REPORT TO THE SECRETARY OF THE TREASURY 

FROM THE U.S. GOVERNMENT AND FEDERAL 

AGENCIES SECURITIES ASSOCIATION 

October 30, 1991 

Dear Mr. Secretary: 

Secondary market yields on Treasury securities declined steadily during most of the 

period since our meeting last July, although in recent days there has been some rise in longduration issue yields owing to concerns about the possibility of increased fiscal policy 

stimulus. The rebound in economic activity which began last spring continued during the 

third quarter as real GNP registered its first growth in a year. At the same time, several 

recent reports suggest that some of the upward momentum was lost as the summer progressed. 

In particular, businesses continue to display unusual caution in thcir employment decisions, 

and the resulting slow job creation has dampened real income gains and consumer confidence. 

Should these patterns persist for much longer, they might pose a serious threat to the recovery's 

durability. These factors notwithstanding, there continue to be a number of reasons to expect 

a moderate expansion in total output over coming months. Improvement in housing investment 

should be stimulated by the lowest mortgage interest rates in over a decade, and a further 

increase in export volumes is likely given continued growth in foreign demand and favorable 

terms of trade. With business inventory-to-sales ratios still declining on trend, even modest 

increases in domestic spending should foster fresh increases in goods production. Moreover, 

monetary policy is expected to remain accommodative, and additional easing steps by the 

Federal Reserve may be forthcoming if business statistics remain sluggish and money-supply 

growth does not accelerate from its languid summertime pace. 

Although economic growth has been relatively subducd for a recovery period, the 

fixed-income securities markets remain highly sensitive to dcvelopments which imply 

increased credit demands or inflation risks. This is why the recent discussions in Washington 

about potential fiscal stimulus through tax reductions have tended to push long-term bond 

yields upward and have contributed to an appreciable further steepening of the Treasury yield 

curve. With this perspective as background: 

The Committee recommends that the following securities be sold to refund $20.2 billion 

maturing securities and raise $17.8 billion of new cash: 

-- $14.0 billion 3-year notes due 1 I/ 15/94; 

-- $12.0 billion 9 3/4-year and 7 7/8 percent notes due 8/15/2001; 

-- $12.0 billion 29 314-year 8 l/8 percent bonds due 8/ 15/2021. 

The Committee voted unanimously in favor of the size and composition of the 

refunding package. This package should convey a sense of continuity and normalcy on market 

matters at a time of environmental disruption and in light of recent changes in auction 

procedures. 

The Committee strongly supported the reopening of the August 10-year (i.e., 7 7/8 

percent of 8/15/2001) and the August 30-year (i.e., 8 1/8 percent of 8/15/2001). The 

Committee voted 11-5 and 13-3 in favor of reopening the two issues. This group continues to 

believe that creating large consolidated issues where practical is dcsirable. Consolidated issues 

are least disruptive to a congested marketplace, help avoid the potential for squeezes, and 

often capture scarcity value existent in a givcn market context. 
For the remainder of the current quarter, the Committee recommends: 

-- Sell $12.5 billion 2-year notes at two auctions, raising $2.9 billion of new cash; 

-- Sell $9.0 billion 5-year notes at two auctions, raising $1 1.0 billion of new cash; 

-- Sell $12.75 billion and $13 billion 52-week bills at two auctions, raising $1.4 

billion of new cash; 

-- Increase weekly 3- and 6-month bill auction size to $20.8 billion by the end of 

the quarter, raising no new cash. 

Summary of New Cash for Quarter 

Refunding $17.8 billion 

3- & 6-month bills 0.0 

52-week bills 1.4 

2-year notes 

5-year notes 

2.9 

11.0 

Total $33.1 billion 

Already raised 40.0 

Estimated Foreign Add-ons -

2.7

Net Market Borrowing $75.8 billion 

The Committee recommends a cash balance of $30.0 billion on December 31. 

As a final point on Treasury financing in the first fiscal quarter, the Committee 

recommends that Treasury retain its regular auction announcement date for the November 2- 

and 5-year (i.e., 11/20). The Committee would recommend a Monday 11/25 auction for the 

2-year and a Tuesday 11/26 auction for the 5-year. The Committee believes a 5-year auction 

held the day before Thanksgiving (i.e., 11/27) would cost Treasury participation and result in 

consequent interest expense versus the recommended rearranged schedule. The group sees no 

major market obstacle to a 12:OO noon/l:OO p.m. weekly bill/2-year note sale on Monday 11/25. 

Holding to the regular announcement schedule and rearranging auction dates would keep 

"when issued" trading compressed to 7 days as opposed to 14 days. 

In December, however, the Committee believes the trade-off between the risk/reward 

of a longer WI period and the cost of auctioning 2- and 5-year notes on the two days before 

Christmas argues for pushing the auction announcement date back earlier in December. Where 

the Treasury positions that announcement date is somewhat flexible if Treasury chooses to cut 

down the extended WI period. A Friday or a Monday announcement (i.e., 12/13 or 12/16) is 

possible as opposed to the regular Wednesday announcement date for these two auctions. 

As a general comment, the Committee recommends reasonably short WI trading periods 

as a means to narrow systemic credit exposures -- both for Treasury and market participants. 

This consideration is even more apt in light of the recently announced revisions to auction 

procedures by Treasury. As new participants access Treasury directly with their bids, 

Treasury is potentially exposed to a credit failure by bidding participants between auction 

date and the day prior to settlement. Apparently the participant's clearing bank only becomes 

responsible for the participant's financial obligation on the day prior to settlement in the 

"autocharge" process. This potential credit exposure should be fully reviewed and considercd 

when Treasury sets WI periods for future auctions. 
For the January/March quarter, the Committee concurs with the suggested $20 billion 

end-of-quarter cash balance. The Committee recommends that further incremental increases 

in the weekly bill, year bill, cycle coupon, and refunding auctions be instituted to achieve the 

funding of the $95-100 billion quarterly cash deficit. The Committee continues to believe that 

large increments in funding can be achieved through the year bill cycle. The Committee 

believes $500 million to $1 billion increases would easily be accommodated by this market on 

a month-to-month basis and should be instituted in the January/March quarter. The 

Committee also notes that a late February to early March cash management bill will be 

necessary to achieve the needed funding target. This bill could be either all April CMs or a 

balance of April and June CMs. 

In response to the question of the 1992 refunding calendar, the Committee recommended unanimously that the Treasury shorten the period between announcement and 

settlement of the refundings in February, August, and November by one week so as to 

minimize WI exposure. The reasons for this recommendation parallel those previously noted 

in this report. Unfortunately, the May 1992 calendar does not lend itself to effectively cutting 

down on that time period because the 15th of the month would follow by one day the last 

refunding auction if the shortened WI period were followed. In short, the Committee 

recommends announcement dates for the 1992 quarterly refundings be as follows: 

February 5 

April 29 

August 5 

November 4 

Auctions and settlements would follow on the subsequent week, with settlement on the 15th 

or the first business day after the 15th. Finally, the Committee members had a number of 

comments and observations with regard to the current review and the subsequent changes in 

the government securities market. As a group or individually, the Committee stands ready to 

be as helpful as the Treasury chooses to make us. We know we serve at your pleasure. Many 

of the Committee members have specific views on the many complex and evolving procedures 

and rules. Balancing the objectives of opening up the auction process with incremental costs 

and nuisance counterweights is an important goal. We accept both as responsible objectives, 

but on occasion, the goals can cut at cross purposes. If we can be helpful in sorting out those 

balances, we would welcome the opportunity. 

Mr. Secretary, that concludes our report and we welcome questions and discussion. 

Chairman Jon S. COrzi