REPORT TO THE SECRETARY OF THE TREASURY 

FROM THE TREASURY BORROWING ADVISORY COMMITTEE OF THE 

PUBLIC SECURITIES ASSOCIATION 

August I, 1990 

Dear Mr. Secretary: 

Market yields on U.S. Treasury securities have declined considerably since the last 

meeting, while the yield curve has assumed a more positive slope. An unwinding of earlyyear spikes in food and energy prices lent a more favorable tone to recent inflation statistics, 

and foreign bond markets, other than in Japan, have stabilized following a sharp rise in yields 

during the first quarter. Market sentiment has also been buoyed by the prospect that 

negotiations between the Administration and Congress would lead to large, credible reductions 

in the Federal budget deficit and market borrowing needs. Meanwhile, renewed evidence of 

softness in business conditions and speculation that financial restructuring could constrain 

domestic spending created an especially firm tone among short-dated issues, a trend that was 

further aided by a silent easing of Federal Reserve monetary policy in mid-July. Since early 

May, 3-year note yields have fallen from 8.93 percent to 8.00 percent, while 10-year note yields 

have eased to 8.35 percent from 8.96 percent, and 30-year bond yields have gone from 8.95 

percent to 8.40 percent. Treasury bill yields have declined somewhat less, however, due to 

persistently heavy new bill supplies which have been a direct outgrowth of the Resolution 

Trust Corporation's working capital program. 

Prospects for further declines in market yields will depend importantly on the outcome 

of the ongoing budget negotiations. The resolve that has been expressed by the President and 

Congressional leaders to reach agreement on a fiscal package has been most encouraging, but 

the total size and perceived enforceability of any fiscal accord will likely be the key 

determinants of how the markets respond. While that latest producer and consumer price 

data have on balance had a calming effect on financial markets, participants remain sensitive 

to the risk that persistent upward pressures on compensation costs and a downtrend in the 

dollar exchange rate may be pushing up the underlying rate of inflation. It is against this 

background that we have produced our recommendations for the August refunding. 

The Committee's recommendation on the quarterly refunding and on the composition 

of financing over the next two quarters reflects a significant concern on our part about the 

growing and uncertain forward financing calendar. We are also increasingly concerned about 

the recent concentration of funding in the shorter dated maturities and the weekly bill series 

in particular, even though we acknowledge the working capital nature of the RTC-generated 

demands. Given this concern, the Committee believes Treasury should bias its financing 

composition going forward toward a extending maturities. This bias should be an issue of 

degree and not a fundamental policy shift on working capital financing. 

The Committee endorses significantly increasing the emphasis on the quarterly 

refunding, as well as all cycles other than the weeklies. In this vein, the Committee considered 

suggesting additional cycles which could diversify the recent focus on net bill funding. The 

Committee discussed instituting a 1-year to 18-month coupon cycle and/or the potential of a 

bimonthly year bill sale. These ideas, however, only underscore the Committee's sense that a 

primary emphasis on the regular bill market as the primary source for incremental financing 

should receive a fresh look. 
Some of the arguments supporting this view were: 

(1) Treasury should maintain some reserve of flexibility toward the bill 

market in an uncertain environment. 

(2) Heavy bill financing has the potential at some point to impact all 

markets as relatively higher bill rates ripple out the yield curve across the credit 

spectrum. 

(3) Individual investor demand, as reflected in more noncompetitive bid 

applications, seems to be favoring longer maturity securities. 

(4) The nature of the RTC needs may have a longer duration and may be 

significantly larger than previously expected, thus changing the nature of the 

funding requirement. 

(5) Stepped up capacity is comfortably available in the coupon cycles and 

in the quarterlies. 

With these thoughts in mind, the Committee recommends by a vote of 15-4 that a $32.25 

billion offering of new securities be sold at yield auctions to refund $20 billion maturing 

securities and raise $12.25 billion new cash. The recommended composition is: 

-- $1 1.5 billion 3-year notes due 8/ 15/93; 

-- $10.5 billion 10-year notes due 8/ 1 5/2000; 

-- $10.25 billion 30-year bonds due 8/ 1 5/2020. 

For the remainder of the current quarter, the Committee recommends: 

-- Sell $1 1.75 billion 2-year notes raising $2.3 billion 

in new cash; 

-- Sell $9.00 billion 5-year notes raising all new cash; 

-- Sell $10.75 billion 52-week bills in August and $1 1 

billion 52-week bills in September, raising $2.7 

billion new cash; 

-- Maintain the weekly 3- and 6-month bill auction 

size at $18.4 billion, raising a total of $15.80 

billion; and 

-- Sell $10 billion cash management bills in early 

August for April maturity, raising all new cash. 
Summary of New Cash for the July-September Quarter 

Refunding $12.25 billion 

3- and 6-month bills 15.80 

52-week bills 2.70 

Cash management bills 10.00 

2-year notes 2.30 

5-year notes 9.00 

Estimated foreign add-ons 

To be raised 

Already raised 

Paydown September 

cash management 

Net market borrowing $73.60 billion 

In addition, the Committee anticipates the need for a significant short term cash 

management bill of approximately $10 billion for payment by August 31 maturing on 

September 20 to bridge a low point in the Treasury's cash balance. 

Reflecting the Committee's concern over the heavy supply in the October-December 

quarter, the Committee recommends an end-of-September cash balance of $40 billion. This 

high cash balance will allow for greater flexibility in meeting the subsequent quarter's need 

and reflects the view of using all cycle slots when available to fund the heavy forward 

schedule. 

For the October-December quarter, the Committee suggests continued emphasis on all 

cycle auctions including modest additions to the weekly bills. For purposes of proposing a 

financing schedule for the fourth quarter, the Committee assumed $20 billion of RTC funding 

and no benefit from current budget negotiations. This left the group with an estimated $90 

billion funding requirement in the quarter and we recommend a $25 billion end of quarter 

cash balance. 

Summary of New Cash for the October-December 

Additions to 2-, 4-, 5-, 

and 7-year coupon cycles $25.25 billion 

Refunding 10.50 

1-year bills 6.66 

Weekly bills 18.89 

Long dated cash management 

bill in December 10.00 

Foreign Add-ons 

Net market borrowing 

Reduction in cash balance 

Total requirement $90.00 billion 
As an additional comment, the Committee recommends that the Treasury implement a 

procedure of rank-ordering coupon bids to a third decimal on a yield basis as the means of 

determining accepted bids in coupon auctions. The Committee vote was 12 to 7 favoring this 

initiative. 

The Committee believes that one basis point bidding increments hurts participation in 

longer maturity auctions. One basis point movements are not reflective of underlying market 

practice, nor does it allow for effective risk management for those participating in auctions 

as a large W.I.underwriter and/or distributor. The fact is that one basis point on a 30-year 

bond is nearly 1/8 of a point in price. Many auction participants feel that the cost of a "stepup" bid of one basis point is too high to justify the auction set-up exposure. Moving to a third 

decimal yield bid would eliminate this concern and enhance auction participation, leading to 

lower Treasury costs. 

Since most Committee members believe this procedure should be applied to all coupon 

auctions consistently, there was concern that investor and Treasury operational problems 

might develop in implementing this procedure broadly. The Committee would be pleased to 

work with the Treasury to refine this suggestion and consider alternatives which might 

facilitate this initiative. 

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

%=Chairman