REPORT TO THE SECRETARY OF THE TREASURY 

FROM THE 

TREASURY BORROWING ADVISORY COMMiTTEE 

OF THE 

PUBLIC SECURITIES ASSOCIATION 

FEBRUARY 1, 1985 

Dear Mr. Secretary: 

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

Treasury in November 1994, economic activity has remained robust. Price 

increases for final goods are still subdued, but inflationary pressures in raw 

materials and intermediate goods are intmstfying. In response, the Federal 

Reserve has continued to tightened monetary policy, and the federal funds rate 

now stands at 5.5%, 0.75% higher than in early November. 

Yields on Treasury securities have moved in divergent directions during the 

three-month interval. At the extremes, yields on maturities under six months rose 

by approximately 75 basis points, whereas yields on maturities of ten years and 

longer dectined by approximately 20 basis points. The result was a substantial 

flattening of the yield curve. Its present shape and forward prices for various fixedincome instruments indicate market participants continue to expect further 

increases in interest rates in the corning months, but to a lesser extent and at a 

slower pace than previously. 

Within this context, to refund the $30.5 billion of notes and bonds maturing 

on February 15,1995 that are privately held and to raise additional cash of $16.5 

billion, the Committee reoommnds that the 7reaswy auction $47.0 biitbn of the 

following securities: 

$17.0 billion 3-year notes due February 15, 1998; 

s $12.0 billion 10-year notes due February 15,2005; 

-$1 1.0 billion 30 IM-year bonds due May 15,2025; and, 

$7.0 billion cash management bills due April 20, 1995. 

The Committee was unanimous in its recommendation on the size of each 

of the refunding issues and on the maturity of the 3-year offering. With respect to 

the 10-year offering, 14 of the 16 Committee members present for the meeting 

favored a new issue rather than a reopening of the 7 7&% note due November 15, 

2004. The principal argument cited in favor of this position was that a reopening 

would raise the total amount maturing on that date to over $32 Wllion. The already 

uneven schedule of maturities in the years 2001 to 2004 would be exacerbated 
while the February 15, 2005 maturity slot would be left vacant. The two remaining 

members of the Committee had no strong views on the matter and abstained. 

With respect to the bond offering, three options were consubred: a new 30 

114-year issue, a new 30-year issue, and a reopening of the 7 1/20! bond due 

November 15,2024. Nine members of the Committee favored a new 30 114-year 

issue, citing the betlief that the longer issue with May and November coupons 

would be particularly attractive for stripping purposes and possibly as a 

consequence be issued at a modestly lower yield. The six members who favored 

a reopening of the 7 1/2% bond due November 15, 2024 concurred in the 

preference for an issue with May and November coupons but thought that the 

larger issue which would result from a reopening offered the prospect of greater 

tiquidity and thus some potential saving in cost. 

With the aim of achieving a cash balarrce of $20 billion on March 31, the 

Committee unanimoudy recommends that for the remahder of the quarter the 

Treasury meet its borrowing requirement in the following manner: 

Two 5-year notes totaling $1 1.0 bitlion each, to raise $22 billion 

of new cash; 

Two 2-year notes totaiing $17.25 billion each, to raise $3.8 

billion of new cash; 

One 1-year bill totaling $17.25 billion, to raise $750 million of 

new cash; 

Weekly 3- and &month bills totaling $27.6 billion through the 

remainder of the quarter, to raise $1 2.8 billion of new cash; 

A cash management bill totaling $14.0 billion to mature on April 

20 to meet the seasonal cash need in early March; and, 

Redemption on February 15 of bonds called earlier, to reduce 

cash by $2.0 billion. 

Including the $16.5 billion raised in the mid-quarter refunding as well as 

anticipated foreign add-ons of $4.9 billion, the proposed financing schedule will 

raise a total d $72.75 billion. When added to the $21.0 billion already raised or 

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

requirement of $93.75 billion. 

