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Treasury-Federal Reserve Study of the
U.S. Government Securities Market

NEW TECHNIQUES IN DEBT MANAGEMENT SINCE THE LATE 1950fS




Prepared by
Lawrence Bjnyas
Deputy Assistant to the
Secretary of the Treasury
May 31, 1967




THE
I
FEDERAL
RESERVE
BANK of
SE LOUIS

Research Library

Table of Contents
Page No,
TEXT
Historical Summary:
Innovations in Treasury bills
Issuance of coupon securities at a discount
Cash refunding
Advance refunding
•.. *.
Bond auctions
Participation certificates
Innovations in nonmarketab'le issues:
Savings bonds
Foreign and foreign currency securities
Market Impact and Analysis of Major New Techniques:
Treasury bill area:
6-month bill.. • Annual bills (quarterly and monthly cycles)
9-month bill
Bill strips
Summary
Cash refunding
Advance refunding:
Scope
Performance factors
Investor participation
Market impact
Dealer participation and activity
Cost of advance refunding
Tax consequences
Participation certificates

1
6
9
13
23
25
33
35

..
*•

41
46
50
51
52
55
61
62
70
75
81
85
94
101

CHARTS
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.

Growth of regularly issued Treasury bills
Composition of the under 1-year marketable debt
Publicly held Treasury issue maturities
Structure of the over 1-year marketable debt
Increases in regular bills Nov. 1958 to Dec. 1966
Exchanges of publicly held issues in advance refundings
Size of eligible issue coupons in advance refundings and
percent of public holdings exchanged
Percent of eligible issues exchanged related to length
of extension in advance refundings
Yields on public and private long-term issues
Long-term Treasury yields during relevant
advance refundings
Public holdings of marketable Treasury and
Federal Agency obligations
Market yields on Federal Agency and Treasury securities
and new corporate reoffering rates




5
18
19
21
53
64
66
68
77
79
102
105

II
APPENDIX
Appendix
Page No.
Tables:
1. Monthly average rates on 3 and 6-month bills
in the weekly auctions
2. 3-month bills - quarterly averages of auction results
3. 6-month bills - quarterly averages of auction results
4. Annual bill auction results
5. 9-month bill auction results
6. Bill strip auction results
7. Outstanding amounts of regularly issued bills
8. Treasury issues in rights and cash refinancings
9. Dealer activity in quarterly rights refundings
10. Dealer activity in quarterly cash refinancings
11. Advance refundings 1960-1966 (eligible issue amounts,
terms and exchanges; offered issue terms, adjustment
payments, and rates of return)
12. Exchanges in advance refundings by investor classes
13. Exchanges in senior and in pre- and junior advance
refundings by investor classes
14. Yields on long-term Treasury, municipal, and
private securities
15. Dealer activity in advance refundings, 1960-65....
16. New issues in advance refundings to the public
and to dealers
17. Over 10-year Treasury bonds issued in cash and regular
rights refundings and in advance refundings 1960-65
18. 3 to 10-year Treasury securities issued in cash and
regular rights refundings and in advance refundings
19. Estimated cost or savings in advance refundings on
eligible issues maturing through 1966
20. Nontaxable and taxable exchanges in advance refundings
and adjustment (boot) payments, 1960-1966
21. Federal Agency and Treasury market yields and new
Aa corporate reoffering rates
Examples of tax treatment of adjustment (boot) payments
Explanation of minimum reinvestment rate for the extension
of maturity in advance refunding




1
2
4
6
9
10
11
12
14
15

16
22
23
24
26
27
29
30
32
34
35
36
37

New Techniques in Debt Management Since the Late 1950fs

As in other fields, new techniques and innovations in debt management
were developed to meet specific needs.

Some of these needs were already

well established by the late 1950fs while others evolved later, but all
are related to fundamental and continuing debt management objectives.

The

basic functions of Treasury debt management are to borrow for expenditures
not covered by revenues and to refinance maturing obligations.

Of equal

importance is the role of debt management in achieving major national
policy goals—the promotion and maintenance of sound noninflationary growth
in the domestic economy and progress toward balancing our international
accounts.

There are also a number of subsidiary objectives:

to achieve

and maintain a well balanced debt structure; to provide debt instruments
designed to meet market and nonmarket requirements; to minimize the interference of debt management action with the execution of Federal Reserve
monetary policy; and to hold interest costs to a minimum within a framework consistent with all other goals.

A recent addition to these aims is

the coordination of Treasury and Federal Agency financing within the context of broad economic policy objectives.

Historical Summary

Innovations in the Treasury Bill Area
Toward the Fall of 1958 the Treasury became increasingly concerned
over the lack of receptivity in the market, even to short-term offerings.
Faced with the huge increase in the deficit in fiscal 1959, the Treasury




- 2felt that much of it, out of necessity, would have to be financed in the
money market area of Treasury bills.

At that time, only 91-day bills were

being issued except for the seasonal tax anticipation bills.

In expanding

the amount offered each week to increase the total volume of the 91-day
bills outstanding, the Treasury ran the risk of not having the offering
adequately covered by subscriptions.

Instead, by lengthening the maturity

of the bills, it was felt that the same amount offered each week would be
able to support a proportional increase in the volume outstanding.

For

example, $1 billion of 13-week bills offered each week would keep $13
billion outstanding and $1 billion of 26-week bills could maintain $26
billion outstanding, etc.

Conversely, it would take only $1/2 billion of

26-week bills to keep $13 billion outstanding.

Accordingly, these con-

siderations led to the introduction of the 6-month bill in December 1958.
The 26-week bill was not intended as a substitute for the 13-week bill.
While the weekly shorter bill offerings were reduced, they were continued
for those investors preferring the most liquid Treasury borrowing instrument.

Developing a full cycle of 6-month bills while cutting back on 3-month
offerings was a relatively slow process in a period of pressing and immediate needs.

Thus, the quarterly 1-year bill cycle involving amounts of

$2 billion in each issuance was introduced in the Spring of 1959 to fill
that gap.

In order to interfere as little as possible with certificates

generally offered in the quarterly refinancings of mid-February, May,




- 3August, and November, the 1-year bill was designed to mature in midJanuary, April, July, and October.

During the period through 1959, the currencies of most free world
industrial countries had become convertible or fixed in terms of gold and/
or dollars.

Due to increases in the U.S. balance of payments deficit the

Treasury lost gold steadily and increasingly.

The rising excess of outgo

over income resulted mainly from our military commitments, foreign aid,
tourism, export of capital, and more particularly, the lure of higher
interest rates abroad following currency convertibility.

To discourage

the flight of short-term funds seeking higher rates overseas after the
onset of the 1960-61 recession, bill rates were prevented from declining
to the low levels that had been reached in earlier post-war recessions.

In 1961 the procedure familiarly called "operation twist11 was undertaken jointly by the Federal Reserve System and the Treasury.

The System's

role was to divert part of its open market operations for monetary expansion into the coupon issue area, including maturities longer than 1 year.
By so doing, the System would be helping to hold long-term interest rates
down to spur the domestic economy, while refraining from putting downward
pressure on short-term rates.

Debt management's part in the process was

to increase the supply of bills:

first, in the conventional way by in-

creasing offerings of regular bills; and second, by offering bill strips
from time to time.

