REPORT TO THE SECRETARY OF THE TREASURY 

FROM THE 

TREASURY ADVISORY COMMITTEE 

OF THE 

BOND MARKET ASSOCIATION 

February 4,1998 

Dear Mr. Secretary: 

Smce the Committee’s last meeting on October 29,1997, the pace of economic actiwty has wntinued to be 

relatively brisk. However, the situation in Asia and the accompanying appreciation m the dollar are widely 

expected to have a negative ef%ct on U. S . trade performance leading to some moderation m economic growth 

during 1998. On the inflation fiont, the news continues to be quite favorable. While job growth has accelerated of 

late and labor market cur~ditions appear to be extremely tight, wage pressures have been slow to build and the rate 

of increase in both umsumer and producer prices has been trending lower. 

The Asian crisis and credit quahty concerns prompted strong demand for the US dollar and Treasuries which drove 

yields as much as 50 basis points lower in early December. Recently, the stabilization m Asia has reversed this 

trend somewhat with yields now 25-35 basis points lower and the yield curve somewhat flatter than at the time of 

the Committee’s last m-g. Wle the Federal Reserve is widely expected to leave policy unchanged in the near 

term, forward rate strudures are priced for a modest easing over the next several months. 

Within this context, to refund $25.9 billion of privatelyheld notes maturing on February 15, 1998 and to raise $9.1 

billion of new cash, the Committee recommends that the Treasury auction $35.0 billion ofthe following securities: 

$13.0 bilhon 3-year notes due February 15,2001; 

$12.0 billion 10-year notes due February 15,2008; 

$10.0 billion 29 3/4-year bonds due November 15,2027. 

The COmmittee recommends, by an 18-1 majonty, a reopening of the 6 1/8% bond of November 15,2027. The 

Committee felt that a reopening would enhance the benc4unzii.k status of the bond by creating a larger, more liquid 

issue. This could be especially useful with a six mouth interval before the next expected band &ring. There has 

also been increased investor actiwty m the bond sector, and some accompanying increase in financing market 

pressures. All members fklt that the size of the long bond offering should remain at $10 billion in this refunding. 

In its refunding recummendation, a sizable majonty of 13 Carmni#ee members felt that the Treasury should 

reinforce the benchmark status ofthe 10-year note by &ring $12 billion. This majonty believed that the 2 and 3 

year matunty areas offer the best alternatives for future reductions in coupon sizes, and recommends a $13 billion 

3-year secunty m ths refimdmg. Three members fblt that the most recent auction sizes of $14 billion 3-years and 

$1 1 billion 1 0-years would be prefkrable, believing that stabw would be desirable m the near term, with the 

uncertainty over potential future surpluses and financing requirements. Finally, 3 members supported a smaller 

refunding offering of $34 billion, with a reduction in the 3-year offering to $13 bikon. 

RR-2198 
2 

With the aim of achieving a cash balance of $20 billion on March 3 1, 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 $1 1 .O billion each; 

Two 2-year notes totaling $15.0 billion each, with these four auctions paying dawn a net $9.1 billion of 

cash; 

A 1-year bill totaling $12.0 billion, to pay down $3.7 billion of cash; 

Weekly issuance of 3- and 6-month bdls through the remainder of the quarter, to pay down $7.2 b&on of 

cash; and 

0 Two cash management bills totaling $47 billion. 

Including the $9.1 billion raised in the midquarter refunding, as well as anticipated foreign add-ons of $5 .O billion, 

the proposed financing schedule will raise a net amount of $41 bfion. ’Tlis amount, when added to the $31 billion 

paydown for issues that have already been auctioned (or announced) in the quarter, will accomplish the tdal net 

market borrowing requirement of $10 billion. 

For the April - June 1998 quarter, the Treasury estimates a net pay dawn of $75 - 80 billion, with a cash balance of 

$35 billion at the end of June. To accomplish &IS requirement, the Cornnuttee recmunends the provisional 

hcing schedule attached m Table 1. 

At the Treasury’s request, the Commi#ee discussed the alternatives for changes in Treasury market financing, if 

there is further rmprovement in the Federal budget. In this regard, the Committee recognrzed the uncertamty 

regarding both the size and duration ofpotential budget surpluses. ‘Ihat uncertamty, which arises both from future 

economic develapments as well as future fiscal policy decisions, needs to be taken into ccnsideration by the 

Treasury in evaluating techniques for modlfymg existing debt managemat arrangements in the fkce of improved 

fiscal performance. 

