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REPORT TO THE SECRETARY OF THE TREASURY 

FROM THE 

TREASURY BORROWING ADVISORY COMMITTEE 

OF THE 

PUBLIC SECURITIES ASSOCIATION 

February 5,1997 

Dear Mr. Secretary: 

Since the Committee’s last meeting on October 30, 1996, the pace of economic activity 

has been brisk. The mid-year slowdown in consumer spending proved temporary, as robust gains 

in employment and income led to renewed vigor. Significant improvement in net exports, 

although somewhat exaggerated, also contributed to the fourth quarter rebound. Despite abovetrend growth, and aside fiom energy prices, inflation has remained remarkably well behaved. On 

a more cautious note, wage and salary gains are trending higher and may well rise firther amid 

persistent labor market tightness. 

Interest rates on Treasury securities are currently little changed &om the levels which prevailed 

at our last meeting. Monetary policy has remained unchanged Since January of last year, while market 

expectations presently seem tilted in the direction of somewhat tighter credit in the coming months. 

Foreign demand for Treasury securities continues to be supportive of the market, reflecting strength in 

the dollar as well as relatively attractive US. yield levels. 

Within this context, to refund the $18.0 billion ofprivately-held notes maturing on February 15, 

1997 and to raise $21.75 billion of cash, the Committee recommends that the Treasury auction $39.75 

billion of the following securities: 

$17.75 billion 3-year notes due February 15,2000; 

$12.0 billion 10-year notes due February 15,2007; 

$10.0 billion re-opened 6 1/2 percent bonds due November 15,2026. 

The Committee unanimously supported a modest reduction in the size of the 3-year note to 

$17.75 billion fiom the $18.5 billion level in the prior refunding. This recommendation is consistent 

with the Treasury’s recent tendency to modestly reduce o!€kring amounts of shorter-term coupon 

issues, in connection with more fiequent offerings of longer-term securities. The Committee also took 

into account the new cash raised through the Treasury’s initial offering of inflation-indexed securities. 

In that context, this recommendation &her Contributes to recent efforts to reduce reliance on shortterm financing. 

Eleven of the thirteen members present voted to recommend that the Treasury issue $12.0 

billion 10-year notes, up &om the $10.0 billion level in the prior refunding. Two of the members 
favored a size of $14.0 billion, consistent with 10-year issue sizes before the shift to more fiequent 

offerings. In formulating this recommendation, the Committee was minW of the need for large, liquid 

issues in this important benchmark maturity. The Committee also considered the interval between this 

auction and the next 10-year note auction in the May refundtng. It was felt that the larger sized 

offering would reduce the potential for an undue scarcity to develop in the repurchase agreement 

market. It is also consistent with the Committee’s rmmmendation in its report of May 1,1996 that it 

would be preferable to target a minimum size of $12.0 billion for the 1 0-year note auctions in February 

and May. 

Another fiictor in the Committee’s consideration of the size of the 10-year note was its 

unanimous vote not to re-open the 61/2 percent notes due October 15,2006. This security, first issued 

on October 15, 1996, was re-opened in last year’s November refunding. An additional re-opening 

would result in a particularly large issue which, on the margin, would be somewhat more difEcult for 

the Treasury to efEciently refund upon maturity. Also, there was no evidence of a shortage of this 

issue in the repurchase agreement market, and it was felt that the market was likely to place a premium 

on a new large 10-year benchmark issue. 

In terms of the bond in its refunding recommendation, the Committee unanimously supported 

$10.0 billion as the appropriate size. The Committee also voted by 11-2 to recommend a re-opening of 

the 6 1/2 percent bonds due November 15, 2026. The majority felt that a further increase in the 

strippable product with May 15 and November 15 maturities was desirable. It was also noted that a 

large issue would reduce the potential for a shortage to develop in the repurchase agreement market 

during the si-month period before the issuance of the next 30-year bond. 

