FROM THE OFFICE OF PUBLIC AFFAIRS
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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 Anderson, Mr. Lyski and Mr. Marsico. 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 12:20 p.m. All members were present except Mr. Anderson, Mr. Lyski and Mr. Marsico. The Chairman read the charge, which is also attached.
The Committee discussed the advantages and disadvantages of continuing the re-opening policy for 10-year notes. The continuation or discontinuation of the re-opening policy was discussed simulataneoulsy with increasing 10-year note issuance.
Committee members supporting the re-opening policy cited the lack of long-term financing needs in the recent administration forecast. Committee members supporting discontinuation of the re-opening policy cited inaccuracies in past fiscal forecasts, the value that single issue securities in smoothing the distribution of outstanding Treasuries, the benefits of increased diversification from issuing larger quantities of 10-year notes, and the likely demand for additional long-term Treasury securities. It was pointed out that the 10-year note, while not as attractive to the swaps market as the 5-year note, plays an increasingly important role in risk transfer. Based on this attractiveness, the market would be receptive to greater issuance of 10-year notes.
Some members noted Treasury's heavy reliance on bills and 2-year notes. There is evidence that 2-year notes, in particular, have given up some of the premium that new Treasury issues generally receive. Others argued that, given Treasury's long-term view, the Treasury should not be overly concerned with the small concession paid for large 2-year note issue sizes.
A more general argument for additional issuance of 10-year notes, given the current sizes of 2-year note auctions, was that additional diversification of coupon borrowing would be prudent. In particular, it was noted that signs of a strong economic recovery would be exceptionally costly for 2-year notes given auction sizes and the current steepness of the yield curve.
The Committee voted 14 to 3 in favor of discontinuing the re-opening policy for the 10-year note.
The Committee briefly discussed the status of the 10-year inflation-indexed security in light of the vote on the 10-year nominal note. Members noted that the IIS is not a hedging vehicle and changes in IIS issuance are not expected by the market. If Treasury considers changes to the IIS calendar, members said that Treasury should review the Committee's advice on moving the IIS to the quarterly cycle. In addition, whatever the merits of adding additional IIS CUSIPS, Committee members stressed that there should be no change so soon after the establishment of the current IIS calendar.
The Committee then discussed the Treasury auction announcement and auction times. Members cited the advantages of earlier times for European investors. Members saw no downside risk for earlier announcement times but the advantage of moving to earlier auction times was questioned.
Members cited greater convenience for European investors and greater activity in the financing market as potential advantages in moving to earlier auction times. Members generally felt that those advantages were outweighed by the potential loss of dealer underwriting at earlier auction times. Less important, earlier auction times could lead to greater volatility due to overlaps with data releases.
The Committee generally favored shortening the when-issued period for 2-year notes. Members noted there has been a fall-off in WI trading and Treasury could help to reduce volatility from speculative accounts with a shorter WI period.
Committee members were generally skeptical of the advantages of moving to smaller, more frequent auctions in response to heightened volatility. The current auction calendar gives Treasury securities an event premium and the current calendar was viewed by some members as already well diversified.
The meeting adjourned at 1:20 p.m.
The Committee reconvened at the Madison Hotel at 5:35 p.m. All members were present except Mr. Anderson, Mr. Lyski and Mr. Marsico. 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
July 30, 2002
Timothy W. Jay, Chairman
Treasury Borrowing Advisory Committee
of The Bond Market Association
July 30, 2002
July 30, 2002
The Treasury Department would like the Committee's advice on the following:
- The composition of 5- and 10-year notes to refund $18.8 billion of privately held notes maturing on August 15. What do you recommend regarding the regular reopening policy for 10-year notes.
- 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.
- Treasury regularly announces auctions for marketable securities at 2:30 p.m. on a given day and conducts auctions at 1:00 p.m. a few days later. Would it benefit Treasury to conduct announcements and auctions earlier in the day? Also, would it benefit Treasury to reduce the time between announcement and auction of any of its regularly scheduled securities? For example, 2-year notes are announced on a Wednesday and auctioned the following Wednesday. In October, the 2-year note is scheduled to be announced on October 16, auctioned on October 23, and settled on October 30.
- The Committee noted last April a higher level of volatility is probably a permanent feature of the credit markets. In a higher volatility environment, is Treasury's debt current issuance pattern and calendar well placed to meet our objective of low cost borrowing over time? In particular, do the sizes and frequencies of current coupon offerings adequately mitigate the risks associated with episodes of high volatility? Should the Treasury offer coupon securities more frequently or should it offer a wider range of securities?