REPORT TO THE SECRETARY OF THE TREASURY 

FROM THE U.S, GOVERNMENT AND FEDERAL 

AGENCIES SECURITIES GOmIT'1'EE OF THE 

PUBLIC SECURITIES ASSOCIATION 

January 26, 1988 

Dear Mr, Secretary: 

Since the Committee last met, two issues have dominated the 

U.S* financial markets, The first is the extent of any economic 

slowdown that might result from the stock market collapse in 

October; the second is the potential for higher U,S, inflation 

from the sharp decline in the dollar in late 1987. With regard 

to both of these questions, the hulk of the evidence so far has 

been reassuring. Production continued to yrow strongly in the 

fourth quarter, while the inflation numbers have been on the low 

end of expectations. The uncertainty over these issues has kept 

the fixed-income markets fairly volatile on a day-to-day basis. 

Long-term Treasury bonds are about 1/2 of a point lower in yield 

now than they were then, and three-month bills, about 70 basis 

points higher, Thus, the principal change in the bond market 

over the Last three months has been a flattening of the yield 

curve, which has in large part reflected a lessening of the 

strong demand for liquidity and safety that emerged right after 

October 19, 

The biggest surprise since then has been the apparent 

imperviousness of the economy as a whole to the shock of the 

stock market decline. To be sure, the consumpti.on and housing 

sectors have been generally weak, but that weakness has appeared 

more as a continuation of earlier trends rather than something 

that arose suddenly after October 1.9. And the softness in those 

sectors has been more than offset by the strength in industrial 

production, presumably in response to growing export demand, 

There does seem to have been considerable inventory growth in the 

fourth quarter, however, and that suggests some slowdown in both 

domestic production and perhaps imports early this year. The 

likelihood of that occurring seems even greater against the 

backdrop of puzzlingly slow money growth in 1.987, Moreover, it 

is still far too early to say with certainty that there will be 

no economic fallout from the stock market, The uptrend in 

unemployment insurance claims since October i.s one sign that 

bears watching in this regard, 
As for inflation, despite the concerns that U,S, 

manufacturers are close to capacity constraints because of the 

surge in export orders, the major price indexes are not showing 

any signs of acceleration. Wage rates have edged up slightly, 

but not to any worrisome degree, And although some measures of 

commodity prices have risen, the prospects of a more stable 

dollar should help to allay any concerns of a serious 

inflationary pickup, 

At the time of the last meeting of the Committee, the 

markets were focusing intently on the budgetary process in 

Congress. Whatever disappointment there may have been over the 

results, the federal deficit has generally faded as a matter of 

i-mmediate concern. Attention may be redirected in this direction 

as the President prepares to send his 1989 budget to Congress, 

But for now, the market is probably a~t least as focused on the 

need to extend the long-bond authority as it is on broader fiscal 

questions. With respect to monetary policy, there seems to be a 

growing consensus that there is no need for a change in either 

direction at this time* A renewed bout of dollar weakness could 

of course reignite fears of a tighter policy. Hence, 

international developments--including both the outlook for the 

trade balance and the policy stance of foreign central banks-- 

will continue to be extremely important for the markets. 

Indeed, there have recently been at least two very direct 

links between what happens abroad and the behavior of the 

Treasury market. Dollars acquired by foreign central banks 

through intervention have been recycled into the Treasury market, 

and not just into the hill sector. increasingly, central banks 

have been willing to move further out the yield curve. Secondly, 

the size of foreign add-ons in recent Treasury auctions has been 

up sharply. As a result, foreign sector activity has reduced the 

amount of securities that the Treasury would otherwise have to 

issue in the public market. And that brings us to the 

recommendations we have for the upcoming refunding auctions, 

The Comnittee approved by a 16 to 2 vote a plan for 

financing Treasury debt through the end of June, The plan would 

reduce all cou.pon offerings except the long bond by at least $250 

million from the level of offerings j.n the fourth quarter of 

1987- The long bond which was restricted in size by the 4 lj4% 

interest rate ceiling in November would be set at $8.95 billion. 