These strips consisted of a simultaneous addition to

a number of consecutive weekly maturities of existing bills.

The announce-

ments stipulated that tenders had to include in one bid equal amounts of




- 4each maturity offered in the strip.

The complicated nature of the bidding

for the strips tended to discourage all but the most sophisticated bidders.
As a result, bill rates rose more rapidly than with the more gradual system
of increments to a whole cycle of regular bill offerings.

In the meantime the quarterly 1-year bill had not been enthusiastically
received by the market and its later performance in the next several years
was relatively spotty.

To diminish its impact on the market the Treasury

reached the decision in 1963 to reduce the amounts in each offering substantially but increase the frequency of the offerings.

Accordingly, the quarterly cycle of 1-year bills was converted into
a monthly cycle beginning in August 1963.

Although the amounts offered

were cut back about 60%, the greater frequency of offerings in the conversion permitted an appreciable over-all increase in the amount of
1-year bills outstanding on the completion of the cycle.

The initiation of the month-end annual bill had an important effect
on Treasury debt management choices and decisions in the short-term coupon
issue area.

It virtually replaced the 1-year certificate which had been

the basic "anchor11 issue in the quarterly refinancings.

Instead, except

for one offering of certificates in August 1966 the Treasury has issued
short-term notes of 15 to 21 months1 maturity.

In addition, the pricing

of these short-term notes has been strongly influenced by the results of
the 1-year bill auctions immediately preceding a financing.




- 5In early September 1966, following announcements that Federal borrowing from the public, including Agency borrowing, would be cut back and
sales of PC's would be postponed until the credit markets improved, the
Treasury embarked upon a new month-end cycle of 9-month bills to raise
part of its current cash needs.

At the same time the 1-year segment of

the monthly cycle was reduced slightly.

Including the strip of three

9-month bills offered last November, only 2 monthly issues remained by
the end of the year, to complete the 9-month cycle.
Chart 1




GROWTH OF REGULARLY ISSUED TREASURY BILLS

^Includes $1.2 billion strip of 4, 5, and
6-month bills issued in November.
tIncludes $.4 billion dated Dec. 31, 1966,
delivered Jan. 3, 1967.

- 6Chart 1 shows the composition of outstanding bills by original term
to maturity.

In early December 1958 just before the inception of the 6-

month bill, regularly issued 3-month bills totaled $23.4 billion.

By

the end of 1966 the regular weekly and monthly bills outstanding amounted
to $57.8 billion—an increase of $34.4 billion.

Of the $57.8 billion

total, $16.9 billion or 29% were originally issued as 3-month bills, $26.0
billion or 45% were 6-month bills, and the combined 9-month and 1-year
bills were $14.8 billion or 26%.

By and large the 2-1/2 fold expansion of regularly issued bills occurred without straining the absorptive capacity of the market and the
added choices of maturities played a significant role in the orderly distribution of the expanded volume.

Discount Issuance of Coupon Securities

In 1958 the Treasury actively explored the question of issuing
coupon securities at a discount.

At that time the General Counsel of the

Treasury held that public debt legislation enacted soon after U.S. entry
into World War II overrode an earlier provision against offering a security
at less than par.

Also in 1958 the Attorney General rendered an opinion

in concurrence with the Treasury General Counsel which stated that it was
clearly the intent of Congress to give the Secretary greater flexibility
in the issuance of Treasury obligations.

Accordingly, the Treasury began

to offer coupon issues at a discount late in 1958.




Although reasonably

- 7certain that such issuance was legally possible, the Treasury did not exercise the option until 1958, mainly because it was felt that below par
offerings would not be favorably received by the market.

The principal advantage of discounting coupon issues is that it enables the Treasury to "fine tune" the yields on its offerings to make them
more attractive.

Pricing equally close could, of course, be accomplished

by providing the next higher coupon rate at a premium.
on a number of occasions over the years.

This has been done

In practice, however, it was

found that investors were generally loath to pay over par for a closely
priced offering in a somewhat cautious market environment.

One advantage to the investor of offering issues below par is that
the discount can usually be treated as a capital gain if the issue is held
to maturity.

Moreover, the discount price can be treated as the cost basis

for determining a gain (or loss) if the issue is sold before maturity.
This is of no advantage to nontaxable investors and is not a very important
advantage to taxable holders ordinarily, because there are definite limits
to the allowable amount of discount at original issue, which would be permitted capital gain treatment.

Section 1232 of the 1954 Internal Revenue

Code spells out this limitation.

Under Section 1232 "If the original issue discount is less than 1/4
of 1% of the redemption price at maturity, multiplied by the number of
complete years to maturity, then the issue discount shall be considered to
be zero.11




- 8However, if the discount at original issue is

l/47o

or more of the maturity

value for each full year to maturity the discount is treated as ordinary
income.
of

9 9 . 5 0 ,

For example, if a 2-year note held to maturity is issued at a price
the

. 5 0

discount would be treated as ordinary income for tax pur-

poses, but at a price of, say,

9 9 . 5 1 ,

the

. 4 9

discount would be treated as

capital gain.
According to the tax code, under original issue discount (i.e. the 99.50
example above), any gain on subsequent sale--up to the prorata amount of the
discount based on how long the issue has been held—would be considered
ordinary income.

Suppose that in the first example above, where a 2-year note

was issued at 99.50, the original investor sells the note for 99.75 at the end
of one year.

The prorata part of the discount for the time he has held the

note is .25, or one-half of the issue discount.
it is ordinary income.

Since his gain is .25, all of

If the gain were less all of it would still be ordinary

income, but if it were more the excess over .25 would be a capital gain.

If

the second buyer then holds the note to maturity and redeems it at 100 (face
value), the prorata share of the discount for the second year would also be
.25, and the second investor's gain would also be all ordinary income.
The trouble with an original issue discount obligation is that, when it
is traded in the secondary market, the proration of the discount has to
continue to be taken into account.

For odd periods of holdings and at varying

purchase prices, this could create numerous problems.
In this connection, an
Treasury notes in 1964.

anomalous situation developed with an issue of

In the regular quarterly refunding of February in

that year, the anchor issue offered by the Treasury was an 18-month 3-7/8%




- 9note at a discount price of 99-7/8.

Since the discount was less than 1/4% of

the par redemption price at maturity, it was not considered original issue
discount for tax purposes.

In the following April, the Treasury reopened the

3-7/8% note to raise needed cash, but this time the price was 99.70 because
the market had softened.

The .30 discount in this case, however, was original

issue discount and therefore, in the market, the additional issue of 3-7/8's
was not truly identical to the February issue.

In order to differentiate be-

tween the two, the additional issue had to be stamped and during the remaining
term to maturity the market had to provide separate quotations for each part.
However, the right to issue certificates, notes, and bonds at a discount
has served the Treasury well.

Within the limitation precluding original

issue discount treatment for tax purposes, it was found desirable to issue
securities at a discount on many occasions.

In all since the practice was

introduced in 1958, discount issuances have totaled about $97 billion of
coupon obligations for cash or in exchange for maturing securities.
Cash Refunding
In the Fall of 1958 and throughout 1959 the Treasury also experienced a
rapid rise in the proportion of maturing issues which public holders turned
in for cash, instead of accepting attractively priced exchange offers.

