MINUTES OF THE MEETING OF THE 

PSA TREASURY BORROWING ADVISORY COMMITTEE 

FEBRUARY 4 AND 5, 1992 

February 4 

The Committee convened at 9:00 a.m. at the Treasury 

Department. All members were present, except Mr. Fuld and Mr. 

Napoli (see attached list). 

I gave the Committee an informational background briefing on 

Treasury's most recent borrowing estimates and historical 

information relevant to the refunding. The Treasury's estimates 

and background information were released to the public on 

February 3, 1992. 

The Committee also received a briefing by a Treasury staff 

member on recent events in the U.S. economy, which was followed 

by a question-and-answer period. Assistant Secretary Powell then 

"chargedw the Committee to make recommendations on the February 

Treasury refunding and related matters (see attached charge). 

The meeting adjourned at 10:40 a.m. 

The committee reconvened at 2:15 p.m. at the c ad is on Hotel; 

all members were present, except Mr. Fuld and Mr. ~apoli. The 

discussion began with a discussion of the amount of the long-term 

to be offered. The following points were made: 

Given the size of Treasury's financing needs now and in the 

foreseeable period, the Treasury should not cut the size of 

any of the securities that are offered currently. 

It probably will be necessary in the fourth fiscal quarter 

of 1992 or in FY 1993 to add cycles to Treasury's financing 

schedule. A change in cycles, including cutting the size of 

the long-term bond in the February refunding, is not 

appropriate at this time. 

The Treasury could leave the size of the long-term bond 

unchanged from the August and November 1991 refundings ($12 

billion each), thus reducing the size of the bond in 

proportion to Treasury's overall financing needs. 

The Treasury already has reduced long-term financing in 

relation to total borrowing, particularly considering that 

30- and 40-year Refcorp bonds are no longer being issued. 

Market absorption of the long-term bonds in the August and 

November 1991 refundings was not strong. Market 

participants currently have built the expectation that 

Treasury will cut the long-term bond to $9 to $10 billion in 

the February refunding into the yield on the existing 30- 
year bond. At $12 billion or higher, the announcement of a 

a long bond would be followed by a market correction, 

increasing the yield on the 30-year maturity. 

The Treasury should follow a consistent, predictable debt 

management strategy to lessen market volatility. Cutting 

the long-term bond would create uncertainty in the market 

and increase price volatility. 

Treasuryls ability to sell 30-year bonds is unique. 

Treasury does not crowd other borrowers out of that maturity 

sector, because most corporations could not issue 30-year 

bonds (credit quality concerns of investors) or would not 

issue them (they donlt fit into the corporation's business 

plans). The effective maturity of mortgages is shorter. 

Shifting Treasury financing toward intermediate and short 

maturities would put pressure on corporate borrowers and the 

mortgage markets. 

Cutting the Treasury 30-year bond by a few billion dollars 

is not going to have a noticeable impact on long-term 

yields. 

Treasury should issue long-term bonds to take advantage of 

market rates, which are low compared to rates in the 1980s. 

Corporations, municipalities, and individuals are extending 

the maturity of their debts. 

The Committee voted 17-0 for the size and composition of the 

refunding and to reopen the 7-1/2s of 11-15-01 and-the 8s of 11- 

15-21. Reopenings were recommended to provide for larger, more 

liquid issues, which would be more difficult to squeeze. The 

recommended refunding totals $39 billion and consists of $14.5 

billion of 3-year notes, $12.5 billion of 9-3/4-year notes, a 

reopening of the 7-1/2s of 11-15-01, and $12 billion of 29-3/4- 

year bonds, a reopening of the 8s of 11-15-21. 

The Committee agreed by consensus to the financing package 

recommended by the chairman for the remainder of the JanuaryMarch quarter. That package appears in the Chairman's report to 

the Secretary. Several members believed that the Treasury should 

give more emphasis to 52-week bills, a recommendation that was 

made formally in July. 

The Committee also agreed by consensus that the appropriate 

levels of the Treasury cash balance are $20 billion on March 31 

and $30 billion on June 30. It was suggested that a balance of 

$40 billion would not be inappropriate, given the size of the 

Treasury's July-September borrowing requirement that is implied 

by the FY 1993 Federal Budget. 
After deciding on the refunding recommendation, the 

Committee turned its attention to the portion of the Charge 

requesting advice on how to determine whether to reopen a 

security and how the price should be decided. The Committee 

listed the following as indicators of a squeeze: 

-- Trading slows; 

-- Increase in fails and other delivery problems; 

-- Yield on security in cash market differs significantly from 

yields on recently issued Treasury securities of similar 

maturity; 

It was noted that the fact that a security is available only at 

below-market "specialw rates in the rep0 market does not 

necessarily indicate an acute shortage of the security. 

A "Bond Bankw concept was discussed to deal with a 

shortage of a security. The Treasury would make an elastic 

supply of a security available temporarily to prevent potentially 

disruptive shortages of particular securities. The Treasury 

could charge a penalty interest rate (less stringent that the 

market price or rep0 market rate) to entities that borrowed the 

securities and in so doing earn money that would reduce the 

Treasury's cost of borrowing. 

Opposing the Bond Bank concept, the view was expressed that 

on-the-run Treasury securities are often used for hedging 

activities. A Bond Bank could encourage further hedging, using 

the on-the-run securities, and extend the period of time during 

which a security is on special in the rep0 market. 

The Committee turned briefly to a discussion of the way to 

distribute reopened issues. It was suggested that a reopening 

might be done like the go-rounds that the FRB-NY does in 

connection with open market operations. A public announcement 

would be made of the availablility of securities, although not 

the amount to be awarded. Primary dealers would be requested to 

bid; other entities could bid through primary dealers. 

The committee did not make any specific proposals regarding 

reopenings, preferring to discuss the subject in more depth at a 

special meeting at a later date (preference expressed by 

consensus). 

Nor did the Committee have time to discuss in detail the 

proposed single-price, open auction technique that is proposed in 

the Joint Report on the Government Securities Market, prepared by 

the Treasury, Federal Reserve, and SEC. The Committee, by 

consensus, also expressed the view that this subject should be 
included as a topic for the same special meeting in which 

reopenings will be discussed. 

Several points were raised, however, concerning the proposed 

single-price, open auction, including its potential implications 

for the when-issued market. If the technique resulted in a 

broader distribution of securities through the auction, WI 

trading might be diminished. This could lead to greater market 

volatility and make it hard for the Treasury to determine the 

appropriate level at which to begin an iterative auction. Also, 

market participants' risk exposure could be increased by the time 

it would take to conduct an auction in which bidding is conducted 

in several iterations. 

The meeting adjourned at 4:45 p.m. 

February 5 

The Committee reconvened at 9:00 a.m. at the Treasury. All 

members were present, except Mr. Fuld and Mr. Napoli. The 

Chairman presented the Committee report to Assistant Secretary 

Powell. There was a question-and-answer period related to the 

Committee report. The Treasury expressed an interest in holding 

a special meeting to discuss reopenings and the auction technique 

late in March. The meeting adjourned at 9:40 a.m. 

Attachments 

J$fll K. Ouseley, Director 

Office of Market Finance 

Domestic Finance 

February 11, 1992