It would keep hill auctions at current levels through April 

before raisiny themt it would meet quarter-end cash balance 
targets through the use of cash management bills. The Committee 

considered but rejected recommending the elim~riation of a note 

cycle as premature because of the projected size of the ongolng 

deficit - 

For the quarterly f inanciny then the Committee recommends 

that the follewlng securlties be sold at auctions to refund $12.1 

blllion maturlng securlties and ralse $15-2 billion of new cash: 

$9.5 bllllon 3-year notes due 2/15/91 

$9.0 brlllon 9 3/4-year notes due 11/15/97 

$8,75 brllion 29 l/4-year bonds due 5/15/17 

The commi,ttee proposes to reopen existing securities for the 

two Longer offerings, Tl'ere was unanimity in proposing to reopen 

the 8 3/48 bonds due 5/15/17, while the proposal to reopen the 

8 7/8% notes of 11./15/97 was passed by a 12 to 6 vote. The 

minority in the latter vote were concerned that the premium 

currently in the market might deter some potential kidders from 

entering the auction. The majority felt that auction premiums 

above par were not a problem and that some investors preferred 

the higher coupon. 

For the remainder of the quarter the Committee recommends: 

-- Sell $8 3,4 bllllon 2-year notes at two remalnlng 

auctlons payrng down $2-2 brllion, 

- Sell $7 1/'4 blllson 5-year notes ralssng ail new 

cash, 

- - Sell $6 3/4 bsllion 4-year notes raising $750 

mllilon, 

- - Sell $9.25 billion 52-week bills at two remaining 

auctions paying down $800 million. 

- - Sell $12.8 b~llion at each remalnrng 3- and 6-month 

Treasury b~ll auction paying down $5-9 brlllon. 

- -. Sell about $5.3 billion in cash management bills to 

meet quarter-end cash balance targets, 
Sununary of New Cash Needed for Quarter 

Refundrng $15.2 hrllj on 

3- and 6-month bllls -5,9 

52-week bills -0.8 

2-year notes -2,2 

4-year notes -8 

5-year notes 7-3 

Cash management bllls 5-3 

Total $19+7 blllion 

already raisea $ 3.7 blllion 

hstimated Foreign 

Add-ons for remainder 

of quarter 3.3 - 

Net Market Borrowing $26 -7 bllllon 

The Committee recommends cash balances for March 31 and 

June 30 of $10 billion and $20 bi1l.ion respectively. 

The Committee considered the question of shortening when 

issued periods for mid-quarter refundings, They concluded by a 

vote of 16 to 2 that it would be appropriate to shorten these 

periods by one week. This could be accomplished by moving the 

announcement of the auction dates and the actual auctions later 

by one week. Presumably this change would also require the 

Committee to meet one week later than is presently scheduled each 

quarter. This was riot deemed to be a problem and the Comml.ttee 

rccommerrds that this new procedure be announced inuncdiately and 

instituted starting with the May financinq. 

The reduced supply of Treasury bills that has developed over 

the last year was addressed by the Committee- it was recognized 

that a relative scarcity of bills has developed in the market and 

the lack of availabiLity is causing some problems for traditional 

bill buyers such as the Federal Reserve and foreign central 

banks. As a result, these and other investors have begun to 

lengthen their holdings of Treasury securities. After some 

discussion, it was concluded that this development on balance has 

been advantageous to the Treasury. It has kept the yield curve 

steep and reduced the cost of Treasury bills which still. 

constitute 198 of the private holdings of marketable debt.. But 

we feel that the drop in outstanding bills has achieved its 

purpose and further reductions should he avoided in the future, 
Mr, Secretary this concludes our report and we ~elcome 

questions and discussion, 

Chairman 
REPORT TO THE SECRETARY OF THE TREASURY 

FROM THE U.S. GOVERNMENT AND FEDERAL 

AGENCIES SECURITIES COMMITTEE OF THE 

PUBLIC SECURITIES ASSOCIATION 

Y 4, 1988 

Dear Mr, Secretary: 

At the time of our last meeting, the economic news was 

generally reassuring, although there were concerns about an 

overhang of inventories. Immediate inflation worries were muted, 

although latent concerns remained as a result of the dollar's 

weakness in 1986-7. The period since that meeting divides itself 

fairly naturally in two as far as the government bond market is 

concerned, For about five weeks, a rebound in the dollar along 

with a sharp drop in the closely watched CRB index allowed the 

rally that had begun in mid-December to continue, it was further 

aided by the slight easing in Federal Reserve policy that, as we 

now know, was being implemented right around the time of our 

meeting on January 26. From then until March 3, yields on longterm Treasury bonds fell by almost 3/8 of a point, The rates on 

both three-month bills and federal funds declined by about 20 

basis points, as the yield curve flattened. 

