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FE D E R A L R E S E R V E BANK OF NEW YORK Fiscal Agent of the United States r L Circular N o. 5 3 8 3 * 1 September J 5 ,1963 TREASURY STATEMENT ON ADVANCE REFUNDING To All Banking Institutions, and Others Concerned, in the Second Federal Reserve D istrict: There is printed below a Treasury Department statement, dated September 4,1963, cover ing the background and details of its current advance refunding offer. This statement supple ments the Treasury statement of the same date sent to you with our Circular No. 5382. A lfred H ayes, President. ADVANCE REFUNDING OFFER The Treasury today announced that it will offer holders of seven issues of outstanding Treasury securities an opportunity to extend their holdings at attractive yields. $23.0 billion of these securities are held by the public. Including $9.1 billion of holdings by official accounts, there are $32.1 billion of these issues outstanding. The current offering combines a “junior” advance refunding of certain securities maturing in 1966 and 1967 with a “pre-refunding” of all securities maturing on May 15, 1964. Holders of securities eligible for exchange will have the option through all of next week of exchanging them for three new issues as follows: Securities eligible for exchange and their maturity dates Securities offered in exchange and their maturity dates P r e r e f u n d in g 31/4% certificates, 5/15/64 3%% notes, 5/15/64 434% notes, 5/15/64 3%% bonds, 1968 (new) 4% bonds, 1973 (new) 4 bonds, 1989-94 (additional issue) 11/15/68 8/-15/73 5/15/89-94 J u n io r A d v a n c e R e f u n d in g 3%% 4% 3%% 3%% bonds, 5/15/66 notes, 8/15/66 notes, 2/15/67 notes, 8/15/67 4% bonds, 1973 (new) bonds, 1989-94 (additional issue) 8 /15 /7 3 5/15/89-94 The Background of this Advance Refunding This advance refunding is another part of a continuing debt management program designed to finance the Government’s requirements at the lowest practicable cost, while also furthering the growth and expan sion of the American economy, helping to restore balance of payments equilibrium, and developing a maturity structure of the debt itself that will contribute to flexible operations at minimum cost in the future. By offering holders of outstanding issues with coupons of 3^4% to 4% % an opportunity to invest for longer periods at coupon yields of 3%% to 41/g%, the Treasury willaccomplish further needed restruc turing of the outstanding debt as a coordinate part of its program for carrying out these inter-related objectives. During the remainder of calendar 1963, the Treasury must raise a net amount of approximately $6 billion in cash. The present intention isthat the great bulk of this cash financing will be accomplished through offerings of Treasury bills, possibly including taxanticipation bills. The Treasury will, of course, adjust the timing and magnitude of these borrowing operations with a view not only to the pattern of its cash requirements and the needs of the balance of payments situation, but also to assure that the growth of the very short-term debt does not exceed the needs of the economy. The Treasury must also attempt, from time to time, to reduce the debt in the one-to-five-vear maturity area, in order for the market to be able to absorb readily future borrowing within that area. In the pre-refunding portion of this operation, the Treasury is seeking to reduce the total size of the security issues maturing on May 15, 1964, of which $8.0 billion are held by the public. This is a larger quarterly maturity than any othernow outstanding. The junior advance refunding, by reducing the amount of debt maturing in 1966 and 1967, will help to simplify the Treasury’s problems of refunding maturing obligations in the years immediately ahead. With the economy still operating well below capacity levels, the Treasury has a continuing concern that its actions shall not reduce the availability of capital for constructive investment nor place upward pressures on long-term interest rates. Past experience with advance refundings which were conducted under comparable market conditions suggest that such operations may have a helpful catalytic effect in testing and clarifying the absorptive capacity of the long-term market without any appreciable effect on long-term interest rates. Debt management operations during the first seven months ofcalendar 1963have laida strong founda tion for the achievement of the Treasury’s objective of non-inflationary financing of the budget deficit. Despite increasing use of Treasury bills during the January-July period of this year, the Treasury has reduced the total debt maturing within one year by $2.0 billion over the same period. The debt maturing in one-to-five years has been reduced by $3.6 billion. During the same span of time, the debt maturing beyond five years has been increased by $6.1 billion. This change in structure has been accompanied by a sharply reduced reliance on the banking system in financing the deficit. The estimated holdings of Government securities by all commercial banks have actually declined by $4.3 billion during the firstseven months of calendar 1963. Perhaps even more signifi cant, commercial bank holdings of Government securities on July 31, 1963 were only about $100 million higher than they were at the end of 1960. despite the fact that the total outstanding Government debt has risen by $15.1 billion during that period. In short, the debt restructuring accomplished thus far in calendar 1963, together with the restructur ing which will be accomplished by this advance refunding, should assure that the budget deficit will be financed in a non-inflationary manner, and should contribute further toward this country’seconomic growth and its external balance. Advance Refunding of High Coupon Issues Typically, advance refundings have involved the exchange of outstanding securities for new issues