October 29

The Committee reconvened at 8:30 a.m. at the Treasury in closed session. All members

were present, except Ms. Kenworthy and Messrs. Capra, DeRegt, Horowitz, Kessenich, Napoli,
Pike, and Wardlaw.

The Chairman presented the Committee report (copy attached) to Under Secretary
Hawke, Assistant Secretary Gensler, and Deputy Assistant Secretary Anderson. Assistant
Secretary Gensler asked the Committee if the Treasury were to reduce the quarterly package from
that recommended by the Committee, what cuts would they recommend. The Committee
chairman noted that, if needed, the Committee would be more in favor of trimming the 3-year
note than the 10-year or 30-year securities. He pointed out the substantial and ongoing
investment and hedging demand for the 10-year note, and that the Committee’s recommendation
for a slight reduction in the size of this issue is predicated on a reopening. The Chairman
indicated that the Committee has provisionally recommended raising the 10-year note back up to
$12 billion at the next refunding. Under Secretary Hawke expressed appreciation for the
Committee’s efforts and dedication to their responsibilities.

ht

Paul F. Malvey
Associate Director
Office of Market Finance
Domestic Finance
October 29, 1997

The meeting adjourned at 9:05 a.m.

Attachments

“ , ”
Certified by: Cole djyl
Richard Kelly, Chairman
Treasury Borrowing Advisory Committee
of the Bond Market Association
October 29, 1997


MINUTES OF THE MEETING OF THE
TREASURY BORROWING ADVISORY COMMITTEE
OF THE BOND MARKET ASSOCIATION
October 28 and 29, 1997

October 28

The Committee convened at 12:40 p.m. at the Treasury Department for the portion of the
meeting that was open to the public. All members were present, except Ms. Kenworthy and
Messrs. Capra, DeRegt, Horowitz, Kessenich, Napoli, and Pike. The Federal Register
announcement of the meeting and a list of Committee members are attached.

Deputy Assistant Secretary for Federal Finance Roger Anderson welcomed the Committee
and the public to the meeting. John Auten, Director, Office of Financial Analysis, summarized the
current state of the U.S. economy. Jill Ouseley, Director, Office of Market Finance, presented the
chart show, which had been released to the public on October 27, updating Treasury borrowing
estimates and providing statistical information on recent Treasury borrowing and market interest
rates.

The public meeting ended at 1:05 p.m.

The Committee reconvened in closed session at the Madison Hotel at 4:10 p.m. The
members were present who had attended the public briefing. Deputy Assistant Secretary
Anderson gave the Committee its Charge, which is also attached.

November refunding

The Committee began by considering the attached pro forma financing plan for the
October-December quarter that had been prepared in advance by one of the members, using the
market borrowing estimates that were released by the Treasury on October 27. (See attached
table 1.) The committee voted unanimously to recommend that the Treasury issue $15.0 billion
3-year notes, $11.5 billion 10-year notes (assuming a reopening as discussed below), and $10
billion 30-year bonds. The recommendation differs from the attached pro forma in that 3-year
notes are $.5 billion less. On balance, the package represents a $1.0 billion reduction in the 3-year
note size from the August refunding; a $0.5 billion reduction in the 10-year note size relative to
the August refunding; and a maintaining of the 30-year bond relative to the August refunding.

The Committee also voted unanimously to recommend that Treasury reopen the August
10-year note, given that there are signs of persistent market dislocations in both the cash and RP
markets, and that the situation is not expected to ameliorate soon. In addition, the Committee
voted unanimously that Treasury maintain the current sizes of coupon offerings for the balance of


the current quarter, making up any temporary needs with cash management bills (CMBs) or
regular weekly bills.

Marketable financing for the January-March quarter

For the January-March quarter, given the Treasury’ s forecasted funding needs, the
Committee recommended keeping the sizes of coupon offerings the same as recommended for the
third quarter, with the exception that 10-year notes would be raised to $12.0 billion . (See
attached table 1a.) The chairman pointed out that the pro forma for the first quarter includes
large CMBs with April maturities. He noted that having a large volume of CMBs maturing after
the April tax date will restrain the bulge in cash balances that occurs in the second half of April,
and allow the Treasury to maintain consistent offering sizes of weekly bills in the April-June
quarter.

Scheduling of inflation-indexed securities for 1998

The Treasury has already announced that it expects to sell 10-year inflation-indexed
securities (IIS) in January 1998, and that it will sell a 30-year IIS some time during 1998. The
question to the Committee concerned its recommendation regarding the auction schedule for IIS
in 1998, and in particular, where in the financing calendar would the committee recommend that
Treasury introduce a 30-year IIS.

Before addressing the timing of the 30-year IIS, the committee discussed how best to
integrate the IIS into Treasury’s auction calendar. In 1997, IIS were auctioned once per quarter
with settlement dates on the 15" of the first month of a quarter. In light of the unexpectedly large
drop in the FY97 deficit and forecasts for low deficits in the upcoming year, the members
discussed the prudence of increasing the frequency of IIS auctions beyond the quarterly cycle of
this year at a time when the sizes of fixed-rate auctions are flat or declining, with net paydowns.
In this context, the Chairman noted that at the last meeting in July it was pointed out that the
reductions in auction sizes (from their peak amounts of the prior twelve months) that had been
implemented by that time had already had a substantial impact on cash raised, of about $75 billion.
And if the coupon auction sizes in place in July were maintained for the succeeding twelve
months, it would result in raising only $1.6 billion in net new cash. Thus he raised the point that
increasing the number of IIS auctions in 1998 would increase the Treasury’s dependence on IIS
for new cash.

The Committee unanimously recommended that Treasury announce the same quarterly
cycle for IIS for 1998, with an auction for 10-year IIS in January, one for 30-year IIS in April,
and two more auctions in July and October.


Treasury’s mid-quarter refundings for 3-year and 10-year notes and 30-year bonds
typically settle on the 15 of the middle month of a quarter. Counting back from the 15", the
auctions are usually held on the Tuesday, Wednesday, and Thursday (when there is a bond) prior
to the 15", if there is at least one or more days between the last auction and settlement. In May
1998, the 15" falls on a Friday. Because there is no bond scheduled for the May refunding, the
Treasury asked the committee’s opinion on when to auction the 3-year and 10-year notes in the
May 1998 refunding. It was the consensus of the Committee that conducting the auctions on the
12® and 13* of May would provide a sufficient window for WI trading before settlement on
Friday, May 15.

Mar! ree f 0

The Treasury asked the Committee’s views on market participants’ preparedness for the
year 2000 (Y2K) and whether there are specific ways that the Federal Government in general and
the Treasury in particular could or should help to heighten awareness.

All members considered preparation for Y2K to be a significant, and costly, issue. Cost
estimates for preparation for Y2K ranged up to $200 million for the firms of Committee members.
One member noted that the Federal Reserve and the Comptroller of the Currency are targeting
Y2K as one of their themes in bank examinations. Others pointed out that it is not only important
for their firms to be prepared, but also the vendors and customers with whom they conduct
business. Some firms are sending out notices to vendors and institutional customers requiring that
they certify that they are compliant. One member questioned whether the private sector is aware
of the Federal Government’s efforts to ensure Y2K compliance. Another questioned that
awareness of the magnitude of the issue outside the United States and suggested that the Federal
Government could help in promoting awareness if foreign markets.

In conclusion, it was recommended that the Federal Government could help in
ascertaining the level of readiness for Y2K, focusing on financial service providers, industry-wide
service providers, and on foreign markets. .

The meeting adjourned at 5:35 p.m.