The extraordinary rise in employment reported the next 

morning was the first of a series of statistics that sharply 

altered market perceptions. Fears of economic softness were 

gradually replaced by projections of strong economic growth. 

With the latter came worries about accelerating inflation as a 

result of capacity constraints and tight labor markets, worries 

that were exacerbated by an actual pickup in inflation indicators 

during March. Added to this mixture was disappointment over the 

February trade figuresand a reversal of the Fed's easing move. 

All together, these various factors produced a nearly 70-basispoint backup in Treasury bond yields to slightly over 9%, their 

highest level since mid-December. This was accompanied by a 

steepening in the yield curve, as 3-month bills only rose by 

about 20 basis points. 

it now appears that the prospects for real growth of better 

than 3% in the next few quarters are quite good, particular in 

light of the recent survey of capital spending plans. However, 

the outlook will depend critically on whether the pickup in 

consumer spending in the first quarter continues for the rest of 

the year. This in turn presents a dilemma: can the trade 

deficit be pared significantly in such an environment, given the 

recent strength in imports? Moreover, the likelihood of 

continued solid real growth does nothing to reduce concerns over 

inflation, nor do the batest developments in the oil market, 
2 

As for the markets themselves, they have demonstrated an 

impressive ability to absorb unsettling news with a minimum of 

disruptions (e-g., the Texas bank problems and the spate of 

stories on the extent of the FSLICSs difficulties), This is in 

part due to the excellent technical conditions, at least in the 

Treasury market. Renewed purchases by foreiyn central banks as 

well as the Pedss purchases of coupon securities to meet seasonal 

reserve needs have both helped. So has the continued light 

issuance by the Treasury. And there may be some signs of support 

at the long end from the growing realization that Congress may 

not extend bond authorization any time soon. This, then, is the 

environment in which we have developed our recommendations for 

the upcoming refunding auctions, 

The Committee considered several recon~mendations to address 

the rather pleasant position the Treasury finds itself in of a 

projected cash surplus for the second quarter (the first 

quarterly surplus in 7 years). These included: decreasing the 

new issue size of Treasury bills below $12.8 billion: eliminating 

a note cycle; a major cutback in the size of the long bond; a 

modest reduction in all coupon offerings; an increase in the 

projected cash balance for June 30. It unanimously chose a 

combination of the last two options, i.e,, new coupon offerings 

should continue to be reduced in size and the cash balance target 

for June 30 should be raised. 

Specifically, the Committee voted unanimously for a $25.5 

billion financing to refund $16-5 billion of securities maturing 

May 15 and to raise $9 billion of new cash, The Committee voted 

11 - 7 for a new bond rather than a reopening of the 8 7/8% 

bonds due 8/15/17. In view of that decision, we voted 

unanimously that the size of the new bond should be $8.75 billion 

rather than $8.5 billion. By a 13 - 5 vote the Committee 

recommends an $8-25 billion 3-year note and an $8.5 billion 10- 

year note rather than the other way around, 

In regard to the reopening question, it was argued that the 

Treasury would save in interest costs with a new issue, Those 

who voted in favor or a reopening were concerned about the 

possibility that the relatively small size of the new issue could 

result in a poor secondary market from a trading standpoint if 

the Treasury" authority to issue long bonds should lapse. The 

vote in favor of a smaller size for the two shorter issues 

reflected the belief that the actual size of those offerings 

would be larger as a result of foreign add-ons, especially on the 

3-year note, 
For the remainder of the quarter the Committee recommends: 

- - Sell $8,0 billion 2-year notes at 2 remaining 

auctions paying down $4-4 billion, 

- - Sell $6-75 billion 5-year notes raising all 

new cash. 

