REPORT TO THE SECRETARY OF THE TREASURY 

FROM THE 

TREASURY BORROWING ADVISORY COMMITTEE 

OF THE 

PUBLIC SECURITIES ASSOCIATION 

NOVEMBER 1, 1994 

Dear Mr. Secretary: 

During the three months since the Committee's last meeting with the 

Treasury in August 1994, economic activity has remained strong. While there is 

little evidence yet of a broadening of inflationary pressures to final goods, some 

generalized price increases are apparent in commodities and intermediate 

goods. In response, the Federal Reserve again tightened monetary policy, and 

the Federal funds rate now stands at 4.75010, 0.50% higher than in early August. 

Yields on Treasury securities rose during the three-month interval by 

approximately 60 to 80 basis points. The increase was accompanied by a 

modest flattening of the yield curve. Market participants, as indicated by the 

yield curve's present shape and by forward prices for various fixed-income 

instruments, expect additional increases in interest rates in the coming months. 

Within this context, to refund the $28.8 billion of notes and bonds 

maturing on November 15, 1994 that are privately held and to raise additional 

cash of $15.7 billion, the Committee recommends unanimously that the 

Treasury auction $44.5 billion of the following securities: 

$1 7.0 billion 3-year notes due November 15, 1997; 

$1 2.5. billion 10-year notes due November 15, 2004; and, 

$15.0 billion cash management bills due December 22, 1994. 

With the aim of achieving a cash balance of $30 billion on December 31, 

the Committee unanimously recommends that for the remainder of the quarter 

the Treasury meet its borrowing requirements in the following manner: 

One 5-year note totaling $1 1.0 billion, to raise $1 1 billion of new 

cash; 

One 2-year note totaling $1 7.0 billion, to raise $1.6 billion of new 

cash; 

Two l-year bills of $17.0 billion each, to raise $1.6 billion of new 

cash; 
Weekly 3- and 6-month bills totaling $27.2 billion through 

December 1 and $26.0 billion for the remainder of December, to 

raise $14.7 billion of new cash; 

a A cash management bill totaling $8.0 billion to mature late in 

January to meet the seasonal cash need in early December; 

and, 

Redemption on December 22 of both the $15 billion of 

outstanding cash management bills and the additional $15.0 

billion of cash management bills to be issued in conjunction with 

the mid-quarter refunding, to reduce cash by $30.0 billion. 

Including the $15.7 billion raised in the mid-quarter refunding as well as 

anticipated foreign add-ons of $3.0 billion, the proposed financing schedule will 

raise a total of $25.6 billion. When added to the $34.0 billion already raised or 

announced during quarter, this amount will accomplish the total net borrowing 

requirement of $59.6 billion. 

For the January-March 1995 quarter, the Treasury estimates its net 

market borrowing requirement in the range of $65 to $70 billion with a cash 

balance of $20 billion at the end of March. In determining the composition of 

Treasury marketable financing for the January-March quarter, the Committee, 

as discussed later in this report, also considered the broader question of the 

appropriate mix of bills and coupons to raise new cash during the entire 1995 

fiscal year. Although a formal vote was not taken on a recommended financing 

schedule for the January-March quarter, the following schedule is consistent 

with the Committee's view on the broader question: 

Auctions 

Refunding: 

3-year note 

10-year note 

30-year bond 

5-year notes 

2-year notes 

1 -year bills 

3- and 6-month bills 

Cash management bills (April maturity) 

Estimated foreign add-ons 

Size (billions) Raisina (billions) 

Subtotal 
Less: 

Redemption of January cash management 

bills 

Redemption of 4-year notes 

Redemption of -/-year notes 

Early redemption of 7 718% bonds due 

February 15, 1995 

Subtotal -

Total Net Market Borrowing $67.0 

In response to the request for its view on the calendar for the auctions of 

Treasury securities during the holiday periods in November and December, the 

Committee unanimously recommends the following schedule: 

Issues Auction Dates 

Cash management bill Thursday, November 10 (at 1 1 :30am) 

2 year note Monday, November 21 

5 year note Tuesday, November 22 

2 year note Wednesday, December 21 

5 year note Thursday, December 22 

In addressing the request for the Committee's views on the appropriate 

mix between bills and coupons for the new cash to be raised in fiscal year 1995, 

the Committee stressed in its deliberations the need to focus on the longer-term 

implications of any shifts in the borrowing mix. 

The drop in borrowing needs in fiscal 1995 as a result of the decline of 

the budget deficit is widely seen as temporary and to be followed by larger 

requirements in fiscal year 1996 and beyond. Further, the Committee 

recognized that the net redemption of nonmarketable securities issued-to state 

and local governments may approximate $25 to $30 billion in fiscal year 1995. 

The increased market borrowing as a result of this short-fall offsets much of the 

reduction in borrowing associated with the expected decline in the deficit for 

fiscal year 1 995. 

The Committee also considered the significant impact that the completion 

of the monthly 5-year note cycle in December 1995 will have on the Treasury's 

prospective sources of new cash. First introduced in December 1990, this cycle 

has raised each year since substantial amounts of new cash and made as 

result a major contribution to the Treasury's annual borrowing requirement. 

Beginning with fiscal year 1996, the cash raising potential of the 5-year note 

cycle will decline dramatically. Consequently, it appears that new or expanded 

offering cycles will be, at the minimum, desirable and perhaps even necessary 

25.8 
to meet the Treasury's needs for fiscal year 1996 and beyond. These longerterm needs, in the Committee's view, should importantly influence the 

formulation of the Treasury's borrowing strategy for fiscal year 1995. 

The Committee considered three broad approaches to the current fiscal 

year: (a) modestly reducing the sizes of coupon issues and increasing 

commensurately the issuance of bills; (b) maintaining the sizes of coupon 

issues at current levels; and, (c) modestly increasing the sizes of coupon issues 

to help smooth the transition to fiscal year 1996 when the aggregate amount of 

maturing coupons rises substantially. Without in the circumstance being able to 

evaluate specific alternative strategies for meeting the borrowing needs in these 

later years, the Committee was unanimous in the view that there should not be 

any reduction in the size of net coupon issuance. Committee member were split 

on whether to hold the level of net coupon issuance steady through fiscal 1995, 

which three of the 14 members present favored, or to increase the amount 

modestly, which the remaining 1 1 members favored. 

Several reasons were cited for maintaining or increasing modestly the 

level of coupon issuance in the borrowing mix for the coming fiscal year. First, 

the deceleration in the prospective growth in the deficit is likely to be temporary. 

Absorbing the temporary reduction in the issuance of bills was judged superior 

to the alternative of reducing the sizes of coupon issues only to began 

increasing them soon thereafter. Second, any reduction in coupon issuance in 

the current fiscal year would be inconsistent with the greater demands on 

coupon financing following the maturation of the 5-year note cycle. Third, 

reducing the proportion of borrowing in coupons would accelerate the decline 

in the average maturity of the debt and raise the portion of the debt that would 

need to be refinanced during the period when the borrowing requirement will 

be rising again. 

Finally, the Committee addressed the question of whether the Treasury 

should divide the 3-year note into six issues per year to smooth cash flows, 

which based on the current levels would mean issues averaging $11.5 billion in 

size. The Committee was unanimous in the view that bills are more appropriate 

than coupons for managing cash flows. The Committee also notes that a 

change in the pattern of coupon issuance of this scale would likely surprise 

market participants and might raise unnecessary uncertainty about the 

prospective issuance pattern of other coupon cycles. 

Mr. Secretary, that concludes the Committee's report. We welcome any 

questions or comments. 

-

stephen C. Francis 

Chairman