The Committee convened at 9:12 a.m. at the Treasury Department for the portion of the meeting that was open to the public. All members were present except Mr. White. The Federal Register announcement of the meeting and a list of Committee members are attached.
Brian Roseboro, Assistant Secretary for Financial Markets, welcomed the Committee. Richard Clarida, Assistant Secretary for Economic Policy, summarized the current state of the U.S. economy (statement attached). Timothy Bitsberger, Deputy Assistant Secretary for Federal Finance, presented the chart show, updating Treasury borrowing estimates and debt statistics.
The public meeting ended at 9:24 a.m.
The Committee reconvened in closed session at the Hay-Adams Hotel at 12:05 p.m. All members were present except Mr. White. The Chairman read the charge, which is also attached.
The meeting began with a slide show presentation (attached) by Timothy Bitsberger. Mr. Bitsberger first reviewed Treasury’s goal and constraints. The Treasury is constrained in meeting its objective of lowest cost financing over time by the uncertainty it faces in its borrowing requirements and its borrowing costs. Mr. Bitsberger outlined the Treasury’s efforts over the last few months to better analyze debt management decision-making and asked the Committee to use the slides as the basis for initial advice on approaches the Treasury could use to quantify its performance and decision-making criteria. The first four slides represented some of Treasury’s work in following through on Committee recommendations from the previous meeting on possible performance measures. The remaining slides illustrated some of the work Treasury has done to quantify its debt management decisions. Committee member suggested titles and explanatory notes be expanded to improve understanding of the concepts before the charts were released to the public.
The first slide showed that forecast errors by both public and private sector analysts have been consistently large. Despite the size of forecast errors, some Committee members suggested that Treasury consider the range of possible debt management outcomes given the range of forecasted outcomes.
The second and third slides showed trading and pricing activity for 2-year notes over selected time periods. Committee members felt that the trading data did not cover a long enough time period to show trends in market activity around auctions.
The third slide, showing the relationship between market prices at auction time and the auction stop for 2-year notes since 1995, led to two discussion points: whether Treasury should be concerned about how closely auction results match pricing in the secondary market and whether the relationship between auction pricing and secondary market pricing has changed in recent years. Several Committee members said that activity in the when-issued market has declined in recent years; possible reasons cited for this decline included Treasury’s use of Dutch auctions or a decline in the relevance of Treasuries during the surplus era. The Committee recommended that Treasury expand the data set to get a better idea of long-term trends in when-issued activity.
Committee members generally viewed a normal distribution of spreads between when-issued prices at auction time and auction prices as a good outcome because a normal distribution encourages capital commitment to auctions. Committee members suggested looking at outliers to see if there were lessons to be learned for Treasury, looking at comparisons to auctions after the market had time to respond to auction results but before new information had moved the market, and seeing if auction size affected the distribution of outcomes.
Committee members had a variety of views on the fourth chart. Some viewed it as a useful indicator of how much risk the market is taking on in Treasury auctions, but some argued that the denominator should be capital available to the market and that the measure needed to be adjusted for volatility.
The fifth chart led to a discussion of the factors Treasury should consider as it works towards meeting its objective of lowest cost financing over time. The Committee recognized the trade-off between reducing costs associated with long-term issuance and taking on additional rollover risk.
Committee members suggested that the sixth chart include projections of future average maturities of the debt. Members used the chart as the basis for a discussion on what is meant by “regular and predictable” issuance and whether the volatility of issuance maturity increased Treasury’s borrowing costs. A couple of members argued that issuance volatility could be consistent with regular and predictable issuance if that volatility was in response to factors that the market could monitor. One member suggested that Treasury develop measures of risk aversion similar to those used for private sector borrowers. Others argued, however, that the unique status of a sovereign borrower might reduce the usefulness of such measures.
The next three slides were discussed jointly with the Committee debating the appropriate weighting measures for characterizing debt issuance. The constant issuance concept was recognized as a way to weight issuance by maturity, but Committee members also recognized that there were multiple approaches to describing Treasury’s debt issuance.
The final slide provided the basis for a discussion on what a long-term view on Treasury debt issuance decisions should mean. Committee members offered a wide range of observations (listed as mentioned). Better forecast accuracy would better enable Treasury to define its financing options. Confidence bands around central projections would provide guidance on Treasury decision-making. Alternatively, Treasury could focus on the fundamental factors that would drive specific decisions. In thinking about demand for its securities, Treasury can improve auction mechanics (as it has done) and it can ensure that it sells products that are preferred by investors. One unambiguous indicator of demand that Treasury can follow is bid-to-cover ratios.
