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. Marsico and Mr. Axilrod. The Federal Register announcement of the meeting and a list of Committee members are attached.
Paul Malvey, Director of the Office of Market Finance, welcomed the Committee. Mark Warshawsky, Deputy Assistant Secretary for Economic Policy, summarized the current state of the U.S. economy (statement attached). Paul Malvey presented the chart show, updating Treasury borrowing estimates and debt statistics.
The public meeting ended at 9:20 a.m.
The Committee reconvened in closed session at the Madison Hotel at 12:05 p.m. All members were present except Mr. Marsico and Mr. Axilrod. The Chairman read the charge, which is also attached.
The tentative calendars of security auctions for the November-March period were distributed to the Committee members. The Committee briefly discussed the 2-year note auctions scheduled in November and December. The regular auction dates conflict with the holidays and the Committee acknowledged that recommended alternative dates are desirable.
The Committee then considered Treasury’s financing needs for FY2003 and FY2004. The Committee sees no need for changes to the auction schedule for FY2003 so the discussion focused more generally on the factors that Treasury should consider in deciding how to finance future surpluses or deficits. The Committee noted, as it has in the past, that Treasury has four ways in which it can modify its auction schedule to increase or decrease financing. The Committee recommended that the Treasury respond to changes in financing needs by the following hierarchy: change issue size, re-opening policy, frequency of issuance and, finally, range of maturities offered.
In terms of auction sizes, some Committee members noted that the market could absorb additional amounts of existing 2-year and 5-year notes although one member noted that recent bid-to-cover ratios in both the nominal and inflation-indexed 10-year notes may be a cause for concern. Members said that the market could absorb additional supply of 2-year notes as long as market speculation continued that the Federal Reserve may lower the Fed funds rate. One member also noted that the relatively low price risk of 2-year notes, compared to the longer maturities, gave Treasury flexibility in issuing at the 2-year point.
If financing needs required additional issuance, the Committee positively viewed increasing frequencies of existing securities. Additional auctions of the 5-year note, in particular, would be well received by both dealers and investors.
If additional 5-year auctions were needed, Committee members generally favored maintaining the current mid-month coupon date. Additional issuance of 5-year and 10-year notes was generally viewed as relieving pressures on front end of the curve.
The Committee also discussed what additional securities should Treasury issue, should the need arise. One suggestion was to reverse the actions Treasury took during recent surpluses – reintroduce the 52-week bill, 3-year note, or the bond. Some Committee members noted that the current interest rate environment, from a historical perspective, was especially attractive to long-term issues.
The Committee concluded the discussion of the financing question with a broader discussion of the factors that should guide Treasury when it weighs the trade-off between larger issue sizes or greater auction frequencies (a trade-off that ultimately depends on the relative cost of larger issuance versus the loss of liquidity premium from issuing more securities). The Committee noted the importance of making this decision based on Treasury’s objective of low cost financing over time. As part of this discussion, the Committee reviewed the recent history of the average maturity of debt; generally concluding that, while it may be an indicator of rollover risk, it is less important than the structure of outstanding debt. The Committee also reaffirmed its support for regular and predictable issuance with substantial lead-time before changing the auction schedule.
The question on performance measures generated some debate among Committee members about both the feasibility and desirability of quantifying debt management performance. Some members felt that this issue required more preparation than the current meeting format permitted. Treasury’s efforts to reduce auction release times was cited as one area where quantification is beneficial, but some Committee members were skeptical that Treasury would be able to identify other quantifiable performance measures. Part of this skepticism stems from Treasury’s issuance approach as a non-opportunistic issuer.
The Committee identified some measures relating to debt management that may form part of a larger package of performance indicators: bid volumes, auction tails, bid-to-cover ratios, persistence of fails in the financing market, pricing relative to a curve (spline, LIBOR or RP-adjusted swaps, or G3 funding), and turnover or volume in secondary market. Any performance measures will need to be adjusted for economic and market conditions. Some Committee members argued that debt management is inherently subjective given the enormous range of uncertainty associated with fiscal forecasts and the dependence on current conditions. The Committee also noted the unique difficulties faced by the U.S. Treasury which cannot use another issuer as a benchmark.
Some Committee members cautioned that performance measures may get caught up in the political process. Others argued that the danger of politicization could be reduced by relying on a wide range of performance indicators and that simply proposing indicators may have the beneficial effect of clarifying objectives.
Members also suggested that Treasury would have to develop better forecasting methods before developing concrete performance measures. Volatility around fiscal needs is viewed as intolerably high.
In responding to the question on inflation-indexed securities, Committee members said that market participants are generally comfortable with reopenings. Some members said that Treasury should issue a single security annually and re-open it in each of the following three quarters while others suggested that Treasury issue and reopen two new securities annually. The Committee’s general advice on inflation-indexed securities is to increase issuance gradually and continue the focus on increasing demand by continuing to signal Treasury’s commitment to increase issuance.
The Committee recommended that auction sizes for the 5-year and 10-year notes be unchanged at $22 billion and $18 billion respectively.
The meeting adjourned at 1:00 p.m.
The Committee reconvened at the Madison Hotel at 5:30 p.m. All members were present except Mr. Marsico and Mr. Axilrod. 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 5:45 p.m.
Paul F. Malvey
Office of Market Finance
October 29, 2002
Timothy W. Jay, Chairman
Treasury Borrowing Advisory Committee
of The Bond Market Association
October 29, 2002
October 29, 2002
The Treasury Department would like the Committee’s advice on the following:
• The Administration’s Mid-session Review of the Budget showed a deficit for FY 02 of $165 billion and forecasts for deficits in FY 03 and FY 04, compared to originally projected significant surpluses in the FY 02 Budget. As the change in the fiscal position progressed, the Treasury suspended its scheduled reopening policy and increased auction sizes. Given the projected outlook, Treasury may need to make additional adjustments to its financing plans in FY 03 and FY 04. Would you recommend any adjustments to Treasury’s financing?
Throughout Treasury, we have undertaken to quantify performance through measures of the quality or quantity of services we provide. Are there measures of debt management that would provide useful indicators of the quality of debt management decisions? Are there indicators of the auction process, issuance policy, or the resulting composition of debt outstanding that you believe we should be measuring ourselves against? Should the sensitivity of the outstanding debt to interest rate changes be a measure of performance? Is there a measure of interest rate cost that could be used as a performance measure?
Since we announced our intention to enhance the attractiveness of the Treasury inflation-indexed security (TIIS) market, we have increased the number of 10-year TIIS auctions from two to three per year and spoken widely to promote interest in the inflation-indexed market. Upon completion of this TIIS cycle, we plan to further increase TIIS issuance. If Treasury were to further expand the TIIS market by going to four auctions per year, would you recommend that it issue two new 10-year notes, with each followed by a reopening, or that it issue four new notes? What factors should be considered in determining TIIS auction sizes?
The composition of 5- and 10-year notes to refund $18.8 billion of privately held notes maturing on November15.
The composition of Treasury marketable financing for the remainder of the October – December quarter, including cash management bills if necessary.
The composition of Treasury marketable financing for the January – March quarter.