquarter cash management bill 

maturing on June 22 of approximately $17.0 billion will be needed to cover the 

cash low point in eariy June. 

For the July-September quarter, the Treasury estimates a net borrowing 

requirement in the range of $40 to $45 billion with a cash balance of $30 billion at 

the end of September. To accomplish the anticipated net borrowing requirement, 

the Committee recommends the following provisional financing schedule: 
Size Raising 

Auctiong ($billions) I$bllllons) 

Refunding: 3-year note 18.5 

10-year note 13.5 

30-year bond -12.0 

Subtotal 44.0 14.0 

Other: 5-year notes 2 x 12.0 24.0 

2-year notes 2 x 18.25 3.0 

I-year bills 3 x 18.25 4.2 

3- and &month bills 13 x 27.4 12.7 

Cash management bill 

(September maturity) 

Estimated foreign add-ons 

(10.0) 

45 

Subtotal 38.4 

Less: Redemption of 7-year notes 

Bonds called for redemption 

on August 15, 1995 

Subtotal (9.1) 

Total Net Market Borrowing 43.3 

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 the discussion of alternative ways of meeting the marketable financing 

requirement through the remainder of the fiscaJ year, some members of the 

Committee raised the possibility of the Treasury issuing foreign currency 

denominated debt. In particular, these members expressed the view that the 

combination of the current exchange rate for the US dollar and the Japanese yen 

and the differential in current interest rates between the two debt markets offers an 

opportunity to obtain funding on terms which they judge will tikdy prove attractive. 

The discussion touched on a number of points in connecm with issuing debt 

denominated in foreign currencies, including past experiences of the Treasury, 

practical considerations associated with the actual issuance, debt management 

policy objectives to be served, and potential market reactions. While the 

Committee makes no recommendation on this matter, several members expressed 

the view that the issuance of debt denominated in Japanese yen warrants 

consideration by the Treasury at this time, preferably in the context of broader 

public policy considerations. 
The Committee's discussion of whether the Treasury should issue inflationindexed debt was wide-ranging. The proposal, it was noted, has been raised 

numerous times over the years and has had sufficient merit to attract a number of 

thoughtful and respected proponents. The Committee welcomed the opportunity 

to offer its views on subject. 

From the debt management standpoint, all Committee members agreed that 

the foremost criterion for judging any borrowing initiative by the Treasury should 

be the potential contribution to raising substantial amounts of funds on favorable 

terms. The Committee's deliberations focused on this objective and not on other 

possible policy objectives, however worthy, such as providing a more direct gauge 

of inflation expectations than is now availaMe or discouraging the government 

from pursuing inflationary policies. 

The Committee recognized that there are conceptually sound reasons for 

believing that the issuance of inflation-indexed debt could lower the cost of 

borrowing over the longer term. Academic research often cites the existence of 

some inflation risk premium in the yields on conventional debt that the Treasury 

might capture through the issuance of inflation-indexed debt. By issuing both 

conventional and inflation-indexed securities, the Treasury might be able to 

segment to its advantage the market for its debt. The magnitude of any potential 

saving is uncertain, however, and couid be offset in some degree by the 

comparatively low level of liquidity that typifies inflation-indexed securities in other 

countries and the consequent negative effect the illiquidity would have on the 

price of the securities. 

The recent and prospective substantial growth in self -directed retirement 

plans, which to date have evidenced a strong preference for safe, conservative 

investments, may offer the potential of significant demand for inflation-indexed 

securities, either in marketable or savings bond forms. The uniqueness of the 

instrument would mean, however, a major educational effort would likely be 

needed before the market reached meaningful proportions. 

Defined benefit pension plans might also be a source of demand for 

inflation-indexed securities. An asset class with an assured real return together, 

in all likelihood, with low correlations with other standard asset classes is virtually 

certain to permit attainment of a higher level of "portfolio optimality" and hence be 

an attractive investment to defined benefit plans. 

While there is an intriguing case, which necessarily is largely conjectural, 

for there being a reasonable long-term potential for the Treasury in issuing 

inflation-indexed securities, there are considerable short-term problems to 

developing the product. To begin, recent debate about the accuracy of the 

Consumer Price Index has to a degree politicized the issue and brings to the fore 

concerns about the integrity of the price index to be used for the inflation 

adjustment. More important, there is a need to pace the process of innovation in 

debt management techniques; in the view of the Committee, other initiatives--for 
example, floating rate notes--offer greater immediate potential in terms of raising 

substantial amounts of funds on attractive terms. 

On the basis of its discussion, the Committee concluded that at the present 

time it does not see sufficient evidence that the Treasury would meet the criterion 

of raising substantial funds on favorable terms to justlfy initiation of an inflationindexed debt program in the immediate future. R is unlikely that in deferring the 

introduction of inflation-indexed debt the Treasury would forego any unique 

opportunity to establish a market niche for itself. The failure to date of a market for 

privately-issued inflation-indexed securities to devbp, which some cite as an 

indication that the demand for such investments may be limited, at least among 

institutional investors, suggests that taking additional time to analyze the potential 

more thoroughly would entail little risk to the Treasury. In any event, before 

initiating a pragram to begin the issuance of inflation-indexed debt, the Committee 

believes there is a need to undertake extensive market analysis of both defined 

contribution and defined benefit pension plans as well as other major investor 

groups in order to better determine the prospective demand and appropriate 

terms. 

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

questions or comments. 

Respectfully submitted, 

Stephdn C. Francis 

Chairman