The Committee met through lunch to discuss the first question of the charge (attached). Some Committee members thought that the market would be surprised by the reintroduction of the 3-year note, others thought that the market was expecting it. Minimum sizes for quarterly 3-year note auctions were ranged from $15 billion to $25 billion. Commercial banks and central banks were viewed as the strongest source of demand. The Committee noted that the size of 2-year note auctions might be a factor in determining the ultimate level of demand for the 3-year notes.
Committee members generally spoke favorably about a regular re-opening policy for 5-year notes. Reasons cited for a regular re-opening policy were high level of financing flexibility with the policy, the market has already adjusted to expectations of greater 5-year note issuance, and it may be premature to issue monthly issues given budgetary uncertainty. The Committee concluded that the Treasury could conduct initial auctions of $20 billion with reopenings of $15 billion. The Committee was split on the timing of the reopenings with some favoring the mid-point between existing auctions and others favoring a mid-month date.
The Committee discussed what, if financing was required, the next step should be for Treasury to move to monthly 5-year notes or regular reopenings of 10-year notes (ten members favored monthly 5-year notes and eight favored regular reopenings of 10-year notes). The advantages cited for monthly 5-year issuance were good market focus; the shorter maturity is preferable given budgetary uncertainty, and good market depth. The main advantage of regular reopenings of 10-year notes was that reopenings in general are less permanent, giving the Treasury the option of scaling back if deficits are smaller than expected.
The Committee also discussed other financing options including the introduction of a tap issue security, the reintroduction of 30-year bonds, introducing floating note securities, reintroducing 52-week bills and reintroducing the 7-year note. Some Committee members argued that Treasury should reintroduce securities in the order in which they were suspended while others suggested that Treasury should look at the demand side before deciding on the next generation securities.
The Committee recommended that auction sizes for the 5-year and 10-year notes be increased to $24 billion and $20 billion respectively.
The meeting adjourned at 2:30 p.m.
The Committee reconvened at the Hay Adams Hotel at 5:40 p.m. All members were present except Mr. White. The Chairman presented the Committee report to the Assistant Secretary for Financial Markets, Brian Roseboro and Deputy Assistant Secretary for Federal Finance, Tim Bitsberger. A brief discussion followed the Chairman's presentation, but did not raise significant questions regarding the report's content.
The meeting adjourned at 5:50 p.m.
Paul F. Malvey
Office of Market Finance
February 4, 2003
Timothy W. Jay, Chairman
Treasury Borrowing Advisory Committee
of The Bond Market Association
February 4, 2003
February 4, 2003
The Treasury Department would like the Committee’s advice on the following:
• We plan to reintroduce the 3-year note in May to reduce reliance on bills and 2-year notes. We also plan to increase long-term financing, largely through increased 5-year note issuance. Given forecasts of increased borrowing needs, should we announce:
* An intra-quarter reopening policy for 5-year notes auctioned in May;
* Our intention to study the advantages of reopening 5-year notes;
* An intra-quarter reopening policy for 5-year year notes and our intention to study whether we should move to an intra-quarterly reopening policy for 10-year notes;
* An intra-quarter reopening policy for 5-year and 10-year notes; or
* Our intention to study the advantages of reopening 5-year and 10-year notes.
• Our objective is to finance the government at lowest cost over time. Our largest constraint in meeting this objective is the uncertainty we face. We have identified some indicators that may be helpful in quantifying our success in meeting our objective. We will begin this part of the meeting with a presentation of slides that illustrate the some of these efforts. Our goal is to develop a set of performance measures by which our past decisions can be objectively measured and our future debt management decisions can be guided. As we present these slides, we have the following questions:
* Which measures are most likely to help us meet our goal?
* Are there any measures that are unlikely to be helpful?
* Are we heading in the right direction?
* Are there alternatives or extensions that you would recommend?
• The composition of Treasury notes to refund $3.2 billion of privately held bonds maturing on February 15.
• The composition of Treasury marketable financing for the remainder of the January – March quarter, including cash management bills if necessary.
• The composition of Treasury marketable financing for the April – June quarter.