For the April-June quarter, the Treasury estimates a paydown of $5 to $10 

billion of markertable securit'tes with a cash balance af $35 biition art the end of 

June. To accomplish the antidpat& paydown, the Committee reoommends the 

Mowing provisional financing schedule: 
3 

Size Raising 

($bitlions1 ($billions) 

Refunding: 3-year note 

10-year note 

Other: 5-year notes 3x11.0 33.0 

2-year notes 3 x 17.25 2.6 

1 -year bills 4 x 17.25 2.1 

3- and 6-month bills 2 x 27.6 

Estimated foreign add-ons 

11 x 25.4 (20.1) 

6LP 

Subtotal 20.5 

Less: Redemption of April 

cash management bills 

Redemption of 7-year notes 

Total Net Market Paydown (7.5) 

The Committee also notes the likely need for the issuance of intraquarter cash 

management bills to cover cash low points during the quarter. 

In formulating its response to the request for the Committee's views on 

possible adjustments to the Treasury's borrowing pattern beginning in January 

1996, when the 5-yew note series will have come full cycte and no longer provide 

significant amounts of new cash, the Committee first sought to identify the basic 

principles which shouid guide its recommendations. Committee members agreed 

on two areas of major concern: the average length of the debt and the schedule of 

maturities. 

Although the Committee is aware of no compelling study or argument that 

points to an optimal average length for the debt, the present pace of decline, if 

continued, will increase the Treaswy's exposure to variations in the level of 

intwest rates and could become a subject of worry to investors. From its recent 

peak of 6 years in June 1991, the average length of privately-held marketable debt 

has fallen to 5 years, 6 months. the present borrowing strategy is continued into 

1996 and beyond, the pace of the decline would czantinue unabated. Though it 

cannot say when, the Committee does believe that at some stage the trend will 

attract the notice of investors in the US and abroad and begin to raise concerns. 

The consequences are unknown, but it seems highly likely there wouM be a 

negative effect on the Treasury's cost of borrowing over the longer-term. 

This concern led the Committee to the principle of having as one objective 

of its recommendations for adjustments to the Treasury's borrowing pattern 
beginning in January 1996 a slowing or an arresting of the pace of decline in the 

average length of the debt. 

Of comparable importance in the Committee's judgment is the schedule of 

maturities of the marketable debt. For the past several years, the proportion of the 

debt maturing under two years, for example, has been reasonabiy stable at levels 

under 50 per cent. With the current borrowing strategy, the proportion is destined 

to rise, as it has been recently. While again the Committee knows of no 

convincing case that points to some ideal schedule of maturities, a rise in the 

proportion of debt maturing within one or two years, especially in conjunction with 

a steady decline in the average length of the debt, seems bound ultimately to raise 

concerns among investors. in the inevitable periods of stress in the financial 

markets, it is likely that a heavy concentration of maturities to be refinanced in the 

near-term could add materially to the Treasury's cost of borrowing. 

This concern led the Committee to the view that the second objective of its 

recommendations for adjustments to the Treasury's borrowing pattern beginning 

in January 1996 should be to ensure a more even spread in the schedule of 

maturities across the full maturity spectrum and a concomitant avoidance of undue 

reliance on short-term financing. 

Given these principles and objectives, the Committee unanimously 

recommends that the sources of hew borrowing be concentrated in longer-term 

maturities. Specifically, consideration should be given to increasing the cycle 

frequency of either the 10-year note or 30-year bond. For example, the frequency 

of issuance for the 10-year note could be increased to eight times a year, or the 

frequency of issuance for the 30-year bond could be returned to four times a year. 

To facilitate an increase in the cycle frequency, the size of individual offerings 

could be reduced from present levels while enlarging the total amount raised over 

the cycle. 

In recommending that new borrowing stress longer-term coupon issues, the 

Committee rejected the alternative of increasing the frequency and proportionate 

sizes of either 52-week bills or 3-year notes or other shorter-term issues. 

However, the Committee remains in favor of pursuing the feasibility of issuing new 

types of securities, including variable rate notes, which offer the prospect of 

lowering the Treasury's cost of borrowing. 

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

questions or comments. 

Respecffully submitted, 

Stephen C. Francis 

Chairman