This,

of course, is a natural consequence of a rising interest rate environment,
in which investors believe that alternative instruments are more remunerative
or that the offered issues may subsequently be obtained at lower cost in the
market.
In either case, the Treasury was faced with an increasing volume of
attrition at a time when, in addition to massive refunding requirements,




- 10 large amounts of new funds were needed.

To meet this development, the

Treasury announced in March 1960 that holders of succeeding maturities
would not necessarily have the pre-emptive right to an exchange offer.
Instead, the Treasury at its discretion would pay off maturing issues with
funds obtained by offering an approximately similar amount of new securities
for cash subscription.
One of the problems which arose from the use of the cash refunding
technique was related to the roll over of maturing issues held by official
accounts.

In a rights refunding when a coupon issue matures, the Federal

Reserve and the Government Investment Accounts generally roll over their
holdings into the new securities offered, while other investors subscribe
for as many of the new issues as they wish.

In the case of new cash

financings the Federal Reserve does not participate at all while the Government Accounts have usually been allotted a predetermined amount in full,
generally $100 million or less.

All other investors are subject to percentage

allotment except for minor amounts to small subscribers allotted in full.

In

the case of cash refundings the Treasury had to find a way to accord the same
treatment to the holdings of the Federal Reserve and Treasury Accounts as in
rights refundings; otherwise their subscriptions would be subject to percentage allotment as would those of all other subscribers.

In that event, the

Federal Reserve and Treasury (for the Government Investment Accounts) would
have to guess the correct percentage allotment, or else these official
investors would acquire either more or less of the new securities than their
holdings of the maturing issues.

In either case, mainly with respect to the

Federal Reserve's allotment, there would be an unwanted effect on the money




- 11 market of unpredictable extent:

toward ease if more were acquired than held,

or toward restraint if less were acquired.

The problem was resolved first by allowing all investors to turn in
their maturing securities to pay for the new issues, and second by including
in one category all official-type holders whose subscriptions would be
allotted in full.

These accounts, as listed in the first cash refinancing

announcement of the August 1960 maturities, include:

States, political

subdivisions or instrumentalities thereof, public pension and retirement and
other public funds, Government Investment Accounts, the Federal Reserve
Banks, international organizations in which the United States holds membership, foreign central banks, and foreign states.

Beginning with the November 1963 cash refunding, the Treasury announced
that subscribers entitled to full allotment would be required to certify
that the amounts of their subscriptions do not exceed the amounts of their
holdings of eligible securities immediately prior to the announcement.

The

stipulation is intended to prevent any of the listed holders from buying up
the eligible issues after the announcement

to acquire a larger amount of an

attractively priced offering, possibly for speculative purposes.

Other factors in cash refundings, as in offerings for new cash, such
as maximum allowable subscriptions, cash deposits, allotment ratios, and
minimum allotments have been varied to suit particular conditions.

The cash refinancing procedure has a number of advantages over rights
refundings.




In a cash operation the Treasury determines how much of one or

more issues it wants to offer.

Thus, the technique offers flexibility

in

that additional cash can be raised by offering more than the total amount
maturing, or if attrition is desired, the exact extent of it can be predetermined.

By the same token, unwanted attrition, which may occur in a

rights refunding, can be avoided.

In addition, with more flexible control

over subscriptions and allotments, excessive speculative activity can be
more easily held within bounds.

There are two principal advantages of rights over cash refundings.
First, an investor knows exactly how much of a new issue he will be allotted in a rights operation.

This is preferred by the relatively smaller,

less sophisticated investor who would have to guess the allotment ratio in
a cash refunding and pad his subscription accordingly.

If the guesses on

allotment ratios are too small, investors may end up with much more of the
new securities than they wanted.

Hence, smaller banks and other institu-

tional investors are ordinarily more inclined to participate in rights
refundings than in cash operations.

The second basic advantage of rights is that the market rather than
the Treasury determines the amount taken of each issue when two or more
options are provided.

When the Treasury sets the amounts of each issue

offered in a cash refunding there is some tendency to limit the size of the
longer option for fear that it will not be adequately covered.

For that

reason longer options may be made arbitrarily small, or may be eliminated
entirely.




Thus, rights refundings tend to maximize debt extension.

- 13 The Treasury has made extensive use of the cash refunding technique.
Since its inception in August 1960 through last November, there have been
26 quarterly refinancings.

Of these, 10 were cash operations.

Advance Refunding
In early 1959 when the rapid economic expansion which started in the
Spring of 1958 was in full swing, the Treasury became increasingly convinced
that alternative methods of debt extension to bring about a better balance
in the maturity structure of the marketable debt would have to be explored.
Strenuous and fairly successful efforts had been made to lengthen the debt
in the period between September 1957 and January 1959, but the inexorable
passage of time rendered the success quite temporary.

In the ensuing period

of rapid upturn in market rates of interest, the normal methods of debt extension through cash offerings or refundings at maturity were strongly felt
to be costly and inadequate if, indeed, they were possible at all.

In the normal course of events, as longer-term issues shortened, they
gravitated into the hands of intermediate and short-term holders, mainly
commercial banks and corporations.

Finally, when the issues matured, short-

term holders were not inclined to accept long-term bonds in exchange; thus in
rights refundings--the usual type of operation up to that time--a reverse
transfer of maturing issues to long-term investors became necessary.

Except

in a period of falling interest rates, there was little chance for substantial amounts of long-term offerings to be taken.

The method hit upon as prom-

ising truly significant amounts of debt extension, with a minimum impact
on prevailing longer-term rates, was advance refunding.




In an advance

- 14 refunding the Treasury offers holders of existing issues, which are not
due to mature for some time, the opportunity to exchange their holdings
for longer issues.

In the summer of 1959, legislation was introduced to modify the tax
code sufficiently to ease and simplify advance refunding operations for
many investors who would otherwise be unwilling to exchange.

The legis-

lation provided for nontaxable exchanges in advance refundings, when so
stipulated by the Secretary of the Treasury.

Accordingly, in most cases

investors could carry over the cost basis of their issues eligible for exchange, to the new issues offered.

Generally Federal and State supervisory

authorities followed the Treasury's lead in allowing such accounting treatment and under the provision many institutional investors, including those
not subject to tax, could take advantage of the exchange offer without
having to show a substantial book loss on the old issues being replaced.
In essence, the nontaxable exchange provision postponed any gain (or loss)
effect until the new securities were subsequently sold or redeemed.

Another impediment to successful advance refunding operations was
removed by the new legislation.

It provided that the issue price of the

old security would become the issue price of the new, which precluded
treating the new issue as having been offered at an original issue discount for tax purposes.

In many cases, without the new provision any

subsequent profit on the sale of the new securities would have been converted from a capital gain into ordinary income.




- 15 After the groundwork had been completed, the Treasury tried a pilot
advance refunding in June 1960.

The operation was considered a success

and led to the full scale advance refunding of October 1960.

At that time

the Treasury issued a "white paper", Debt Management and Advance Refunding,
in which basic concepts were discussed.

It indicated that "Senior" advance

refundings, such as the 1960 operation, should involve outstanding issues
maturing between 5 and 12 years whose holders would be offered long-term
bonds of 15 years and over.

"Junior" advance refundings, such as the June

1960 operation, would involve outstanding issues maturing between 1 and 5
years whose holders would be offered medium-term issues in the 5 to 10-year
maturity range.

