REPORT TO THE SECRETARY OF THE TREASURY 

FROM THE TREASURY BORROWING ADVISORY COMMITTEE OF THE 

PUBLIC SECURITIES ASSOCIATION 

November 3, 1993 

Dear Mr. Secretary: 

Since the Comm~ttee'smeeting with the Treasury in early August, concerns over 

the tepid 1.4% growth in GDP during the first half have bean replaced by concerns over 

the confluence of substantial Treasury borrowing in the first fiscal quarter and improved 

economic vigor, as evidenced by the initial report of third quarter GDP growth which 

accelerated to 2.8% despite the dampening effects of the mid-west floods. Consensus 

thinking expects upward revisions and a fourth quarter GDP solidly above 3%,with trend 

infiation at or below 3%,excepting known tax increases. The recent dramatic drop in oil 

prices supports the case for a continuing favorable price outlook. Gains in automobile 

sales and production and in home sales and construction, together with improved 

borrower creditworthiness and the easing of debt sewicing casts, have combined with 

growth in jobs and income and an increase in consumer confidence and spending to 

encourage conviction in the current strengthening trend. Future prospects, however, 

remain constrained by defense cutbacks, soft net exports, continuing corporate 

downsi~in~, inventory strategies and de-leveraging. 

Over the three-month period, monetary policy remained stable. Treasury yields 

were unchanged for 2- and 3-year notes, while apart from the anomaly of the current 30-

year bond in favor of the old bond, yields for 5-, 7-, and 10-year notes and the 30-year 

bond were appro~imatdy 20 basts points lower, resulting in a general flattening in the 

yield curve. 

It is within this context that the Committee met to consider the wmpos~tion of the 

quarterly financing to refund $32.2 billion of privately-held notes and bonds maturing 

November 15. Given the $85.250 billion financing requirement for the current fiscal 

quarter and the $38.250 previously issued or announced, there remains a net $49.000 

billion to be done. The seventeen Committee members present voted unanimously in 

favor af a quarter-end balance of $35 billion and for the selling at competitive auctron 

issues in the quarterly refunding totalling $29.500 billion: 

-- $17.500 billion of 3-year notes maturing November 15, 1998; and 

- $12.000 billion of the 5 314% 9 3/4 year nates. 

for a pay down of $2.7billion. The Committee then voted unanimously in favor of the 

following summary schedule of borrowing for the remainder of the quarter: 
Auctions 

Refunding 

D!!& 

November SizC)

$29.5 billion 

Ralalncr 

-$ 2.7 billion 

2-year Notes November 

December 

5-year Notes November 

December 

November 

December 

3 & 6 month bills 8 auctions 

Less 7 518 12/31/93, four-year note maturity: -$ 8.2 

Net already issued or announced: $36.250 

Plus estimated foreign add-ons: $ 5.300 

Total Net Market Borrowing: $85.250 billion 

Concerning the unanimous vote not only to reopen the existing 10-year (5 314% 

note due 8/15/03) but also to increase its offering size, the Committee cites the following 

The need for the 10-year issue to grow in size to meet prospective 

borrowing requirements was addressed in our a August 4 report. 

Evidenang persistent shortages in the coltaterat markets, the current 10-

year issue has been on "special" since its original sale, significantly differing 

from the pattern that characterized previous 10-year notes. 

The historically low cost of longer-term borrowing could help offset the risks 

associated with the current focus on short maturity financing. 

The cancellation of the 7- and 20-year cycles has significantly reduced 

previous supply in this sector. 

Corporateunderwriters, mortgage-backed departments and derivative swap

desk8 often use the 7- and 1O-year Treasuries for hedging. 

The marketplace and investing public expect both an increase in the size 

of the 10-year issue and a re4pening of the outstanding issue. 
7) Lastly, a new 10-year note would not likely command a significant liquidity 

premium. In fact, enlarging the outstanding 10-year should foster its 

development as the global benchmark issuefor the U.S,and thus contribute 

to the attendant lower yield that a benchmark security typically commands. 

