REPORT TO THE SECRETARY OF THE TREASURY

FROM THE

TREASURY ADVISORY COMMITTEE

OF THE

BOND MARKET ASSOCIATION

November 2, 1999 

Dear Mr. Secretary: 

Since the Committee’s last meeting on August 3, 1999, the US economy has continued to expand 

at a brisk pace. Indeed, the Commerce Department recently reported that GDP posted a 4.8% 

annualized growth rate in the third quarter. Solid gains in consumer demand and business capital 

spending were responsible for the bulk of the elevation in Q3 GDP. While there are recent signs 

that a higher interest rate environment is helping to cool activity in some sectors – like housing – 

the burgeoning global recovery points to a likely near term rebound in exports. On balance, the 

outlook for the US economy continues to appear quite favorable. 

In the weeks immediately following our last meeting, Treasury yields fluctuated in a relatively 

wide range. At its August 24 meeting, the FOMC raised short-term interest rates 25 bp, and 

shortly thereafter rates began to rise across the yield curve. The increase accelerated beginning 

in early October, as evidence of continued strength in the domestic economy, further signs of 

global economic healing, and elevation in headline inflation readings led to a reassessment of the 

outlook for monetary policy. For the most part, the trend toward higher rates continued through 

much of October, but the higher rate trend has partially reversed in recent days after the quarterly 

labor cost data were released. Market participants are uncertain regarding the likelihood of nearterm Fed action, although market price structures still discount moderate Fed tightening over the 

next several months. 

Within this context, the Committee considered the composition of a financing to refund 

approximately $29.3 billion and to pay down about $4.3 billion. 

The Committee considered its recommendation for the size of the financing in the context of a 

discussion of the issues related to a reopening of the 10-year note. Those members who favored 

a reopening cited the long-run benefits associated with the increase in liquidity of benchmark 

offerings, as well as the potential short-run advantage of improved market liquidity in advance of 

Y2K. Those members who favored a new 10-year security felt that the cost savings to the 

Treasury outweighed the uncertain short-term liquidity effects. The Committee voted by a 13-5 

margin for a total financing of $25.0 billion consisting of the following offerings: 

• $15.0 billion 5-year notes due November 15, 2004 

• $10.0 billion of the 6% notes due August 15, 2009. 
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Members who favored a new 10-year security supported an issue size of $12 billion, and a total 

refunding size of $27 billion. 

During this discussion on the merits of a reopening in this specific financing, the Committee 

reiterated its view that a regularized schedule of reopenings for longer-term debt offerings would 

be the most effective approach to creating liquid benchmark issues at the lowest interest cost to 

the Treasury. Scheduled reopenings would also provide the Treasury with additional debt 

management flexibility in an environment of sustained fiscal surpluses. 

In regard to the composition of Treasury market financing for the remainder of the current 

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

following manner: 

• Two 2-year notes of $15.0 billion each, 

• Two 1-year bills of $10.0 billion each, 

• Weekly issuance of $18.0 billion of 3- and 6-month bills through the remainder of the 

quarter, and 

• Three cash management bills totaling $67.0 billion, with $20.0 billion to mature 

within the quarter, and the balance to mature in January. 

For the first quarter of 2000, the Treasury estimates a net market paydown of $12 billion with a 

cash balance of $20 billion on March 31. To accomplish this requirement, the Committee 

preliminarily recommends the financing schedule in the attached table. 

The Committee was asked by the Treasury for its views on the increasing swings in the Treasury 

cash balance over the past few years, and the accompanying growth in the size of cash 

management bills. The Committee was asked about potential alternative methods for dealing 

with these cash balance fluctuations, recognizing that although weekly bill sizes have been 

altered significantly in the past to respond to cash balance swings, there are limits to this 

approach in the current environment of bill offerings that are perceived to be near the minimum 

size necessary to maintain market liquidity. 

The Committee believes the Treasury should continue to use weekly bills to respond to the 

consistently high cash balances evident in the second calendar quarter of each year. However, 

the Committee presently views cash management bills as the best alternative for the Treasury in 

dealing with most of the cash balance fluctuations. 

Members noted that if the Treasury were to implement a reduction in the frequency of 1-year bill 

offerings in the future, an increase in the size of the weekly bills would provide the Treasury 

with more flexibility to use changes in the levels of bill offerings to offset cash balance 

fluctuations. 

Comments over the past few months on the Treasury’s proposed rules for buy backs focused on 

the lead time of announcements, whether to conduct buy backs on a regular and predictable 

basis, settlement dates, the targeting of specific CUSIPs versus maturities, and limits on the 

purchases of any given security. The Treasury sought the Committee’s views on these questions. 
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The Committee’s overriding view is that within the context of sound debt management practices, 

savings to the Treasury from debt buy backs would best be served by a framework that gives the 

Treasury maximum flexibility. It is in the Treasury’s interest to give global investors the 

opportunity to assess their potential participation in the purchase program, but the Committee 

expressed a preference for a relatively short lead time between the announcement and the 

submission of offerings, not unlike the process for a Federal Reserve coupon pass. The buy back 

operation would optimally be conducted in New York morning hours, in order to enhance the 

participation rate of overseas holders of Treasury securities. We believe that investor 

participation would additionally be enhanced by extending settlement to T + 3, the corporate 

settlement standard. The Committee believes that the Treasury should request offerings in 

specific maturity ranges, but not for specific securities or CUSIPs. The Treasury could then 

purchase securities that best satisfied its debt management and savings objectives at that time. 

The Committee also felt that there was no reason to state a limit on the specific amount of any 

given security that the Treasury can purchase. The Committee believes that while it is important 

to clearly state the rules for the program at the earliest possible date, the rules should give the 

Treasury maximum flexibility in its execution of the program. 

Respectfully submitted, 

Kenneth M. deRegt