Thus, the longer outstanding issues in a senior refunding

would be replaced by the new issues offered in a junior refunding, leaving
the 1 to 5-year area open to regular refundings of maturing issues and
cash offerings.

It was felt that in this leapfrog

process the ownership

pattern of the outstanding issues would remain relatively undisturbed, market
churning would be reduced, and the upward pressure on longer-term interest
rates would be much smaller than with conventional refundings at maturity.
In addition, since advance refundings are not subject to any
predetermined schedule, the Treasury can choose the most opportune time
for such operations in relation to the market environment and to other
debt management objectives.

Moreover, unlike refunding at maturity,

attrition is no problem because there is no expectation that nearly all
of the publicly held portion of an eligible issue will be exchanged and
no cash pay off of the remainder is involved.

Thus, the Treasury runs

little risk and any appreciable amount extended not only improves the




- 16 debt structure but also reduces the refunding burden when the issue finally
matures.

While the precepts regarding the leapfrog principle generally continued
to be observed, the role of advance refunding was gradually expanded beginning in 1962.
one operation.

First, junior and senior type offerings were included within
Second, the mechanics of advance refunding were applied to

outstanding issues maturing within 1 year, with the objective of reducing
large concentrations of early maturities to facilitate regular refinancing
when they finally came due, and later such short-term issues were included
with junior advance refundings.

Third, outstanding issues maturing in 5

years or less were made eligible for exchange into long-term issues.

And

fourth, the scope of advance refundings was greatly enlarged in terms of
the number of eligible issues in one operation and the amounts of these
issues in public hands.

Advance refunding into long-term issues was effectively prohibited
when market yields rose above the 4-1/4% interest limitation on bonds in
the Fall of 1965.

Since then the technique has been combined with regular

refundings and has been limited to the advance refunding of issues maturing
within 6 months into notes coming due within 5 years.

Even a brief history of advance refunding would be incomplete without
including a description of its evolution into a formidable debt restructuring tool through conceptual changes and the development of subsidiary
techniques.




- 17 At first the choice of outstanding and offered issues was limited,
by and large, to those which could be accommodated on a straight par for
par basis.

It was felt by some that any adjustment payments to, or by, the

subscriber would complicate the operation beyond the chance of success.
However, such adjustment (or "boot") payments were successfully introduced
in the third advance refunding.

Thereafter, boot payments made possible a

much wider choice of eligible and offered issues and, in fact, led to advance refundings in which as many as nine eligible issues were exchangeable
for any of three offered issues.
By the time of the March 1962 advance refunding, Congressional questions
and criticisms against the new technique led to hearings before the Senate
Finance Committee on March 14 and 16.

Criticism centered particularly on the

senior refundings in which World War II tap 2-l/2fs had been replaced by
the Treasury with long-term 3-1/2% bonds.

The apparent increase in cost to

the maturity date of the old issues was considered too great to be offset by
the subsequent likely saving in interest.

On the other hand, there seemed

little or no opposition to junior refundings since the eligible issues
would have had to be refunded relatively soon anyway.

No truly senior

advance refunding has been attempted since 1962.
Another development resulted from the advance refunding of under
1-year maturities.




Making the offered issues attractive in some cases

- 18 -

produced substantial "rights" values for the eligible issues.

Holders of

"rights" unwilling to exchange were thus encouraged to sell in the market
and to invest the proceeds temporarily in bills.

This had the effect of

depressing bill yields „when the Treasury was actively seeking to increase
such yields for balance of payments reasons.

After the first experience

the sale of additional bills at such a time or the announcement of intention to sell bills was effectively used to prevent any substantial bill
rate declines.

The prerefunding of near maturities and junior advance refundings had
other important aspects.

By removing large blocks of early maturities,

Chart 2




-Includes $2.7 billion of special bills
maturing May 15, 1959.
^Includes $.4 billion of 9-month bills dated
Dec. 31, 1966, delivered Jan. 3, 1967.

- 19 room was made for expanding the volume of regular bills without an undue
increase in short-term debt maturing within 1 year.

As shown on Chart 2,

this procedure was effective in holding the under 1-year marketable debt
from 1958 through 1965 to an increase of $21 billion.

The volume of cou-

pon issues declined from $43 billion to $33-1/2 billion in that time,
while regular bills grew by about $30 billion.

The sharp curtailment of advance refunding following the January 1965
operation was chiefly responsible for the rapid buildup of under 1-year
debt during 1966.

In addition to making room for bills, advance refunding

greatly reduced amounts of short-term issues in public hands by breaking
up large concentrations of early maturities.
by Chart 3.




This is clearly illustrated

From the second half of 1961 through 1966 the volume of

Chart 3

PUBLICLY HELD TREASURY ISSUE MATURITIES!
Effect of Advance Refundings

Ii.
Bl
Semiannually, Beginning July I960

20k

^

Advance
Refunded

20
1
7
4

1
5

1'%
4/

1*
34

Actually
MaturingV^

1
3
l'f
l/e
10

10
14
10

6f
/c
5'4

1
6
4

1
2
ef
lc

960

B2"

64
163
Colendor Y a s
er

5*
'
65"

*Excluding regular weekly and 1-year bills
and tax anticipation issues.

66-

- 20 maturing issues held by the public was diminished by from $1 to $9 billion, or an average of $5-1/2 billion for each semiannual period.

By

1963, following the inception of prerefunding, in which issues maturing
within 1 year were made eligible for advance refunding, the regular
refunding burden was sharply reduced.

By 1964 the publicly held amounts

to be rolled over each half-year had declined to some $5 to $7 billion.
Having these smaller amounts greatly facilitated the quarterly refunding
operations and, indeed, in some cases, made cash refundings easily successful when, otherwise, they might have been risky, if not impossible
altogether.

Moreover, the actual amounts by which early maturities

were reduced, understate considerably the true contribution of advance
refunding to easier regular refunding.

Without such reductions, most

of the much larger original maturities, of necessity, would have been
rolled over into short-term issues requiring refunding again after a
year or two.

In some cases so much of an eligible issue was extended through
advance refunding that the publicly held portion appeared too small
for more than one option in the regular refunding at maturity.

It was

felt in such cases that if the resulting longer issue was too tiny, its
market characteristics would be impaired.

While this, of course, was

true, it is clear that advance refunding in doing a good job of debt
extension had, in effect, already provided additional longer options.




- 21 Chart 4

.STRUCTURE OF THE OVER 1-YEAR MARKETABLE.
DEBT SINCE 1959
•Bit

80

I i . 5 to 20 Year Maturities
Bl

I to 5 Year Maturities
Issued in Regular
Financing
Issued in Advance
70,8
/^fundings

\

60

40

36.4
3.
19
: . I IO
24 J

64.0
606

1.
76

5.
95

17.9

20

22.0

23.7
1 . .53%
94

386

76
.

61.6

33.2
49.3

2.
77

no
.

1959

>

BO

64
0

e

c

—

165

11
7

1.
69

1.
23

123 72%

20 Years and Over
20

1.
34

IJ
00

23.8

20
1.
29

1.
16

1.
08
=.=
14
53
.

40

70
.

1.
75

28.5

2 . .39%
31

8.2

1.
29

195

" M

1.
26

"66

81
.
1

72
.

