REPORT TO THE SECRETARY OF THE TREASURY 

FROM THE TREASURY BORROWING ADVISORY COMMITTEE OF THE 

PUBLIC SECURITIES ASSOCIATION 

August 4, 1993 

Dear Mr. Secretary: 

Since the Committee's meeting with Treasury in early May,economic activity led by car 

sales, capital spending,and industrial production has improved. Growth prospects for the current 

and following quarter center around a solid 3% for GDP. Inflation is widely viewed as stable 

near a stubborn 3% floor. The rising cost of me&cal se~ces, public transportation, and college 

tuttion, coupled with Federal. state, and local tax increases on gasoline, cigarettes, and income. 

seem to assure little adchtional progress will be made in reducing inflation further. 

Notwithstanding the debate over whethet current lowar interest rates will offset the drag 

of higher taxes on GDP growth,profits, and incentives to work and invest, near-term optimism 

is constrained by the effects of reduced defanse spanding, increased taxation and retroactivity, 

uncertain health costs, low consumer confidence, continued corporate downsizing and the 

increased recognition that growingeconomies in Europe and Asia are required for extended GDP 

growth here. Responding to the above and the recently articulated posture of monetary policy, 

the yield curve has flattenad significantly since earIy May. Specifically, the 12 month to 30-year 

spread has narrowed by over 50 basis points, as the 30-year bond has declined in yield by 28 

basis points to 6.52% and 12-month and 2-year yields have increased by 28 and 36 basis points 

to 3.53% and 4.14%, respectively. 

Within this mntext, the Committee met to consider the cornpasition of a finaucing to 

refund $26.7 billion of privately-held notes and bonds maturing on August 15 and to raise $11 to 

$12 billion of cash. Givm the announced $58.3 billion financing for the went fiscal quarter and 

the $22.25 billion previously issued or announced, there remains a net S36 billion to be financed 

this quarter, The Committee voted unanimously, 19-0, in favor of a quarter-and balance of $40 

billion and the selling at competitive auction of three new issues totalling $38.5 billion comprised 

of: 

Befunding 

$16.5 billion of 3year notes, maturing 8/15/96; 

$11.0 billion of 10-year notes, maturing 8/15/2003; and 

$11.0 billion of 30-year bonds, maturing 8/15/2023 

to raise $11.8 billion new cash. 
Underlying the Committee's rehdmg recommendation is its belief that (1) the quarterly 

refunding should remain a central focus of Treasury financing; (2) that investors expect the 

Treasury to confirm in this refunding its commitment to issue S11 billion or more long bonds 

twice a year; and (3) that the 10-year note should be S1l.O billion to affirm its new roIe as a global 

benchmark security and to signal that it will need to grow in size above present levels in the next 

quarterly rsfunding. 

Aucftons QatQ SltP Raising 

Refunding August S38 .S billion $11.8 billion 

2-year notes AuW $16.5 

September $16.5 $6.0 

5-year notes Aup;ust 

September 

$11.0 

$11.0 $13.6 

1-year bills August $15.750 

September $15.750 $2.0 

3- & 6-month bills 8 auctions $24.4 

$24.6 

6 x $24.8 $8,0 

Net Cash Mgmt Bills (10.0) 

Net Already Issued $22.250 

Foreign Add-ons Uifi 

Total net market borrowing $58.250 billion 

The Committee sees the need for one cash management bill of $6 billion to be auctioned 

September 2 to mature January 20. 1994, an attractive maturity given the high Treasury cash 

balance anticipated for January 31, 1994. The Committee notes a fiueher potential cash need for 

up to S4 billion intra-September, and recommends an intra-quarter cash management bill to be 

auctioned September 2 to mature September 16. 
Concerning the follow-on October-Decemberfirst fiscal quarter, the Committee concurs 

with the targeted $35 billion quarttr-end balance. The $95-100 billion net market bonowing 

anticipated by the Treasury is, however, above most current private estimates of approximately 

S85 billion. Should actual needs evolve closer to the private estimates, the Committee 

recommends reducing the 3- and 6-month bill offerings set forth in the financing schedule below: 

Auctions 

Refunding 

3 -year f 17.250 billion 

10-year $11.750 ($3.2billion) 

2-year notes 

5-year notes 

1-year bills 

3- & 6-month bill 

Cash management bills $16.000 to mature 4/2V94 

$15.000 to mature 1/20/94 $31.0 

Estimated Foreign Add-ons a 

Total Net Market Borrowing $95.9 billion 
The first fiscal quarter financingwill be unique inasmuch as Treasury will not only face 

high interest payments on the November 15 mid-pupnsrrefundm8 date, but ss well will no longer 

raise money via 7-year notes or 30-year bonds. As such, larger offering sizes for the 2-year and 

5-year note cycles, as well as the 3- and 10-year notes in the refunding will play key roles. Also, 

longer dated cash management bills, moving mamities to the second fiscal and prospectivdy Iess 

demanding third fiscal quarters, will be central. 

Concerning the question of extending the single-price auction experiment for 2- and 5-year 

notcs for one year beyond the auctions in August 1993, the Committee voted 19-0 in favor of 

continuation. In support of ths unanimous view, the Committee offers the following 

observations: 

--- The marketplace and investors expect the single price auction agreement to 

continue; 

--- There appear to be no major negative effects associated with the experiment; 

- The experiment has been conducted in a markat environment characterized by low 

volatility, an accommadrtive monetary policy, a positively sloped yield curve 

providing substantial financing marps, and widespread global investor 

participation. Additional data, particularly if it happened to be gathered in more 

adverse and volatile conditions, would be useFul in assessing the value of single 

price auctions to the Tremwy. 

--- Whh asyet thore appears no clear evidence, either way, that single-price auctions 

have reduced Treasury financing costs, attracted new investors, or encouraged 

more aggressive bidding compared to multiple price auctions, interestingly, 

immediate post-auction volatility appears to be less with the single-price auction. 

- Lastly, the Committee felt that more experimentation and more actemsive analysis, 

especially if under different market conditions and with the new Treasury 

financing focus, would be helpful in aiding the Treasury's assessment. 

The committee also discussed the potential attraction of includmg other Treasury cycles 

in the experiment at a later date but achieved no consensus. 

IW. Sectatary, hs concludes the Committee's report and we stand ready to address your 

questions or comments. 

~hni-manof the Treasury Borrowinp 

Advisory Committee of the PSA