-- Sell $6 billion $-year notes paying down $0.1 

billion. 

-- Sell $8.5 billion 52-week bills paying down 

$1-3 billion. 

- - Sell $12.8 billion at each of the remaining 

3- and 6-month Treasury bill auctions paying 

down $4.4 billion. 

Summary of New Cash Needed 

Refunding $ 9.0 billion 

3- and 6- month bills (4-4) 

52-week bill (1.3) 

2-year notes (4-4) 

4-year notes (0~1) 

5-year note 

Total $ 5.6 billion 

Already done (4-01 

Estimated Foreign Add-ons 1.9 

Net market borrowing $ 3.5 billion 

The Committee unanimously voted for a $35 billion cash 

balance on June 30 and a $30 billion cash balance on September 

30. The June target accounts for the difference between the 

Treasury's projected $1.5 billion decrease in market borrowing 

and the Committee projected $3.5 billion net market borrowing. 

The Committee recommended that the Treasury offer a full 

sized long bond at this time, This recommendation was based on 

the belief that good debt management practices should not be 

predicated on an assumption that Congress would fail to increase 

the bond authority before the August refunding* It was the 

Committeeis view that should the Congress fail to raise the bond 
authority, the orderly and predictable process of Treasury 

financings would be disrupted. The attendant distortion in the 

pattern of borrowing and resulting uncertainty would likely 

increase the cost of financing to the Treasury, In addition, the 

public commentary that likely would be generated could have an 

adverse effect on the perceived attractiveness of investment in 

the U.S. and hence the terms on which funds can be obtained 

including by the Treasury. 

As mentioned earlier, the Committee rejected the proposition 

that the Treasury should eliminate a note cycle at this time, 

As you know this Committee, in our last special meeting, proposed 

that the 5-year note should be repositioned in the financing 

calendar and the 4-year note cycle eliminated when and if the 

Treasury" cash needs diminish sufficiently, It is the judgement 

of the Committee that this point has not yet been reached. The 

Treasury's improved cash position is importantly related to 

foreign central bank investment which may not continue and a 

large cash deficit is projected for the second half of calendar 

year 1988, 

Mr. Secretary this concludes our report. The Committee is 

prepared to respond to any of your questions. 

Chairman 
REPORT TO THE SECRET Y OF THE TREASURY . . FROM THE U.S. GOVEWENT AND FEDERAL 

AGENCIES SECURITIES COMMITTEE OF THE 

PUBLIC SECURITIES ASSOCIATION 

August 3, 1988 

Dear Nr, Secretary; 

Since the time of our last meeting, four factors have played 

a dominant role in the U.S, Treasury market: (1) the strong 

economy and attendant fears of inflation; (2) the aggressive 

series of tightening moves by the Federal Reserve; (3) the strong 

rebound in the dollar; and (4) the relatively light supply of 

new Treasury debt along with the prospect of no new issuance of 

bonds at the upcoming refunding, Clearly, these factors are 

interrelated, Thus the tightening actions by the Fed have been 

in direct response to the continuing evidence of economic (growth 

in excess of what is generally perceived to be sustainable 

without producing an acceleration in inflation, (By contrast, 

both the central bank and, to a large degree, the fixed-income 

markets have been willing to view the sharp run-up in commodity 

prices as more of a one-time supply shock that need not significantly impact the trend rate of inflation.) In turn, the 

decisiveness of the Fedls policy response, particularly in an 

election year, appears to have helped trigger the change in 

sentiment toward the dollar in the foreign exchange markets, And 

while the pattern of light Treasury issuance is less directly 

related to the other three factors, the generally constructive 

outlook for the deficit reflects to a significant degree the 

economy % strong growth, 

As one or another of these various forces has temporarily 

appeared more important to the markets over the course of the 

last three months, yields on long-term Treasury bonds have ranged 

from a high of about 9 3/8% in late Nay to a low of around 8 7/8% 

in late June. However, the net result has been a pronounce 

flattening of the Treasury yield curve since the time of our last 

meeting. While yields on thirty-year bonds have actually 

declined, yields on two-year notes are up by about 60 basis 

points and those on three-month bills, by over 75 basis points, 

Put slightly differently, the yield curve itself does not seem to 

reflect any significant worsening of inflation expectations, 

Looking ahead, the economy still appears to have a good deal 

of momentum left. Continued strong growth is likely in both 

exports and capital eguipment spending (although the recent pace 

of growth in those two sectors is clearly not sustainable 

indefinitely), The housing sector, by contrast, is likely 

provide little rf any stimulus, The swing sector will clearly be 

consumption, If the strong pickup in employment so far this 

year translates into at least a modest rebound in consum 
then there should be no cause for any significant inven 