1959

.
5

60

B4

f f

65

=37
9=

66

Dec.-

The part played by advance refunding in restructuring the over 1-year
marketable debt is amply demononstrated on Chart 4.

By the end of 1959 the

most vulnerable segment of intermediate and long-term debt, the 1 to 5-year
maturities, had increased to $61-1/2 billion.

This portion of the debt

poses the constant threat of spilling down into the under 1-year category.
When the Treasury is foreclosed by the 4-1/4% bond limitation from extending
beyond 5 years, this sensitive area of the maturity structure is likely to
grow.

By December 1960, 1 to 5-year debt grew to nearly $71 billion from

$40 billion 5 years earlier.

The $9 billion growth in 1960 occurred

partly as a result of the pilot advance refunding in June that year, while




- 22 the big October senior refunding had no effect in that maturity area.

Thereafter, however, advance refunding played a very significant role
in increasing longer maturities.

As late as December 1966, advance re-

funding had accounted for 72% of the $17 billion in 20-year or longer
bonds outstanding, and for 53% of the diminished 5 to 20-year maturities.
Even in the 1-5 year area 39% of outstanding issues had originated in
advance refundings.

In summary, the importance of advance refunding in improving the
structure of the marketable debt can scarcely be exaggerated.

From June

1960 through January 1965 nearly $68 billion of securities was extended
into longer-term issues in 11 operations--an average of $6.2 billion per
operation, of which $5.7 billion was publicly held.
refundings gradually increased during the period.

The scope of advance

By combining as much

as $26-1/2 and $22 billion of publicly held eligible issues in the July
19 64 and January 19 65 operations, the Treasury brought about the extension
of more than $18 billion of those securities.

Yet, despite these massive

doses of debt extension and the upward pressure of the continuing economic
expansion beginning in 1961, the impact on long-term interest rates was
modest.

Rates on long-term Governments rose only moderately and private

long-term rates very little, if at all.

Not until July 1965 following

the escalation of the war in Vietnam, did interest rates begin to rise
sharply.




- 23 Bond Auctions

In 1962 the Treasury made arrangements and set forth rules for selling
entire issues of long-term bonds through competitive bidding to underwriting
groups.

Immediately following each auction, the winning syndicate was to

reoffer the bonds to the investing public at a price determined by the underwriters.

The procedure, in essence, was similar to the normal method of

selling corporate and municipal bonds through competitive bidding.

In these long-term bond auctions, the Treasury expected there would be
at least 3 very large bidding groups, although under the rul&s, no acceptable group was prohibited from bidding.

Each of these syndicates included

some of the big primary Government security dealers and dealer banks, as
well as other dealers, brokers, and banks willing to be affiliated with the
major members of the group.

The basic idea behind the organization of these

large marketing groups was to spread the risk of handling a large issue and
to ensure as wide a distribution as possible of the bonds to the investing
public.

The first auction for $250 million bonds was held in January 1963.

In

its invitation to bid the Treasury announced that the bonds could carry
either a 4 or 4-1/8% coupon rate, would come due in 30 years, and would become callable after 25 years.

The winning syndicate bid a price of 99.85111

per $100 for the bonds as 4 f s of 1988-93 at an interest cost to the Treasury
of 4.008%, and the bonds were reoffered at par.




The reoffering was a success

- 24 in that the underwriters were able to dispose of the securities, terminate
price restrictions, and dissolve the selling group in two days.

The Treasury held the second auction in April 1963 for $300 million of
bonds.

The invitation to bid called for either 4's or 4-1/8fs of 1988-94,

and the winning bid was 100.55119 on a 4-1/8% coupon at an interest cost
of 4.093%.

The bonds were reoffered at 100.75 to yield 4.082%.

However,

this issue proved more difficult to sell than the first auction offering
and remained bound by syndicate restrictions for some time.

It so happened

that the chances for the second offering to achieve a quick sell-out were
substantially dampened by the announcement of an impending large telephone
issue on the day of the Treasury auction.

The interest cost to the Treasury on the auction bonds was probably
less than if they had been sold in regular financings.

The yield spread

on each of the auction issues was 8 basis points above prevailing Treasury
market rates as compared with an average spread of about 12 basis points
for regular Treasury offerings.

The new auction method of selling long-term bonds created a number of
problems.

First, the underwriting risk was great because the Government

bond market is extremely sensitive to economic and political news of all
kinds, both domestic and foreign.
much exposure.

Thus, the underwriters could not stand

Second, obtaining advance commitments from prospective

investors was likely to be difficult, particularly in a cautious market




- 25 environment.

Third, the Government bond market is so broad and one long-

term Treasury issue is so much like another, that market stability in the
maturity area of the new issue could not be successfully maintained by the
winning syndicate.

Stabilizing the market would be very difficult,

especially if the other market professionals were to sell the issue short.
And fourth, the attitude of the Federal Reserve in maintaining an "even
keel" during the auction and early reoffering period could not be expected
to continue indefinitely.

As a result of the problems involved, the long bond auction has not
been used since April 1963.

At the time, market circles held strongly

that the risks of competitive bidding for an entire issue of long-term
bonds were too great even if the amounts offered were limited to $300
million or less.

Participation Certificates
The sale of participation issues as a debt management tool originated
in 1953 mainly as part of a generalized program to hold down the Federal
debt subject to statutory limit, but the budgetary effect was also recognized.

The first PC's, the Commodity Credit Corporation certificates of

interest, were (and still are) short-term instruments of participation in
a pool of crop loans.

They have been taken mostly by commercial banks, are

subject to redemption on demand, and are guaranteed by the CCC.




For a number of years the CCC certificates of interest were the only

- 26 PC's offered by the Federal Government, except for a small RFC issue in
1954 which was liquidated 2 years later.

Ordinarily CCC PC's result when

crop loans are taken over by banks or other financial institutions, instead of being presented for payment by the Government.

In that way the

CCC PC's reduce expenditures for loans in addition to holding down the
debt.

In fuller explanation, the proceeds of PC sales have a two-fold fiscal
effect:

When deposited in the general fund balance, the proceeds diminish

the Treasury's refunding or new borrowing needs.

Thus, the public debt is

reduced or prevented from increasing as much as it would have without the
PC's.

The explanation of the effect on budget expenditures is more com-

plicated.

The money for most Federal credit programs is drawn from re-

volving funds set up under Congressional authorizations.

Drawings by the

agencies represent borrowings from the Treasury and as these agencies make
loans to the public, the funds used become budget expenditures.

The process

is reversed when loans are repaid by the public or are sold to private investors, or when PC's are issued.

As the repayments, or proceeds of out-

right sales or of PC's, are deposited in the Treasury's balance they become
negative budget expenditures, and at the same time agency indebtedness to
the Treasury is reduced.

It should also be stressed, however, that PC sales

represent some replenishment of loanable funds for the credit programs.

To stem the rising tide of private loans and mortgages held by the
Government, outright sales of financial assets had been actively pursued




- 27 under some programs.

However, these were nowhere near large enough to

affect the overall rapid growth of Federally financed credit to the public.
To study this and other related problems, the President appointed a Committee on Federal Credit programs, with the Secretary of the Treasury as
Chairman.

The Committee submitted its report in February 1963 and among

its many recommendations, the report strongly urged that private financing
should be substituted for public credit, whenever it was feasible to do
so.

