FROM THE OFFICE OF PUBLIC AFFAIRS
The committee convened in closed session at the Hay-Adams Hotel at 11:45 p.m. All members were present, except Mr. Axilrod, Mr. Davis, Mr. Leech, Mr. Stark, Mr. Sundaresan, and Mr. White. Assistant for Financial Markets Brian Roseboro and Deputy Assistant Secretary for Federal Finance Timothy Bitsberger welcomed the Committee, and turned the meeting over to the Chairman. The Federal Register announcement of the meeting and a list of Committee members are attached.
The meeting began with the Chairmans reading of the charge. Mr. Bitsberger then presented the charts relating to the first discussion point of the charge. The first chart illustrated Treasury projections for the July-September 2003 quarter, highlighted the large increases in financing coming from compensating balances and non-marketables (mainly from SLGSs). The second and third charts highlighted the flexibility in Treasury current issuance calendar. The fourth chart showed Treasury projected maturity profile from now into 2012. The chart also illustrated the even distribution of Treasury maturity profile. The last chart showed average maturity of marketable debt and of issuance from 1981 to 2008.
Committee members thought that Treasury current issuance schedule was adequately flexible for the foreseeable future. Committee members said that the discussed charts were greatly improved from the earlier versions. The members also believed that Treasury had ample time to make necessary financing changes to accommodate the changing budget deficits. One member also suggested that given Treasurys reliance on the bills for residual issuance Treasury could bring back 52-week bills if additional financing was required. A discussion ensued on the government budget forecast process and how that process could lead to deviations from market forecasts.
Mr. Bitsberger then moved to the second question of the charge. He presented a chart to show that during the period of December 1992 to June 2003 the on-the-run premium for the 2-year auctions that coincided with the FOMC announcements averaged 2bps point lower than the other auctions.
Some Committee members felt that it was difficult to draw a definitive conclusion given the small number of recent observations of FOMC announcements coinciding with note auctions. Some Committee members believed that the results of the analysis might be biased by Treasury policy changes, such as auction format and the shortening of the auction outcome release time. The Committee members also questioned whether moving auctions for FOMC announcements would set a precedent for moving auctions to avoid other potentially market-moving releases; ultimately endangering the regularity of Treasurys auction schedule.
The Committee was split on their recommendation of whether to move note auction. A slim majority (seven members) believed Treasury should change the auction calendar. The majority argued that Treasury should change the auction calendar since it was simple to implement and there was some evidence that the uncertainty associated with the FOMC announcements was costly. Those voting against the move believed that it was not necessary for Treasury to change its calendar because there was ample time between auction release time and the time of the FOMC announcements for the market to adjust and the move could set a precedent in disrupting auction regularity.
Mr. Bitsberger then presented charts on Treasurys issuance of long-term securities. The charts highlighted the importance to Treasury of regular and predictable issuance and flexibility to quickly raise and pay-down cash in response to uncertain fiscal needs.
In the discussion of the costliness of long-term issuance, Committee members expressed a wide range of views. Some noted the lack of demand for long-term securities, illustrated by the 10-year to 30-year spread. One member argued that there was a public good aspect to long-term issuance although another noted that Treasury should not raise its borrowing costs to provide public goods. Some members noted that there may be benefits of long-term issuance if borrowing needs greatly increase over the next 30 years. In general Committee members felt that, while issuance of 30-year bonds may not currently be appropriate, it might be sometime in the future.
Some Committee members also raised the question of what in Treasurys analysis separated 30-year bond issuance from 10-year note issuance. Treasury officials noted that, unlike the 10-year note, small bond issuance ultimately came to dominate the portfolio. Some Committee members also felt that the investor base for the long-dated securities may grow over time. Other Committee members felt that without a risk free long term instrument it would be difficult for the market to transfer long-term risk. The benefits of more efficient risk transfer or hedging would outweigh the relative higher costs of the long bond.
On the flexibility factor, the Committee members believed that Treasury should manage risk by doing a stress analysis that included the optimistic and pessimistic budget scenarios. Some members felt that the long bond might make sense if Treasury considered the possible increase in government liabilities due to programs such as Medicare and Social Security.
In summary, the Committee felt that Treasury had made a case that the long bond was not needed at the current time but there could be a case for the long bond sometime in the future. The Committee was also concerned that the lack of a long-term risk-free instrument made long-term risk transfer difficult. The Committee also thought that debt management would benefit from the improvement in government budget forecasts.
The Committee then discussed financing requirements for this quarter. Members suggested that Treasury should consider the minimum auction sizes for 5-year and 10-year notes in the current environment to be $18 billion. Committee members noted the elevated level of fails in the 10-year and projected financing requirements as the basis for recommending somewhat larger sizes.
The meeting adjourned at 1:50 p.m.
The Committee reconvened at the Hay-Adams Hotel at 5:30 p.m. All members were present, except Mr. Axilrod, Mr. Davis, Mr. Keller, Mr. Leech, Mr. Stark, Mr. Sundaresan, and 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 Chairmans presentation, but did not raise significant questions regarding the reports content.
The meeting adjourned at 5:50 p.m.
Office of Market Finance
July 29, 2003
Timothy W. Jay, Chairman
Treasury Borrowing Advisory Committee
of The Bond Market Association
July 29, 2003
Treasury Borrowing Advisory Committee Quarterly Meeting
The Administration recently estimated that the deficit will be higher than earlier anticipated, $455 billion in FY2003 and $475 billion in FY2004. The Administration has also pledged to cut the deficit in half in the next few years. We will show you a few charts that describe projections of our future financing needs and interest costs given current issuance. We would like the Committees advice on whether the recent adjustments to the financing schedule provide Treasury with sufficient debt management tools to handle the consequent increases or decreases in debt issuance while facilitating our primary objective of meeting the governments financing needs at the lowest cost over time.
FOMC Calendar Changes
From time to time, FOMC announcements occur on Treasury note auction dates. Our analysis suggests that coincident dates of FOMC announcements and note auctions raise our borrowing costs (see chart). We would like the Committees advice on whether Treasury should consider adjusting its note auction schedule to avoid coinciding with FOMC announcement dates. If so, what adjustments to the note auction calendar would the Committee recommend.
Treasurys Issuance of Long-Term Securities
We will show you several charts highlighting the factors that influence Treasurys long-term issuance. We would like the Committees comments on these charts and the relevance of these factors.
Financing this Quarter
We would like the Committees advice on the following:
- The composition of Treasury notes to refund approximately $43.7 billion of privately held notes and bonds maturing on August 15 (this includes $1.3 billion of the 8 3/8% 8/15/03-08 that was called on 4/15/03).
- The composition of Treasury marketable financing for the remainder of the July-September quarter, including cash management bills if necessary.
- The composition of Treasury marketable financing for the October-December quarter.