correction and production growth could be maintained at about the 

same rate as in the first half. Presumably, the Fed is prepared 

to tighten further if growth does not slow soon to around 2 1/2%, 

Further tightening from here, however, would have to be done with 

an eye toward the capital markets, since last yeargs events in 

the stock market are still fresh in investors memories. As for 

the elections, their impact on the financial markets has been 

hard to detect up until now, but attention is likely to become 

more focused in the coming weeks, 

It is against this background that we have developed our 

recommendations for the refundin 

The Committee recommends that the following securities be 

sold at auction to refund $14.8 billion maturing securities and 

raise $9.2 billion of new cash: 

-- $12 billion 3-year notes due 8/15/91. 

-... $12 billion 9 J/4-year notes due 5/15/98. 

The Committee voted 12 to 7 in favor or a $24 billion refunding 

instead of a $22 billion refunding., The majority felt that the 

additional size was warranted because of the Treasury" inability 

to include in the refunding the usual 30-year bond offering 

because of the 4 1/4% interest rate ceiling on Treasury bonds, 

While the amount is more than the market is expecting, the 

offerings will be well received because there is currently an 

excellent demand for Treasury securities, 

The Committee voted i2 to 7 in favor of $12 billion each of 

3-year and 9 3/4-year notes rather than $10 billion and $14 

billion respectively because of $14 billion auction of 10-year 

notes might be viewed as too large an increase from previous 

auctions of 10-year notes for the market to absorb easily-- 

particularly if unfavorable news shoul occur before the auction, 

The Committee voted 17 to 2 for reopening the 9% notes due 

5/15/98 rather than offering a new issue. It was judged that 

this would neither save nor cost the Treasury anything in 

interest costs in the immediate auction. The outstanding 9% 

notes are currently in short supply and it will help the 

liquidity of the market to have one larger issue in the 10-year 

maturity area rather than 2 smaller ones, 

We judge that about $6 billion of 30-day casb management 

ill have to be auctioned for payment August 15 and about 

lion 20-day cash management bills early i September to 

smooth out the Treasury's casb flows for the quarter. We 

recommend that the first cash management bill be auctioned on 
3 -. 

Thursday, August I1 in order to allow the 3- and lo-year notes to 

be auctioned at their customary times. 

For the remainder of the arter we recomen 

-- Sell $10 billion 2-year notes at 2 remainin 

auctions paying down $,95 billion* 

..- Sell $7-75 billion 5-year notes raising all new cash* 

-- sell $7 billion 4-year notes raising ,450 billion, 

-- Sell $9,5 billion 52-week bills at two remainin 

auctions raising $,ZOO billion, 

-- Sell $13.6 billion a% each of the remainin 

6-month bill auctions in August raisin 

billion. 

-- Sell $14 billion at each of the remaining 3- and 

6-month bill auctions in September raising $3.350 

billion. 

Summary of Mew Cash for the Quarter 

Refunding 

3- and 6-month bills 

52-week bills 

2-year notes 

5-year notes 

4-year notes 

Total 

Already raised 

Estimates Foreign Add-ons 

Net Market borrowing 

$9-2 billion 

4.0 

.2 

(1.0) 

