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 for Messrs. Anderson, Druckenmiller and Lyski. 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. Karen Hendershot, Acting Director of the Office of Macroeconomic Analysis, summarized the current state of the U.S. economy (statement attached). Fred Pietrangeli, a senior economist in the Office of Market Finance, presented a series of charts updating Treasury borrowing estimates, and debt and interest rate statistics.

The public meeting ended at 9:20 a.m.

The Committee reconvened in closed session at the Madison Hotel at 10:35 a.m. All members were present except for Messrs. Anderson, Druckenmiller and Lyski. The charge, also attached, was distributed to the Committee.

After reading the charge, the Committee began by reviewing its financing advice from the previous Committee meeting in October. In October, it observed that central budget forecasts can be met with existing securities and existing schedules. The Committee then discussed any financing changes needed if financing requirements exceed current central projections and sought to provide advice that would acknowledge any potential downside risks.

Committee members generally agreed that there was little room for additional increases in 2-year notes, at least in the short-term. One member argued that there is additional capacity at the short-end of the curve.

For some Committee members, the need for leveling off issuance of 2-year notes, combined with more pessimistic budget forecasts, indicates that Treasury may be approaching a time when it will need to increase issuance of 5-year notes. Members generally spoke positively about Treasury's ability to issue 5-year notes. The high level of fails in the financing market experienced recently can be taken as an indication that the market can readily absorb more supply. The Committee also discussed whether increased auction sizes would allow for a suspension of reopenings and the market impact of returning to single-issue 5-year notes. Members generally favored suspending the regular reopening policy, if auction sizes become large enough, and some noted that more frequent maturities would help investors managing duration risk.

Committee members discussed the appropriateness of buybacks in a period of fiscal deficits. Most members viewed the buyback program as a valuable tool that should be kept viable until surpluses return. Members acknowledged the need for a transparent justification for buyback operations in the absence of surpluses and that financing gains, by themselves, were an insufficient justification for the program. Suggestions for maintaining the program until surpluses return included only conducting buyback operations in surplus quarters and using the buyback program as a cash management tool. One member suggested that participation could be increased by conducting more frequent operations with fewer securities.

The Committee next considered the question of how Treasury could enhance development of the Treasury inflation-indexed securities (IIS) market. Committee members noted that the IIS program has been an expensive way to raise debt to date, but may not be in the future. Some members noted that IIS have a unique position in portfolios because of their lack of correlation with other assets. One member argued that there is insufficient demand for a security linked to the consumer price index and that Treasury could shift the index to something that the market needs. Other members disagreed with this assessment and argued, instead, that relatively high cost of IIS to date is a result of supply outstripping demand.

Committee members identified several actions the Treasury could take to enhance the TIPS market. Most important, Treasury needs to make an explicit statement about its commitment to the program. Treasury could also work to increase awareness of the program to various investor classes (the deflation protection feature was cited as attractive). Auction cycle could be moved, possibly tying IIS issuance to the quarterly refunding, or moving to four auctions a year. Another suggestion is that tax treatment should be simplified.

The Committee next considered ways in which the net long position (NLP) reporting requirement could be modified to help reduce auction turnaround times. While compliance by dealers was characterized as more complex. Committee members acknowledged that separation of NLP reporting from the auction process was feasible. While noting that a change to a reporting time as of auction time would require a higher level of self-policy by auction participants, existing sanctions were generally viewed as sufficient. Treasury should state what the costs of non-compliance are.

For the quarterly refunding, the Committee recommended a $15 billion reopening of the 5-year note, a $13 billion initial offering of the 10-year note, and no buybacks for this calendar quarter. For the next quarter, the Committee made a tentative recommendation of $18 billion for a new 5-year note, $11 billion reopening of the 10-year note and a par amount of $9 billion in buybacks (which seemed large to some members). The Committee also suggested that Treasury consider revising the IIS schedule to coincide with the quarterly refunding process and move to more frequent issuance to increase market focus (perhaps with a $4 billion initial offering and a $2 billion reopening).

The Committee also had a brief discussion of a proposed schedule change that would move the Committee meeting two weeks forward. This change is attractive from Treasury's perspective because it allows additional time for deliberation on Committee advice. Some Committee members, however, voiced concern about additional focus on the committee Report to the Secretary which could lead to two weeks of greater market uncertainty.

The Committee adjourned at 12:35 p.m.

The Committee reconvened at the Madison Hotel at 5:50 p.m. All members were present except for Messrs. Anderson, Axelrod, Druckenmiller and Lyski. The Chairman presented the Committee report to the Under Secretary for Domestic Finance Peter Fisher, 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 6:10 p.m.

Paul F. Malvey

Director

Office of Market Finance

January 29, 2002

Certified by:

1st Quarter Financing Table

2nd Quarter Financing Table

The Treasury Department would like the Committee's advice on the following:

• The composition of financing in 5- and 10-year notes to refund $4.1 billion of privately held bonds maturing on February 15.
• The composition of Treasury marketable financing for the remainder of the January-March quarter, including cash management bills if necessary.
• The composition of Treasury marketable financing for the April-June quarter.
• The Administration announced last week that the budget deficit is expected to be $106 billion in FY2002 and $80 billion in FY2003. It is still forecasted that in the out years the budget balance will return to significant surpluses. Given the significant change in the projected outlook, Treasury needs to make additional adjustments to its financing plans this year and next. What would you recommend as adjustments to Treasury's financing? In terms of issue sizes, buybacks, reopenings, frequencies, securities?
• What recommendation do you have for the issuance calendar of Treasury's 10-year inflation-indexed security? What suggestions do you have for enhancing the development of the 10-year IIS market?
• Currently, net long positions for Treasury auctions are calculated as of 12:30 p.m. for a 1:00 p.m. auction close, and reportable net long positions are submitted along with bids for calculation of the 35 percent award limit. Would it be feasible to have the net long position calculation computed at 1:00 p.m., but reported after the close of an auction? Effectively, bidding entities would be responsible for net long calculations relative to amounts bid, and auction awards would be based solely on amounts bid. Net long positions for purposes of the 35 percent rule would be determined after awards are made. Also, what sanctions do you recommend if an entity were found to be in violation of the 35 percent rule. What else do you recommend to improve the turnaround in Treasury auctions?
• Any other topics related to Treasury's debt management program.