With the aim of achieving a cash balance of $20 billion on March 31, the Committee 

unanimously recommends that, for the remainder of the quarter, the Treasury meet its borrowing 

requirement in the following manner: 

Two 5-year notes totaling $12.5 billion each, to raise $4.7 billion of new cash; 

Two %-year notes totaling $17.5 billion each, to pay down $1.5 billion of cash, 

One 1-year bill totaling $19.25 billioii, to raise $0.5 billion of new cask 

Weekly issuance of 3- and &month bills through the remainder of the quarter, to raise 

$9.1 billion of new cash; and 

A cash management bill totaling $20.0 billion to mature on April 24 to meet the 

seasonal cash need in early March. 

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Including the $21.75 billion raised in the midquarter refunding, as well as anticipated foreign 

add-ons of $7.0 billion, the proposed financing schedule will raise a net amount of $61.6 billion. This 

amount, after subtracting the net paydown of $1 1.6 bilhon to date in the quarter, will accomplish the 

total net market bo~owing requirement of $50.0 billion. 

For the April-June quarter, the Treasury estimates a net paydown in the range of $10-15 billion 

with a cash balance of $35 billion at the end of June. To accomplish the anticipated net paydown, the 

Committee recommends the provisional financing schedule attached to this report. . 

In its deliberations concerning this financing schedule, the Committee assumed that the next 

offering of inflation-indexed securities in April would be maintained at $7.0 billion. Given this 

assumption, and in view of the size of the planned net paydown, the Committee recognizes the 

Treasury’s need for fltlexibility in terms of possible modest reductions in the size of coupon auctions. 

In response to the Treasury’s request for its views, the Committee considered the question of 

whether to introduce half-decimal bidding for 13-, 26- and 52-week bill auctions. As noted by 

Treasury half-decimal bidding would provide unique prices for bills with &ties of more than 

72 days. The Committee’s view on Mdecimal bidding was unanimous in fivor of this change. 

As noted in its report of August 3, 1994, when the committee considered the question of 3- 

decimal yield bidding for note and bond auctions, the Committee feels that smaller bidding increments 

would, on the margin, induce some market participants to bid somewhat more aggressively, with 

potential for modest savings to the Treasury. The Committee also feels that such a change would be 

relatively easy to introduce, as it is consistent with existing secondary market practices and generally in 

line with the changes introduced by the Treasury in February 1995 for note and bond auction bidding. 

The Committee also considered possible complications which might arise, in terms of 

monitoring Treasury’s auction bidding rules, as a result of reductions in the amount of certain bill 

offerings available for purchase by the public. In particular, it was noted that, after taking account of 

auction allotments to central banks and other official institutions, the remaining size of some bil) 

offerings was such that a potential mzvrimum 35 percent award could be smaller than the Treasury’s 

current $2 billion net long position auction reporting threshold. Such reporting requirement is used to 

facilitate enforcement of the Treasury’s policy concerning maximum amounts of securities awarded to 

any one bidder in all auctions of Treasury securities. <. 

In order to help avoid inadvertent violations of that policy in cases invotvlng auctions of small 

Sizes of Treasury bills, the Committee considered a number of possible reporting practice changes. 

This included adjusting the size of the reporting threshold on an auction-by-auction basis, when 

Treasury is aware that the available size of a bill offering would entail a maximum potential single 

bidder award below $2 billion. Alternatively, the Committee considered a reduction in the reporting 

threshold for auctions of Treasury bills to $1 billion - an amount judged suf6cient to ensure proper 

monitoring of the single bidder award policy. 

With one abstention, the Committee members strongly prefmed lowering the went net long 

position reporting threshold for Treasury bill auctions to $1 billion, while retaining the current $2 

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billion threshold for note and bond auctions. The Committee felt this approach would lessen the risks 

of unintended errors which might arise fiom fiequent auction-to-auction changes in reporting 

thresholds. It would also Limit the additional complexities, and related compliance costs, associated 

with adhering to the Treasury’s rules and procedures for auction bidding. In this regard, it was noted 

that those complexities inevitably add costs to participants in the process, and particularly for those 

hvestors who are only occasional direct participants in Treasury auctions. 

Mi-. Secretary, that concludes the Committee’s report. We welcome any comments or 

qUeStiOnS. 

RespdfUy submitted, 

<- 

Richard M. Kelly 

Chairman 

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