November 4, 2003

The Committee convened in closed session at the Hay-Adams Hotel at 11:35 a.m. The following members of the Committee were not present: Keith Anderson, Richard Davis, Thomas Maheras, Thomas Marsico, Joseph Rosenberg, Suresh Sundaresan, and Charles White. Deputy Assistant Secretary for Federal Finance Timothy Bitsberger welcomed the Committee and turned the meeting over to the Chairman. The Committee briefly discussed organizational issues before addressing the charge.

The Committee then discussed Treasury’s long-term financing, the first issue on the Committee’s charge (attached). Mr. Bitsberger presented several charts (attached) that depicted the long-run fiscal projections of the Office of Management and Budget (OMB) and the Congressional Budget Office (CBO). Mr. Bitsberger pointed out that Treasury is well positioned to meet its borrowing needs with its current issuance calendar if OMB’s deficit forecasts are met. The chart of CBO’s projections highlighted potential legislation that could increase the deficit going forward. A chart of hypothetical auction sizes using the CBO deficit projections including policy changes and assuming no changes in Treasury’s auction calendar was also shown. One Committee member committed that he thought the possible auction sizes were sustainable as the overall credit market was likely to grow in size over the same period.

In general, the committee felt that Treasury’s current issuance calendar provided it with enough flexibility to handle current deficit projections as well as the uncertainty around those projections. One member expressed concern about the possibility of higher deficits accompanied with the declining average maturity of the debt, noting that while long-term issuance as a percentage of total issuance will increase this year as indicated in one of the charts, Treasury should issue even more in the five- and ten-year sector to help keep the average maturity up. Another member pointed out, though, that if the economy is approaching a turning point, Treasury does not want to get caught issuing a lot of long-term securities just as the fiscal situation begins to improve. From a debt management perspective, smaller deficits are more worrisome than larger ones because it is easier to expand the auction calendar than to eliminate issues.

On the issue of Treasury’s auction calendar, one member raised concerns that Treasury’s issuance of 5-year notes in the middle of the month is creating cash flow problems that are increasing Treasury’s reliance on short-term cash management bills and rendering the 4-week bill irrelevant. A suggestion was made to move the 5-year note to the end of the month. Treasury noted that in the long-run having the 5-year interest payments and maturing issues in the middle of the month will help to smooth cash balances.

The Committee next turned to the second question on the charge dealing with Treasury inflation-protected securities (TIPS). Before the Committee discussed the issue, Mr. Bitsberger presented charts detailing the history of TIPS issuance and potential sources of TIPS demand. The Committee advised the Treasury to try to determine where the largest demand for a TIPS issue might come from and then figure what maturity that sector would find most attractive. One member suggested official foreign institutions as a potential source of demand, indicating that a shorter dated TIPS issue would be appropriate. Others thought that pension funds and life insurance companies are more likely sources of demand, which would support issuing a new TIPS with a maturity greater than 10 years.

Members mentioned several benefits to a longer-dated TIPS issue. One member commented that big pension plans were expressing interest in long-dated TIPS but were worried about their effect on market prices if they were to buy into the market. Issuing in the long-end could reduce such liquidity concerns, and the improved liquidity could perhaps actually reduce the TIPS yield in the long end. Others noted that the improving economy may lead investors to worry about inflation and that they would likely want longer rather than shorter inflation protection. The TIPS curve is also flatter than the nominal curve as a lot of the term premium in long-dated nominal securities is due to the inflation risk premium.

When deciding what the maturity of a long-dated TIPS should be, some Committee members suggested a 20-year security. First it would minimize market expectations that the Treasury would reissue the nominal 30-year. It would also fill out the TIPS curve between the previously issued 30-year TIPS and the 10-year TIPS, and investors could consequently hedge it on both sides. Several members have also heard that investors and traders would prefer a 20-year TIPS.

Some Committee members, though, raised the question of whether the problems with long-term nominal issuance - higher cost and a lack of flexibility - do not also apply to long-dated TIPS. And if they do, they questioned whether those problems are sufficiently smaller in comparison or the benefits sufficiently great to justify a longer-dated TIPS issue. The Committee in general agreed that the Treasury should not embark on issuing a long-dated TIPS unless it was completely committed to the security because introducing an issue and then canceling it a few years later could harm the development of the TIPS market.

Market conditions and the fails situation were discussed next. The Committee felt that the Treasury should let the market resolve the fails situation with the May ‘13 10-year note. While the situation is much improved since this past summer, members commented that fails were still at an elevated level which does hurt general market liquidity because dealers are forced to reduce their market making activities as the fails take up space on their balance sheets. One member felt that the reason market forces have not solved the problem yet is because the market is waiting for a statement from the Treasury about whether it will reopen the May 10-year issue. The Committee agreed that the moral hazard and uncertainty created by reopening the issue now would outweigh the benefits. In the future, one member thought Treasury could possibly reduce future fails problems by increasing the number of investors who have to report net long-positions. Others thought that approach would be troublesome as investors might not like having to report their positions.

The Committee then discussed financing needs (tables are attached to Committee Report). Members noted that increased demand, particularly by foreign investors provided support for larger auction sizes. Committee members also noted that the fails situation in the old 10-year note may provide support for 10-year issuance.

The meeting adjourned at 1:10 p.m.

The Committee reconvened at the Hay-Adams Hotel at 5:40 p.m. The following members of the Committee were not present: Keith Anderson, Richard Davis, Thomas Maheras, Thomas Marsico, Joseph Rosenberg, Suresh Sundaresan, and Charles White. The Chairman presented the Committee report to the Acting Under Secretary for Domestic Finance, 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.

Jeff Huther
Director
Office of Market Finance
November 4, 2003

Certified by:

Timothy W. Jay,
Chairman
Treasury Borrowing Advisory Committee
of The Bond Market Association
November 4, 2003

 

November 4, 2003

Treasury Borrowing Advisory Committee Quarterly Meeting

Committee Charge

Long-Term Financing

We will show you a few charts that describe projections of our future financing needs given our current issuance calendar. We would like the Committee’s advice on whether Treasury’s financing calendar provides sufficient flexibility given the current fiscal outlook. If the Committee views the current calendar as insufficiently flexible to meet the range of projections shown, what recommendations does the Committee have for changing the calendar and when should these recommendations be implemented?

Treasury Inflation-Protected Securities

We are currently considering adding an additional TIPS security to our financing calendar. What criteria should we use to determine the appropriate maturity for a new issue?

Market Conditions

RP fails, particularly on the May ‘13 10-year note, persist at an elevated level. We would like the Committee’s feedback on current market conditions and how effective private sector initiatives and regulatory measures have been in handling the fails situation.

Financing this Quarter

We would like the Committee’s advice on the following:

·                     The composition of Treasury notes to refund approximately $24.8 billion of privately held notes and bonds maturing on November 15 (including $3.4 billion of the 8-3/4% 11/15/03-08 that was called on 7/15/03).

·                     The composition of Treasury marketable financing for the remainder of the October-December quarter, including cash management bills.

·                     The composition of Treasury marketable financing for the January-March quarter.