2 

7.8 

$20.6 billion 

2 

$25.3 billion 

The Committee" reecmmendation taken literally replaces the 

funds that would normally come from the long bond through a 

combination of increased 3- and lo-year notes and Treasury bills, 

This meets "Lo goals: (I) it offers immediately large coupon 

offerings, particularly the 10-year note as close a substitute as 

possible for the bond: (2) by increasing Treasury bills it gives 

the Treasury the leeway to pay down should the long bond 

authority become available in future quarterly financings, We 

considered but rejected the idea of a longer term cash management 

bill since there did not seem to be an obvious opportunity to pay 

it dawn this year. Adjustments in the regular weekly bill cycle 

therefore seemed preferable. 
For the October - December quarter the Cornittee recommends 

modest additions ($.250 billion each from the previous size of 

offerings) for the 7-year and 5-year notes and the one year 

bills; maintain the 2-year notes at $10 billion and the regular 

weekly bills at $14 billion. Since the size of the refunding 

depends on whether or not the offering of a long ond is possible 

in November we have penciled in a $25 billion rerunding. This 

could be raised or lowere8 depending on the bond authority with 

adjustments made in other issues and/or the year-end cash 

balance. 

The Committee recommends cask balances of $30 

September 30 and $25 billion on December 31. The higher cash 

balance in September is needed because of projected heavy cash. 

drains early in October, The need for a higher ending balance in 

December is mitigated by projected tax receipts in the middle of 

January 1989, 

Mr. Secretary this concludes our report and we welcome 

questions and discussion, 

Chairman 
REPORT TO THE SECRETARY OF THE TREASURY 

FROM THE U.S. GOVERNMENT AND FEDERAL 

AGENCIES SECURITIES COMMITTEE OF THE 

PUBLIC SECURITIES ASSOCIATION 

November 2, 1988 

Dear Mr. Secretary: 

At the time of our last meeting, we cited four factors that 

had been playing a particularly important role in the U.S. 

Treasury market: (1) the strong economy and the attendant fears 

of inflation; (2) the aggressive series of tightening moves by 

the Federal Reserve; (3) the strong rebound in the dollar: and 

(4) the relatively light supply of new Treasury issues along with 

the prospect of no bond at the guarterly refunding- The 

situation with regard to each of these factors has changed 

significantly in the interim. 

Most of the economic indicators over the past few months 

have been signaling a more moderate rate of real growth than had 

prevailed in the first half of the year, These signs of at least 

some deceleration have in turn reduced the level of concern over 

inflation, as has the sharp drop in oil prices. Moreover, the 

actual inflation numbers (especially for the CPI) have come in 

slightly lower than had been anticipated just a few months 

earlier, The Federal Reserve, which raised the discount rate to 

6 1/2% just one week after we last met, has since maintained an 

essentially unchanged policy, And there is now a fairly 

widespread expectation in the market that no further change in 

the Fed's stance is likely before year end. To the extent that 

the anticipation of rising short-term interest rates in the U.S. 

was a key source of the dollar's strength last summer, it should 

not be surprising that the dollar has lost a good portion of its 

earlier gains in the new environment, As for the Treasury's new 

issuance, the normal seasonal pick-up in borrowing will now 

presumably include supply at the long-end for the first time 

since May. 

These extensive differences in the fundamental outlook over 

the last three months help to explain the unusual changes in the 

shape of the yield curve that have occurred since then. Thus, 

coupon yields have declined -- the two-year note, which yielded 

8,32% on August 2, is currently yielding 8,258 and the long-bond 

bas declined from 9,08% to 8.75%, while rates on three-month 

bills have risen by roughly the same amount as the federal funds 

rate, from 6,90% to 7,38%. In short, the flattening of the yield 

curve which bas characterized the Treasury market for most of 

1988 has not yet shown signs of reversing itself. 

ahead, economic growth is likely to continue to be 

moderate (after allowance is made for the distorting effects of 

the drought on the published GNP figures), Export growth, which 

had fueled the economy in the first half of the year, has begun 
to taper off, At the same time, there is no evidence that 

private domestic demand is about to pick up the slack. Consumers 

are constrained by heavy debt loads, housing appears stagnant, 

and the latest surveys suggest that the greatest strength in 

investment spending may be behind us, Neither the federal nor 

the state and local sectors is likely to be a source of stimulus 

in 1989. As a result, the economy should drop back to something 

closer to 2% growth over the course of 1989. It is far from 

clear, however, whether that will be slow enough to prevent some 

further upward movement in the inflation rate since the economy 

is operating so close to full capacity, Much will depend on what 

happens to oil prices, and they are likely to be quite volatile. 

