FROM THE OFFICE OF PUBLIC AFFAIRSPO-3052
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The Committee convened at 9:00 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 and Mr. Rosenberg. The Federal Register announcement of the meeting and a list of Committee members are attached.
The Committee was welcomed by Timothy Bitsberger, Deputy Assistant Secretary for Federal Finance. Richard Clarida, Assistant Secretary for Economic Policy, summarized the current state of the U.S. economy (statement attached). Fred Pietrangeli, a senior economist for the Office of Market Finance, presented the chart show, updating Treasury borrowing estimates, and debt statistics.
The public meeting ended at 9:25 a.m.
The Committee reconvened in closed session at the Madison Hotel at 12:05 p.m. All members were present except Mr. White and Mr. Rosenberg. The Chairman read the charge, which is also attached.
The Committee began by discussing the question regarding the smoothing of Treasury cash balances through the buyback of shorter-dated Treasury securities or by conducting term repos when cash balances are high. The Committee noted that TT&L capacity is limited by the amount of collateral that banks are willing to set aside. The consensus view was that buying short-dated bills or executing term repos was an appropriate means of managing cash volatility when cash balances were high.
Next the committee turned its attention to the question regarding the decline in the average maturity of the debt and appropriate composition of outstanding debt and new issuance. The committee began with a discussion regarding the difficulty of quantifying the duration of the Federal government's assets, as well as the cost-benefit tradeoffs between short-term borrowing and rollover risk. The committee noted that, historically, average length has generally remained within a range of between 4-1/2 years to 6 years, and that this range has served Treasury well. The committee suggested that in times of surplus and/or low inflation forecasts, that it perhaps would be prudent for Treasury to let the average maturity move toward the lower end of this band. By contrast, in times of deficits, greater forecast uncertainty, and /or forecasts of rising inflation, it would be appropriate for Treasury to take steps to move the average length toward the upper end of the range.
Regarding the composition of the quarterly refunding, by a unanimous vote, the Committee recommended a $20 billion issue of a 5-year note and a reopening of the 4-7/8 percent 10-year notes of 2/15/12 in an amount of $11 billion. In addition, the Committee recommended that a new TIIS be included in the quarterly refunding cycle. Members felt that including TIIS in the refunding auctions would further enhance the TIIS product by raising the visibility of the instrument. It would also work to Treasury's benefit because the underwriting markets are most liquid during quarterly refundings and the presence of TIIS in the refunding auctions could spur crossover buying by new, non-traditional TIIS investors. Members stated that TIIS should be offered every quarter at the refunding, with a minimum initial size of $4 billion and a reopened size of $3 billion.
Discussion ensued among committee members concerning the regular reopening policy with regard to the 5-year note and 10-year notes. The Committee recommended that the regular reopenings of 5-year note be discontinued at this time. Noting the tightness in financing markets, members felt that the minimum size for new 5-year note offerings should be $20-22 billion. The Committee felt that the size of 5-year note offerings could be gradually increased if needed but they did not suggest an upper limit. The regular reopening of the 10-year should continue.
Looking at the remainder of the April-June quarter, the Committee recommended that the 2-year notes remain at $25 billion, and that weekly bills be increased from the $26 billion level to the $32 billion level starting in mid May. (See attached table.) They recommended that 4-week bills be increased from $16 billion to a peak of $22 billion by mid-May, and then back down to the $14 billion range by the end of June. The Committee had a brief discussion about the composition of financing for the July-September quarter. Recommendations for the July-September quarter are also in an attached table.
Finally, the Committee discussed the question of increased volatility in credit markets and the implications for Treasuries. The Committee noted that increased volatility had both a secular component, such as increased optionality on corporate and mortgage debt, as well as cyclical component, e.g., the interest rate cycle and issuance volume. Members noted the increasing trend in credit market volatility over the recent past, but stated that the level of volatility was well below past volatility peaks and that the trend should not be viewed as an indication of a structural change. The Committee observed that Treasury securities are the primary vehicle for hedging other credit market instruments and that Treasury securities were being heavily used to transfer risk. Members noted that the large increase in daily trading volume in Treasury securities was a manifestation that the markets that use Treasuries for hedging and other uses were growing faster than Treasury issuance.
The meeting adjourned at 1:20 p.m.
The Committee reconvened at the Madison Hotel at 6:05 p.m. All members were present exept Mr. White and Mr. Rosenberg. 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 6:15 p.m.
Paul F. Malvey
Office of Market Finance
April 30, 2002
James R. Capra, Chairman
Treasury Borrowing Advisory Committee
Of The Bond Market Association
April 30, 2002