In this regard the sale of participations in pools of Federal Agency

held loans and mortgages seemed to promise the speediest approach for implementing the Committee's recommendation.

Even before the Federal Credit Committee report, the Export-Import Bank
of Washington in 1962 began to issue certificates of participation against
a pool of selected foreign loans in its portfolio.

These certificates were

originally 10-year obligations (later 7-year) with semiannual level amortizations of principal to coincide roughly with the amortization schedules of
the loans in the pool.

The certificates were offered only to commercial

banks, mainly those with a substantial interest in foreign loans.

By the

terms of the offerings, the Eximbank PC's had limited negotiability, in that
the banks originally subscribing, could sell only sub-participations to
correspondent banks or other affiliated institutions.

To make up for this

lack of liquidity, the participations were made subject to redemption in
part or full at the option of the holder, or of Eximbank, beginning 2-1/2
years from issue date.




As a source of funds, additional issues of PC's were

- 28 sold by the Eximbank from time to time without appreciably changing the
basic terms of the instrument.

In pursuance of the Federal Credit Committee recommendation on an enlarged role for private credit, active consideration began to be given to
expanding the scope of participation offerings.

After intensive study,

legislation was introduced and enacted in September 1964 empowering the
FNMA to act as trustee for pooling Federal Agency held mortgages as the
backing for a new type of PC offering.

In effect, these PC's represented

the sale of the interest and principal payments on the mortgages.

Accord-

ingly, the PC's were arranged to mature serially to correspond with the
payments inflow.
outright sales:

In the mortgage field, PC's have distinct advantages over
they remove the risk of mortgage default; they eliminate

servicing costs; they attract investors otherwise not interested in mortgages directly.

The mortgages involved in the first PC offerings were from FNMA's
Management and Liquidation and Special Assistance portfolios and from the
portfolio of the VA.

FNMA sold the initial PC offering in November 1964,

as a $300 million, 10-year serial issue with $30 million maturing each year.

The marketing arrangement as originally set up has remained essentially
unchanged.

PC offerings are awarded by FNMA to one very large underwriting

syndicate, which in turn reoffers them to the investing public at prescribed
interest rates and prices.

The rate and price for each of the maturities

making up the issue is determined by negotiation between the syndicate and




- 29 FNMA, with Treasury concurrence.

This includes a scale of underwriting

charges or commissions for each of the serial maturities paid by FNMA.

Aside from rates and prices, the terms and conditions of the FNMA PC's
posed a number of market problems.

For example, some of the serial matu-

rities were unpopular and hard to sell; the amount of each serial maturity
was small, making dealer operations in the secondary market difficult and
risky; although negotiable, the PC's were all registered, requiring more
time for transfer and handling; and the guarantee by FNMA, though backed
by a letter from the Secretary regarding Treasury willingness to lend funds
to FNMA for servicing the PC's if necessary, was not considered by some to
be fully binding legally.

After the first few offerings, the receptivity of the market to FNMA
PC's declined in the rapidly rising interest rate environment following the
enlargement of the war in Southeast Asia.

During the same period the envi-

ronment for Eximbank offerings weakened as demand for bank credit increased
sharply.

Despite attempts to make the Exim-type PC's more attractive by

reducing the time when they could be redeemed by holders and by making them
eligible for Federal Reserve discount, the Eximbank found it increasingly
difficult to sell PC's at reasonable rates of interest.

Meanwhile, to further increase the role of private credit and in view
of the greater need for funds primarily as a result of the war, plans for
an expanded PC program went forward, culminating in the Participation Sales




- 30 Act of 1966, passed in May.

Under the statute the potential coverage of

credit programs subject to inclusion in participation pools was substantially enlarged.

To provide for Congressional control, the Act requires

Congressional approval through appropriations for any insufficiency of the
pools to the servicing of the PC's.

In addition, the legislation authorizes

the Treasury to coordinate the PC offerings with its debt management operations and to approve the direct sales of certain financial assets.

The

programs and Agencies listed in the Act are:
Direct loans of the Farmers Home Adminstration, Department of Agriculture, relating to farm operations, farm ownership, housing^and soil and water;
Loans for academic facilities by the Office of Education, Department
of Health, Education and Welfare;
Loans and mortgages held by the Department of Housing and Urban Development except those related to secondary market operations of FNMA;
Loans and mortgages held by the Veterans Administration;
Loans held by the Eximbank;
Loans held by the Small Business Administration.
According to the House Banking and Currency Committee report on the
participation sales bill, the level of all direct Federal loans outstanding
on June 30, 1966, was estimated at $33.3 billion, assuming all PC sales
contemplated in the January 1966 budget document were completed.

Of this

amount, however, only some $10 to $11 billion of financial assets are in
the programs listed in the Act.




of interest
During the second quarter of 1966, as market rates/generally increased,

- 31 yields on Federal Agency issues and PC's rose sharply relative to Treasury
market rates as private and public credit demands soared.

Federal Agencies

were faced with greatly increased demands from those unable to borrow from
banks and other sources.

In consequence, the agencies, particularly the

Home Loan Banks, FNMA, and the Farm Credit agencies, increased their market
borrowing.

Together with the expanded PC program called for by the budget

for fiscal 1967, these demands created a very depressed and unhealthy
atmosphere in the credit markets.

By late August the markets had become

so severely tightened that interest rates rose to the highest levels in
40 years or more.

In this situation the Administration acted vigorously to dispel apprehension and to ease pressures on the money and capital markets.

In addition

to other measures, the President, on September 9, 1966, requested the
curtailment of agency borrowing.

The next day the Secretary of the Treasury

announced that scheduled sales of PC's would be postponed until the credit
markets improved, and any new money for agency needs in excess of maturities
would be provided by the Government Investment Accounts.

As a result of official measures to relieve pressures, interest rates
dropped quickly and the tightness in the money and capital markets gradually eased.

Toward the end of the year, the environment was considered

appropriate for FNMA to announce the first offering of PC's following the
early September postponement.

Additional legislation providing Congres-

sional authorization to meet insufficiencies of interest from the loan
pools to service PC interest payments was enacted in September.




- 32 In the meantime, while market receptivity to the growing volume of
PC's was reaching a low ebb during the summer of 1966, meetings were held
among market participants, representatives of the Treasury, the Budget
Bureau, FNMA, and other interested Agencies, to discuss measures for improving the market characteristics of PC's.

Most of the suggestions made

by the market professionals were adopted for the FNMA PC's announced in
December.

These included:

The concentration of one offering into as few

as two or three separate maturities, instead of small annual serial maturities; Optional bearer or registered forms of the certificates; Denominational exchanges of coupon issues to be provided by the Federal Reserve
Banks of New York, Chicago, and San Francisco; Wire transfer facilities between these major money market centers; and an opinion by the Attorney General that PC's are full faith and credit instruments of the United States.
Beginning in 1962, sales of participation certificates through 1966
totaled about $5-3/4 billion.

Of this amount about $4 billion remained out-

standing on December 31, 1966, after redemptions, amortizations, and maturities.

The shift of these amounts from Federal to private credit has required

some degree of experimentation.

By and large, however, there is reason to

think that through adequate coordination with Treasury debt management and
Federal Agency borrowing operations, PC's can play a useful and beneficial
fiscal role.
The history of debt management innovations would be incomplete without
mentioning developments in the area of nonmarketable Treasury securities.
Although such issues do not have a direct impact on the market, they have
important effects in changing the supply of marketable issues and in carrying out broad debt management and national economic policy objectives.