The larger unknowns revolve around next weekls elections and 

what will follow from them in terms or fiscal policy, The 

assumption that Gram Rudman budget targets will be met is 

critical for the dollar and, hence, for monetary policy. And it 

is against a backdrop of those uncertainties that we have 

developed our recommendations for the refunding, 

By a vote of 16 to 2 the Committee recommends that the 

composition of the quarterly coupon financing be: 

-- $9 billion 3-year notes due 11/15/91; 

-- $9 l/2 billion 10-year notes due 31/15/98; and 

-- $10 billion 30-year bonds due 11/15/2018, 

rather than $9 1/2 billion of each of the three issues* The 

large majority felt that the Treasury would be well advised to 

meet market demands by offering successively larger amounts of 

the longer term issues, The yield curve Elattening refletits 

strong demand and the absence of any bond offering since May. 

The reopening of the 9 2/8% bond was considered but rejected by 

an 11 to 7 vote since the current premium of about 4 points was 

considered to be too large for some investors. 

Since it seems highly likely that the Technical Corrections 

ill not have final Presidential approval by this 

afternoon when the Treasury" financing plans will be announced, 

the Cornittee considered twa possible courses of action. Both 

plans would announce the sale of the 3-year and 10-year notes at 

auctions to be held on Tuesday and Wednesday next week and the 

o sell the $10 billion 30-year bonds when and if the 

law. Both plans would schedule the sale of $15 

billion cash management bills due 22/22/88 on Thursday, 

November 10 as temporary substitute for the long bond and as a 

bridging techni e to cover a projected cash shortfall on 

November 15. The plans would then diverge: plan "Aei would 

identify the uncement date, the auction date and the payment 

date for the as November 30, December 7 and December 15 
respectively; plan e'B*t would not predetermine those specific 

dates and instead allow the Treasury the latitude to determine 

those particulars when and if the Act is signed by the President. 

Plan ""Ahas endorsed by the Committee by a 9 to 8 vote with one 

abstention, The majority felt that the market woul be helped by 

greater certainty as to the Treasury" plans, while the minority 

thought that the Treasury should not commit itselr and thus alloh 

the offering to take place more quickly should circumstances 

allow, it was noted that the question of bond authority should 

be resolved by the middle of November. 

The Cornittee then considered the alternatives if the Act 

hid not become law, It was unanimously judged that the $10 

billion lost through inability to issue the bond should be 

replaced by modest increases ($2 billion or so) in the size of a 

variety of the regular Treasury coupon offerings that are 

scheduled between now and February. Temporary adjustments in 

bills may be required for cash balance purposes' This program 

was considered to be better than creating a special new coupon 

issue or relying more heavily on permanent bill financing. 

Assuming the bond financing does take place the Committee 

recommends for the rest of the quarter: 

- - Sell $9.25 billion 2-year notes paying down 

$1.6 billion. 

-- Sell $7-5 billion 5-year notes raising all new 

cash. 

-- Sell $9 billion one year bills at each of 2 

remaining auctions paying down $,7 billion, 

-- Sell $14,4 billion at each of the remaining 3- 

and 6-month bill auctions raising $5,5 billion 

new cash. 

Summaw of new cash needed for tho quarter 

Refunding 

3- and 6-month bills 

52-week bills 

2-year notes 

5-year notes 

Total 

Net Market borrowing 

8,7 

$31.2 billion 

The Committee recommends e cash balance on 12/31 of $23 

billion- 
For the January - March quarter the Committee suggests that 

the weekly bill auctions be raised to $14.6 billion on January 5 

and then to $14.8 billion on February 16. One-year bills and 

two-year notes would climl-i by $250 million at each successive 

auction reaching $10-25 each by March. The two four-year notes 

would be set at $7-25 billion and $7.50 billion -- the five-year 

notes at $7,75 billion -- the seven-year notes at $7-00 billion 

and the February refunding at: the $30 billion level, This would 

fund an estimated cash deficit of $45 billion and allow for a 

cash balance of $10 billion on March 31, 1989. 

Mr. Secreta this concludes our report and we welcome 

questions and discussion.