carrying higher coupon rates of interest. However, as advance refunding continues to evolve as a debt management tool, there will be occasions in which holders of outstanding high-coupon securities will be offered exchange options involving new issues with lower coupon rates of interest. It is important, there fore, that investors become fully aware of the advantages which can accrue to them in an advance refunding exchange of relatively high coupon issues for issues carrying lower coupons. In the present advance refunding, holders of the 4% % notes of May 1964, for example, are being offered an attractive opportunity to exchange their holdings in this issue for longer-term securities bearing lower coupon ratesof interest— ranging from 3%% for the 1968 maturity to 4y8% for the 1989-94 maturity. The financial advantage which will accrue to the holders of the 4 % % notes in making this exchange is, however, as great as the financial advantage offered to the other, lower coupon eligible issues maturing in May 1964, the 3*4% certificates and the 3%% notes. This comparability among the various options is accomplished by the establishment of different adjustment payments to be paid by the Treasury. In the present case, full allowance has been made for the differences in interest over the period from now until next May as between the 4 % % issue and any of the 3%%, 4% and 4 issues offered in exchange. These adjustments are based on the differences between the current market values of the eligible securities and the indicated current market values of those being offered in exchange. In addition, the adjustment pay ment also includes an amount sufficient to improve substantially the effective yield on the new issues over the current market level of yields for the maturities involved. As an illustration, a holder of the 4 % % notes of May 1964 who exercises the option to exchange into the 4% bonds of August 1973 will receive, in the form of an immediate payment from the Treasury, not only the full value of the coupon difference from now until the maturity of the 4 % ’s next May, but, in addition, an investment yield of more than 4 % % on a security which will mature in 9 years and 11 months. Details of the Advance Refunding The subscription books for this offeringwill be open beginning Monday, September 9, and will remain open through Friday, September 13, 1963, for all classes ofsubscribers. Payment date is Wednesday, Sep tember 18, 1963, with interest adjustments as of September 15. The amounts of cash payments due to subscribers under each possible exchange, the amounts of accrued interest adjustments, and the investment yields and reinvestmentrates are setforth inthe attached tables. Other details relating to this advance refunding may be found in the formal offering circulars. Table 1. Payments to and by the Subscriber in the September 1963 Advance Refunding (In dollars per $100 of face value) Accrued interest Adjustment to September 15,1963 payments to Net accrued subscriber Payable to interest ( on account subscriber on Payable by subscriber on payable to o f purchase price issues to be subscriber1 offered issues o f offered issues) exchanged Securities eligible for exchange 11P r e r e f u n d in g ” : Net amount to be paid To Subscriber For the 3%% bond, November 15, 1968 1.086277 1.086277 1.736277 1.587636 1.587636 3.187636 1.253397 1.253397 2.203397 314% Certificate, 5/15/64 4% % Note, 5/15/64... 3 % % Note, 5/15/64... .650000 1.600000 .950000 3!/4% Certificate, 5/15/64 4 % % Note, 5/15/64... 334% Note, 5/15/64... 1.150000 2.100000 1.450000 31/4% Certificate, 5/15/64 43/4% Note, 5/15/64... 33/4% Note, 5/15/64... 1.350000 2.300000 1.650000 For the 4% bond, August 15, 1973 1.086277 1.086277 2.236277 1.587636 1.587636 3.687636 1.253397 1.253397 2.703397 For the 4 % % bond, May 15, 1989-94 1.086277 1.686402 -.600125 .749875 1.587636 1.686402 -.098766 2.201234 1.253397 1.686402 -.433005 1.216995 33/4% Bond, 5/15/66... 1.150000 4% Note, 8/15/66... 1.800000 .400000 3%% Note, 2/15/67... 33/4% Note, 8/15/67........ 700000 por the 4% bond, August 15, 1973 1.253397 2.403397 .336957 2.136957 .305367 .705367 .315897 1.015897 “ J u n io r ” r e f u n d in g : 33/4% Bond, 5/15/66... 1.350000 4% Note, 8/15/66... 2.000000 3 % % Note, 2/15/67........ 600000 334% Note, 8/15/67... .900000 Office of the Secretary of the Treasury Office of Debt Analysis By Subscriber 1.253397 .336957 .305367 .315897 For the 4 % % bond, May 15, 1989-94 1.253397 1.686402 -.433005 .336957 1.686402 -1.349445 .305367 1.686402 -1.381035 .315897 1.686402 -1.370505 .916995 .650555 .781035 .470505 September 4, 1963 1 Minus sign indicates net accrued interest payable by the subscriber. Table 2. Investment Returns in the September 1963 Advance Refunding Approximate investment yield from 9/15/63 to maturity1 Securities eligible for exchange Approximate reinvestment rate for extension perio&2 37/s % Bond 11/15/68 4% Bond 8/15/73 4ys % Bond 5/15/89-943 3 % % Bond 11/15/68 4% Bond 8/15/73 4 ^ % Bond 5/15/89-94i 4.02% 4.02 4.02 4.15% 4.14 4.14 4.21% 4.20 4.20 4.14% 4.13 4.13 4.15 4.15 4.15 4.14 4.21 4.21 4.21 4.20 Not eligible 4.32 4.28 “ 4.34 4.29 “ 4.32 4.28 “ 4.36 4.29 September 4, 1963 ‘ ‘ P r e r e f u n d in g ’ ’ : 3^4% Certificate, 5/15/64 434% Note, 5/15/64... 33/4% Note, 5/15/64... “ J u n io r ” 4.22% 4.24% 4.22 4.24 4.22 4.24 r e f u n d in g : 3%% Bond, 5/15/66... Not eligible 4% Note, 8/15/66... “ 3%% Note, 2/15/67... “ 33/4% Note, 8/15/67... “ Office of the Secretary of the Treasury Office of Debt Analysis 1 Yields to nontaxable holders (or before tax) on issues offered in exchange based on prices of eligible issues (adjusted for payments on account o f issue price). Prices are the mean of bid and ask quotations at noon on September 3, 1963. 2 Rate for nontaxable holders (or before tax). 3 Reopening o f an existing security.
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