- 33 Savings Bonds

By the Spring of 1959, the Savings Bond program was faltering and in
evident trouble.

Sales of E and H bonds had declined from $5.3 billion in

fiscal 1956 to $4.5 billion in 1959, and the net cash drain, the excess of
redemptions over sales, reached more than $.6 billion in the latter year.

Twice before, in 1952 and again in 1957, the Treasury had raised
savings bond rates by small fractions of 1%:

first, from 2.9 to 3% to

maturity in May 1952 and then from 3 to 3-1/4% in February 1957.

As rate

competition for savings sharpened, the 3-1/4% became clearly inadequate.
Accordingly, the Treasury requested legislation permitting the rate to
maturity on savings bonds to be increased to 3-3/4% beginning in June 1959.
The enacted legislation raised the maximum allowable savings bond rate to
4-1/4%, provided the President found that the increase would be in the
national interest.

At the same time, the Treasury also asked for and was granted statutory permission to raise future earning rates on all outstanding E and H
bonds.

Under this innovation, earning rates for the remaining period to

next maturity were increased generally by 1/2 of 1%, the same increase as
provided on new E and H bonds to maturity.

The higher rates on outstanding

bonds eliminated any incentive to switch out of old bonds into new ones and
greatly reduced incentives to move out of savings bonds altogether.

In

asking the Congress for permission to raise earning rates on outstanding
bonds the Treasury also felt that it has something of a trusteeship function




- 34 on behalf of millions of individual savers who do not follow interest rate
trends closely, and that on the grounds of equity these holders were entitled to the increased earning rates.

The new rates worked quite well in bringing a turn-around in the
program and between June 1959 and June 1965 the value of outstanding E and
H bonds increased by over $6 billion.

During this period, the relative

stability of long-term interest rates was a strong factor in sustaining
the performance of the program.

In the Fall of 1965 as competition for savings intensified, E and H
bond sales were again flagging and redemptions rising.

In consequence, the

Treasury asked the President to raise the maturity rate on new bonds from
3.75 to 4.15% and increased the earning rates on outstanding bonds to next
maturity by .4%.

Despite the extreme intensification of the competition

for savings in 1966, the E and H bond program performed remarkably
well after the announcement of the improvement in savings bond rates in
February 1966.

In the 10 months to the end of the year after February,

the amount of E and H savings bonds outstanding grew by nearly $1.0
billion to $50.2 billion, for a total increase of $7-1/2 billion in the
7-1/2 years from mid-1959 to December 1966, for an average growth rate of
$1 billion per year.

Coincidentally, the average rate of growth in E and H bonds outstanding during the past 20 years, although anything but constant, was also $1
billion a year, or a total of about $20 billion.




This is $20 billion the

- 35 Treasury did not have to raise in the market, making possible an $8-1/2
billion decrease in all other publicly held Federal debt during that
period instead of an $11-1/2 billion increase.

Foreign and Foreign Currency Series Securities

Foreign Series:

Nonmarketable securities issued to foreign central

banks and governments, payable in dollars, were introduced in August 1961
under the authority of the Second Liberty Bond Act.

These issues include

certificates, generally 3 months to maturity; 1 to 5-year notes; and bonds
which in practice have had maturities between 1 and 7 years.

Most foreign

series securities have been issued for special purposes.

In general, the foreign series certificates were made redeemable in
whole or part at the option of the holder on 2 days' notice, and longer
issues were usually made convertible into 3-month certificates.

In special

cases certain over 1-year maturities have been redeemable at the option of
the U.S. while others, by prior agreement, were made subject to redemption
before maturity.

In all cases payments on early redemption are at par.

The principal purposes of the foreign series securities have been:

to

insulate certain large transactions from having a major impact on the U.S.
Government securities markets; to provide issues which are not subject to
market risk; to furnish longer-term investment media for facilitating certain types of bilateral financial arrangements; to finance currency swap
agreements; and to induce long-term capital inflows which improve the U.S.
balance of payments position.




- 36 Although not all of these purposes are common to all transactions,
they are interrelated.

For example, in a swap transaction, West German

marks may be obtained by the U.S. in exchange for dollars.

Instead of

using the dollars to buy a large block of marketable issues, the German
central bank might invest in nonmarketable foreign series 3-month certificates at the going rate on 3-month bills.

The Deutschemarks received in

exchange by the U.S. would thus increase foreign exchange reserves for
payments purposes or for protecting the position of the dollar.

The nonmarketable foreign bonds issued in 1964 to Canada in connection
with the Columbia River project and treaty provide an example of the use of
longer-term foreign series securities for bilateral financial arrangements.
The agreement called for project funds to be raised in the U.S. and accordingly $254 million was turned over to the Canadian Government, which then
transferred $204 million in Canadian dollars to the British Columbia
Government to pay for construction costs.

$50 million of the $254 million

U.S. dollars was used to pay off U.S. commercial bank loans to British
Columbia.

The remaining $204 million U.S. dollars was invested by the

Canadian Government in nonmarketable U.S. foreign series nonconvertible
bonds, to prevent the transaction from having an immediate balance of payments impact.

The bonds were arranged to mature serially in equal amounts

over 7 years and as the bonds are paid off, the U.S. dollars received are
added to Canadian foreign exchange reserves.

The outstanding amount of foreign series issues grew to a peak of
nearly $1.2 billion in November 1965.




Since then, they declined to about

- 37 $600 million by the end of 1966.

Of this amount, nearly $330 million wds

in over 1-year convertible issues which do not enter into the U.S. international payments deficits on the "liquidity balance11 basis.

Foreign currency series : In October 1961 the Treasury began to sell
nonmarketable securities payable in foreign currencies to official foreign
entities.

Like the nonmarketable foreign issues payable in U.S. dollars,

the authority to provide these securities stems from the Second Liberty Bond
Act.

The use of such issues originated during World War I when Treasury

certificates of indebtedness denominated in Spanish currency were given in
payment for war material purchased in that country.

Originally, foreign currency series securities could be either certificates of indebtedness with maturities of 1 year or less, or bonds not
limited in any way as to the term to maturity.

Issuing foreign currency

bonds gave the Treasury full leeway to provide maturities upwards of 1 year
as long as the interest rates paid

remained under 4-1/4%.

Since the rates

on foreign currency issues have generally been determined by market yields
on Treasury issues of comparable maturity, the statutory 4-1/4% interest
limit effectively foreclosed the issuance of bonds when market rates rose
above that level.

Accordingly, the Treasury requested legislation, which

was passed in November 1966, to permit also the issuance of foreign currency
series notes having original maturities of 1 to 5 years.

Most foreign currency certificates have had an original maturity of 3
months, usually subject to redemption on 2 days1 notice.




The longer issues

- 38 have generally had original maturities of 15 to 24 months and most were m&de
convertible into 3-month certificates, or redeemable, usually at the option
of the holder.

Others were made payable before maturity according to prior

agreement or were callable by the U.S. Treasury.

In all cases of early re-

demption, payments are at par.

The basic purposes of the new foreign currency issues were to provide
a supply of foreign exchange for conducting operations to defend the U.S.
dollar, to help cushion demands on the U.S. gold stock by adding a new investment medium for foreign central banks and governments, and to assist
in meeting U.S. balance of payments deficits.