One such technique would be to introduce arrangements for the repurchase of outstanding Treasury obligations. In 

the view of most members of the Committee, this debt management technique would be most useful to the Treasury 

m circumstances where uncertamty regarding the duration of a fiscal surplus make it premature to consider changes 

in the number or frequency of regular coupon offerings, and where there was only lrnuted scope fix further 

reduction in existing issue sizes, without phg at risk the attractive liquidrty fhtures of hchmark issues. In 

such circumstances, the Treasury could target the repurchase of existing off-the-run issues, with the choices as to 

particular issues or Sedors reflecting then prevailmg market supplydemand ccm&ons. 

’Ihe Commi#ee further discussed whether any such repurchase initiative should be limited to formal “reverse 

auction” style debt exchanges or also include the abrlay to employ discretionary secondary market purchases, most 

likely using the Federal Reserve Bank as the Treasury’s fiscal agent. A minonty of the members of the Conmuthe 

< that any such initiative should be limited to firma1 auction style debt exchanges, so as to ensure a high degree 

of transparency and regulanty. A majonty of the Committee fklt that the Treasury need not limit itself to formal 

debt exchange offerings, since there could be advantages to be gamed by smaller, more targeted secondary market 
3 

repurchases, witb execution at competitive secondary market prices. All members of the Commi#ee 

there were government amunting policy issues that needed to be addressed. 

that 

The Committee then discussed the question of the scope for further reduction in sizes of existing Treasury coupon 

offerings. Recognizing the size of reductions made to date, the Committee felt there was Mle, if any, room for 

further cutbacks in the size of 10 and 30-year ofFerings. Indeed, many members of the Cammi#ee would favor 

modest increases in the size of these benchmark offerings, especially the 10-year note. In the Committee’s view, 

there is still some scope fbr reduction m issue sizes of the 2-year, 3-year and, to a lesser extent, 5-year note 

offerings, before raising concerns about the liquidrty of those benchmark o&rings. 

In the short term, limrted fiuther issue size reductions m the 2 and 3-year notes, together with flexible utilizatian of 

a debt repurchase arrangement, should provide sufficient tools to respond to further improvements in the budget 

picture. Size reductions would be more hsible if there were greater use of reopenings of existing issues, as 

market circumstances permit. 

Longer term, it may be necessary to reevaluate the number and frequency of regular coupon offerings, wxth a view 

to preserving the liquiday features of large benchmark issues. Indeed, wxth the prospect of a large Eurodenominated govement bond market in the years ahead, maintaining large liquid Treasury bmchmark issues was 

felt to be an even more important policy consideration for the US. Treasury. With this in mind, and to the extent 

Treasury coupon cycle changes were to be needed, the Cammi#ee felt they would best be made in the 2 or 3-year 

sectors of the curve, with some members inclined toward less frequent offerings of 2-year notes and others partial to 

elimination of the 3-year note. In either case, the objective would be to focus Treasury issuance on large, liquid 

offerings of benchmark securities. 

Finally, in forming its recommendation on the auction schedule for a 30-year inflation-indexed bond, it was the 

view of the Committee that enhancing participation in this market should receive greater weight than other fkctors, 

including the short-term management ofthe Treasury’s cash position. All members of the Cornmitree agreed that 

the next oering of an inflation-indexed secunty should be a 30-year bond. This will provide the Treasury wrth 

important market Wback on the nature and level of investor interest in long-term inflation protedon. That 

Wback will be useful to the Treasury in shaping its plans for future inflatim-indexed security issuance. 

A majonty of 13 members believed that maintaining a regular January, April, July, October cycle for inflationindexed securities provided the best platform for investor focus on these instnunents as a distinct asset class. This 

majority recommends that the Treasury announce a 30-year in5tion-indexed band of $8 billion on April 1 for 

auction on April 8. The other six members believed that ynvestor interest was more likely to be increased if the 

instrument was auctioned as part of the May refunding, believing that this time of generally increased investor 

focus on Treasury securities was more likely to increase investor interest in the new secunty. 

Stephen G. Thieke 

Chairman