As revealed in Treasury's chart presentation and the announcements of the 

Increases in the weekly 3- and 6 month bill auctions to $27.6 billion and of the November 

10 auction of $10 billion cash management bills to mature 12116193, the Treasury faces 

a number of intra and inter-quartercash flow and balance management challenges linked 

to intra-quarter financing, Treasury cash flows, regular weekly 3- and 6-month bili sizes, 

concerns about a higher than desirable year-end balance, and the need in December to 

sell a late January 1994 cash management bill. Flrst, the Committee notes that 

according to most private forecasts, the Treasury may need as much as $9 billion less 

in this financing quarter then its forecast indicate. Within the framework of holding3- and 

6-month bills at $27.6 billion for the quarter and the announced $10 billion December 16 

cash management settling November 10, the Committee sees the potential need for an 

intra-quarter $14 billion December 23 cash management bill settling November 15 and 

a further $10 billion January 27, 1994, cash management bill to settle December 3. 

Given the usefulness of having a substantial January 27, 1994, maturity when Treasury 

cash should be high, the Committee recommends reducing the current size of the weekly 

3- and 6-month bills sufficiently to accommodate approximately a $10billion January 27, 

1994 cash management bill and bringing the 3- and 6-month bills weekly more in line with 

the approximately $28.4 billibn anticipated levels needed for the second fiscal quarter. 

Concerning the follow-on January - March second fiscal quarter, the Committee 

concurs with the targeted $20 billion quarter-end balance which suggests the following 

summary of borrowing for the quarter. 

Auctioas Ralsiaa 

Refunding: 

3-year 

10-year 

30-year $16.5 billion 

2-y ear Notes 

.5-year Notes 3 x 21.260 33.750 

1-year Bills 

3- and 6-month Bills 13 x 26.400 10.600 
Cash Management Bills Maturing 1/27 

New Issue 4/21 

$10 

$11 1.o 

Plus: Estimated foreign addms: 6.5 

TOTAL $78.4 billion 

Less: 

Meturity of $7.3 billion 7% 1/15/94 7-year Note 

and $8.1 billion 8 q12% 3/31/94 4-year Note 

TOTAL $15.4 billion 

Total Net Market Borrowing: 

Concerning the Treasury's request for the Committee's views on the schedule of 

auctions for November and December given the hotidays, the Committee is pleased to 

attach its proposed calendar. 

Lastly,the Committee discussed at some length the apparent anomaly surrounding 

the current 30-year bond. The decision of the Treasury announced in May to reduce it8 

reliance on long-term borrowing, shifting to semi-annual 30-year offerings with the aim of 

borrowing current interest expense, may be seen by the market to conflict with the 

Treasury's policy of relieving, by means of a reopening, any "acute and protracted 

shortages" that develops in long-term issues. The Committee continues to support the 

view that only if all three of the following conditions exist is a reopening warranted: 

1) The issue is experiencing lengthy financing pressure with financing costs 

signlflcantly below general collateral. 

2) There exists a known undue concentration of holdings. 

3) The issue trades at an excessive price to surrounding issues. 

In these circumstances, it would be appropriate to Consider reopening the issue in order 

to retain orderly markets and, most importantly, investor confidence. 

In this connection, the Committee notes that the current 30-yearis tradin~some 

25 basis points in yield lower than surrounding issues and is being financed to February 

15, 1994 at rateswell below normal levels. Although the Committee does not betieve that 
the foregomg criteria for an "acute and protracted shortage" are fully met at present, a 

situation could possibly develop wherein Treasury's credibility in dealing with such 

situations might be challenged given the financing strategy announced last May. 

Mr. Secretary, this conctudes the Committee's report and we stand ready to 

address your questions and comments. 

Morgan 8. Stark 

Chairman of the Treasury Borrowing 

Advisory Committee of the PSA 

MBS/I<i 

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