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F E D E R A L RESER V E BANK O F NEW YORK Fiscal Agent of the United States f Circular No. 649 9 "1 L February 26, 1970 J Treasury Raises Minimum Bill Denomination to $10,000 To A ll Incorporated BanTcs and Trust Companies, and Others Concerned, in the Second Federal Reserve District: The following statem ent was made public yesterday by the T reasury D ep artm en t: The U. S. T reasury today announced th a t : (1) New issues of T reasury bills, beginning with the auction scheduled on M arch 2, will be p ro vided in m inimum denom inations of $10,000. (2) T reasury notes and bonds will continue to be made available in denom inations as small as $1,000. These decisions are based upon an evaluation of T reasury costs, tra d in g activity and m arket needs in recent months. These decisions recognize the desirability of m aintaining access by small investors to m ar ketable U. S. Governm ent securities. A t the same time, the deterioration in the m a rk e t’s ability to handle norm al activity and the increase in costs th a t have arisen from the extraordinarily large volume of small transactions in short-term T reasury bills will be ameliorated. Specific factors in decisions (1) The basic function of the T reasury bill m arket is to afford the T reasury regular and economical access to the large volume of funds available from institutional investors for short-term employment in the money m arket. Typically, such funds are available in large blocks. The extraordinary volume of small indi vidual transactions, which provide neither an im portant nor a dependable source of funds to the Treasury, is beginning to overtax existing m arket facilities to the point where the effectiveness of this basic source of T reasury finance could be im paired. (2) The direct costs to the Governm ent of issuing very small denom inations are excessive in relation t( the volume of funds attracted. Analysis of these costs indicates th a t the processing cost for subscriptions subm itted by individuals to the F ed eral Reserve Banks am ounts to approxim ately $15 to $20 p er item. This is equivalent to an additional interest cost of 1.2 to 1.6 percent fo r a typical $5,000 sale of a three-m onth bill and to more th a n % percent fo r six-month bills. These costs are proportionately more for sm aller tra n s actions, a t the extreme equivalent to 6 or 8 percent for a $1,000 sale of three-m onth bills. Such costs are obviously fa r out of proportion w ith going rates of interest. (3) Sizable charges increasingly placed by dealers, banks, and brokers on small transactions to cover th eir costs often reduce the net re tu rn to these investors well below the quoted yield on the bill. A $10 charge, for instance, would reduce the effective yield on purchases of three-m onth bills from 7 to 3 percent fo r a $1,000 purchase or to 6.2 percent for a $5,000 transaction. Moreover there are significant dangers of loss or additional costs to small investors w ithout adequate and convenient means of safeguarding holdings of these bearer securities, which m ust be handled by the investor like cash. (4) These risks and costs are substantially reduced in the case of notes and bonds. These readily avail able securities, which afford investm ent for periods of one year or more, are available in registered form more suitable for individuals. The transactions costs are spread over a longer period of time, so their im pact on interest retu rn s or Governm ent costs is substantially reduced. (5) A ction at this time is p articu larly tim ely. The diversion of savings into T reasury bills, while relatively small in term s of T reasury finance, has contributed to the in terru p tio n of the orderly flow of funds into the housing m ortgage m arket. This has aggravated the problem s of home buyers and the already depressed housing industry. This action thus supports national policy designed to m aintain an adequate flow of funds into m ortgages a t this critical juncture. George Romney, S ecretary of the D epartm ent of Housing and U rban Development, issued the follow ing statem en t: “ The outflow of savings from savings and loan associations, m utual savings banks, and other th rift institutions has aggravated the shortage of m ortgage funds and contributed to a serious decline in housing production. To avoid a serious, growing housing shortage it is essential th a t we discourage the outflow of funds from m ortgage lending institutions. This T reasury action should substantially improve our housing outlook. ’ ’ The T reasury has inform ed us th a t on any reopened series of bills which initially ivere offered with the $1,000 and $5,000 denominations (as will be true for a period of time with 3-month and 9-month issues), the additionally issued bills, although subject a t the time of issue to the new mini mum denomination of $10,000, may nevertheless be exchanged a fte r issue into the $1,000 and $5,000 denominations. Six-month and one-year bills issued hereafter will not be exchangeable into the $1,000 and $5,000 denominations. A dditional copies of this circular will be furnished upon Tequest. A l fr e d H ay es, President.
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