TBAC Discussion Charts

November 1, 2005
Potential Adjustments to 

Treasury’s Auction Calend

• Bring the 30-year bond into refunding w

semi-annually; and

• Move all 5-year note auctions to month-
A Historical Look at Refundings’ DV

Total DV01 of Refunding 

Adjusted for Inflation*

$

05

101520253035404550

Feb-85

Feb-86

Feb-87

Feb-88

Feb-89

Feb-90

Feb-91

Feb-92

Feb-93

Feb-94

Feb-95

Feb-96

Feb-97

Feb-98

Feb-99

Feb-00

Feb-01

Feb-02

Feb-03

Feb

Refunding Date

$ Million

Average Refunding DV01: 

 $26.3 m

Nov 2005 forecast assumes 3,5,10 year issuance of $18b, $13b, and $13b, respectively.Feb 2006 forecast assumes 3,10,30 year issuance of $18b, $13b, and $12.5b, respectively.

Max: $46.1m Nov 86

Min: $12.2m May 00

*Data adjusted to 2005 dollars using GDP deflator 
30-year Bond into Refunding W

- Auction on February/August cycle in 20

during refunding week;

- Dated date of 15th to ensure fungibility w

outstanding bonds; and

- Settlement on 15th of month or next bus

day if weekend or holiday.
5-year Note to End of Mon

- End of month dated date;- End of month settlement; and- Like two-year note, would settle first bu

day of next month if the end of the mona holiday or weekend.
Treasury Auction Calendar 

at Month-End

• 2-year also auctioned monthly at month

are semi-annual 5- and 20-year TIPS.

• Quarterly (Jan/April/July/Oct) this wou

result in 3 coupon auctions in a week, sito refunding week.
Clustering Auctions

• Pros

- Create liquidity event, garner greater market inteupcoming auctions, increasing demand and potentiallreducing borrowing costs.

• Cons

- Concentration of issuance increases dealer risks possibly resulting in lower demand and higher Treasuborrowing costs.
Questions

• The clustering of auctions in refunding weeks increases market fo

potentially leading to higher demand, but it also increases the am

risk market participants must hold, potentially leading to lower dHow should Treasury evaluate this trade-off when considering wplace securities on the calendar? 

• Are there any advantages to moving the 5-year note auction to m

only during 30-year auction months versus holding 5-year note au

regularly at month-end?

• Are staggered announcements of month-end auctions preferable – 

consistent with current Treasury policy – or a single announcemethree coupons?

• What is the potential impact of a February/August 30-year cycle 

TIPS auctions?
Monday Tuesday Wednesday Thursday 

11 12 13 14 15

18 19 20 21 22

FOMC

25 26 27 28 29

Announce 2-year note Auction 2-year note Auction 5-year noteAnnounce 5-year note

2 3456

Settle 2-year note, 5-year note

September 2006 Hypothetical

Coupon Auction Calendar With 5-year at Month End
* Note -- movement of the 5-year TIPS auction to Monday which would regularly be held on Tuesday due to FOMC

Monday Tuesday Wednesday Thursday 

9 10 11 12 13

Announce 10-year TIPS Auction 10-year TIPS

HOLIDAY

16 17 18 19 20

Settle 10-year TIPS Announce 5-year TIPS

23 24 25 26 27

Auction 5-year TIPS * FOMC Auction 2-year note Auction 5-year note

Announce 2-year noteAnnounce 5-year note

30 31 1 2 3

Settle 5-year TIPS, Announce 3-year

 2-year note, 5-year note Announce 10-year

Coupon Auction Calendar With 5-year at Month End

October 2006 Hypothetical
Monday Tuesday Wednesday Thursday 

6 7 8 9 10

Auction 3-year note Auction 10-year note

13 14 15 16 17

Settle 3-year note

Settle 10-year note

20 21 22 23 24

Announce 2-year noteAnnounce 5-year note HOLIDAY

27 28 29 30 1

Auction 2-year note Auction 5-year note Settle 2-year note, 5-year note

November 2006 Hypothetical

Coupon Auction Calendar With 5-year at Month End
More on a 

Treasury Backstop Securi

Lending Facility
Last quarter Treasury presented some preliminary thinking to the Committee oneed for a backstop securities lending famitigate the risk of recurrent systemic fa

We will present additional thinking on th

negative implications of recurrent systemfails. We seek the Committee’s views opossible approaches to setting terms so tborrowing from the facility is only econattractive during periods of protracted fa
Costs of Periods of Chronic Fai

Ultimately Higher Borrowing Costs

•Impaired Liquidity in Cash and RP Markets

–Loss of willingness to lend securities in the RP market–Reduced secondary market liquidity may lead to erosion of the liquidTreasury receives for securities at auction

•Operational Cost of Resolving Fails

–Manual handling of transaction–Cost of risk management of fails – oversight of counterparties

•Increased Regulatory Oversight

–Cost of compliance, burden from increased scrutiny and reporting

•Loss of Price Convergence in Futures Market

–Erodes usefulness for hedging resulting in loss of demand for Treasu

•Exposure of Participants to Credit Risk•Potential Erosion of Benchmark Status
Alternatives to a Backsto

Securities Lending Facili

• Voluntary market-based solutions such 

“prompt delivery trades” 

• Reopenings or other method of increasi

outstanding supply (e.g., tap issue)
Characteristics of “Promp

Delivery” Contracts

• Facilitates trades with negative interest • Only applies to the opening leg of an RP 

transaction – not the closing leg

– Failure to have the security returned lower

earnings to the lender of the scarce security

• Cannot motivate use without better cert

supply 
• Permanent increase in outstanding supply• Discretionary: Judgments by Treasury inheren

subjective

• Uncertainty about the appropriate additional a

supply

• Increases expectations that debt management 

will be tailored to accommodate the collateral 

• Treasury unnecessarily introduces an addition

speculative component to securities prices

Characteristics of Reopenings and 

Methods of Increasing Outstanding 
Characteristics of a Standing 

Nondiscretionary Securities Lending F

• Prevents settlement fails from becoming system

– In place at the onset of chronic fails episode

• Additional supply is temporary

– Increase in outstanding supply reverts to originally 

amount after resolution of fails episode

• Encourages market-driven solutions to supply-

imbalances

– If additional securities offered at a penalty rate, may 

market resolution of fails through the use of “prompdelivery” contracts at rates above the lending facilit

– Could encourage development of completely new s

• Requires incentives to compel use if securities 

at a penalty rate
Possible Incentives for Use of a Sec

Lending Facility at a Penalty R

• Changes in voluntary market conventions regar• Changes to contractual requirements• Changes to the regulatory regime such as a stri

rule 
How Should a Lending Facility 

Designed?

Issues:• Should pricing, quantity or some other trigger be used that allow

facility to kick in?

• How will use affect trading of Treasury securities?• How should rate, maturity and settlement be set?

• Do not want to encourage speculation exacerbating chronic fail• Possibly viewed as favoring larger market participants who cou

smaller firms to be forced to borrow securities at a penalty rate (i.e. “winners curse”)

• May not clear fails in secondary market and could merely result 

transferring fails to Treasury 

– This risk, however, is smaller than for private market partic

because Treasury would be a fully secured lender