In addition, the foreign

currency securities have proved to be a useful device for temporarily augmenting international liquidity.

The more immediate developments leading to the introduction of foreign
currency issues started in 1959, after a number of major countries had
moved to currency convertibility.

This greatly increased the potential for

large scale flows of funds from the U.S. to foreign markets seeking higher
rates of return.

In turn, such movements could create exchange rate diffi-

culties and produce an adverse impact on the balance of payments.

As the U.S. continued to sustain balance of payments deficits, foreign
official efforts to stabilize exchange rates produced a flow of dollars into
the hands of central banks in countries with favorable payments balances.
Most of these dollars were invested at interest in short-term marketable
issues to satisfy liquidity needs.




Although these investments represented

- 39 a reduction in potential drain of U.S. gold, they did not fully meet other
needs.

The foreign currency series securities not only furnish another investment alternative, thus helping to reduce the demand for U.S. gold, they also
directly provide the U.S. with foreign currency needed to protect the dollar
against speculation and to meet day to day requirements arising from trade,
tourism, foreign aid, military commitments abroad, etc.
currency is bought with dollars.

Ordinarily foreign

But in a situation of sustained balance of

payments deficits, the purchase of foreign exchange with dollars would only
increase the amount of dollars in foreign hands.

The technique of borrowing

foreign currency avoids the build up of foreign dollar holdings.

In addition to providing foreign exchange, foreign currency issues maturing beyond 1 year count as long-term investments, which bring U.S. international accounts into closer balance on the generally accepted "liquidity
balance of payments" basis when nonconvertible bonds or notes, which cannot
be optionally exchanged for certificates or redeemed before 1 year are
issued.

For the most part, aside from being liquid earning assets to central
banks and governments, issues payable in foreign currencies are riskless in
that they protect the lender against exchange risk.

Up to the present time foreign currency issues have been denominated
in Austrian schillings, Belgian francs, German marks, Italian lire, and




- 40 Swiss francs.

The volume of foreign currency series outstanding rose to-

a peak of $1.3 billion in September 1965 but by the end of 1966 the amount
had declined to $860 million.

Of this amount about $750 million is subject

to redemption or conversion at the option of the holder.




- 41 Market Impact and Analysis of Major New Techniques*

Innovations in the Treasury Bill Area
By the end of calendar 1966, regularly offered Treasury bills (excluding the seasonal tax anticipation series) had risen to nearly 2-1/2
times the amount outstanding at the beginning of December 1958, from
$23-1/2 billion to $57-3/4 billion.

This $34-1/4 billion rise is by far

the largest growth in any category of the public debt over the same period
and represents more than 70% of the increase in the total public debt.
The increase in the volume of Treasury bills since 1958 has taken place
during two expansions of the economy and one recession.

By and large it

has occurred without undue strains on the money market excepting early in
1960 and more recently, last September, at the crests of the interest rate
cycle.

To a considerable degree the successful expansion program is the

result of careful use of the new techniques and innovations.

The 6-month bill:
ance immediately.

The 6-month bill did not achieve full market accept-

Originally the. new bills were offered in $400 million

amounts each week while offerings of 3-month bills were reduced from $1,800
to $1,600 million.

By June 1959, when the Treasury upped its offerings of

6-month bills to $500 million while the 3-month offerings had declined to
$1.0 to $1.2 billion, average discount rates on new 3 and 6-month bills had
moved up sharply and the spread between them had climbed from an average of
about 25 basis points in the first few auctions to a high of 81 basis points.

*

Background tables and other material will be found in the appendix section.




- 42 In consequence, the $500 million 6-month bill cycle was not completed until
the second half of calendar I960.

By that time the peak of interest rates

had been passed and the economic recession was well under way.

(See Appen-

dix table 1 on 3 and 6-month bill auction rates.)

The low point in Treasury short-term borrowing rates was reached in
April 1961 with the average auction rate at 2.18% for 3 months and 2.30%
for 6 months.
was .64%.

By contrast, in the 1957-58 recession the 3-month bill low point

In the current economic expansion, short-term rates did not really

begin to rise until after the first bill strip offering in June 1961 and
after the supply of 6-month bills was increased to $600 million per week.

By the late Spring of 1961, the 6-month bill was achieving full market acceptance.

The coverage ratio, that is, the ratio of subscriptions

to allotments, was averaging nearly 220% as against about 180% for the
3-month bill.

This occurred despite the increase in the weekly offerings

of 6-month bills to $500 million while the 3-month offerings had been
gradually reduced from $1.8 billion before the introduction of the longer
bill, to mostly $1.1 billion in 1961.

During the period from the cyclical

high in rates in January 1960 to mid-1961, the spreads in average discount
rates between the two maturities had declined to about 15 basis points,
indicating a growing awareness of the greater gain potential in the longer
bills.

(Appendix table 3.)

Also during this period, bidding in the 6-month auctions became increasingly sophisticated.




From 1959 to mid-1961, the range in an auction

- 43 from the average of all successful bid prices to the stop-out, the lowest
accepted bid, narrowed significantly.

Expressed in terms of yields, the

range from the average bid rate to the stop-out rate declined from 4 basis
points to 1 basis point.

While the decline in average rate spreads between the 3 and 6-month
bills may well be attributed to expectations of greater gains on the
longer bills in a falling interest rate environment, the increased concentration of bids more clearly demonstrates market acceptance of the
6-month bill.

By the end of 1963, following the Federal Reserve discount rate increase from 3 to 3-1/2%, rates in the weekly auctions had also risen to
3-1/2% or more.

The increase in rates reflected the enlarged volume of

weekly offerings as the amounts of 3-month bills issued each week had
grown to $1.3 billion and 6-month bills to $.8 billion.

As a result of

a $1.0 billion bill strip in October 1963, which added $100 million to 10
weekly maturities in the 26-week cycle, the total volume of weekly bills
outstanding had increased to $38.5 billion, of which bills originally
6 months to maturity accounted for $21.8 billion or about 57%.
in the
Despite the growth/volume of the longer bills and the increases in
interest rate that had taken place between mid-1961 and December 1963,
the rate spreads in the auctions between the two maturities declined from
about 25 to 13 basis points.

At times the spreads reached as low as 3

and averaged 15 basis points during the period.




In corroboration of the

- 44 market's receptivity of the 6-month bill in a rising interest rate environment, the high concentration of bids around the auction averages
continued without significant change.

In 1964 offerings of 6-month bills were gradually increased to $1.0
billion per week by the Fall, while the 3-month bill was reduced from $1.3
billion to mostly $1.2 billion.

Rates in the auctions had moved close to

4% after the discount rate increase in November, but during 1964 average
spreads did not rise above 20 basis points and were usually considerably
less.

Subscription coverage on the longer of the two maturities had

slipped a little but was still close to 190% during the 4th quarter of
1964 as compared with about 175% on the 3-month.

The bids on 6-month

bills continued to be closely bunched around the average rate and the
yield range between the auction average and the stop-out was usually less
than 1 basis point.

By this time, also, dealer net positions in over 92-

day bills were running 2 to 3 times as large as in shorter bills.

It is

quite likely that with an upward sloping yield curve continuing in the
short-term area the market felt there was still a greater propensity for
gain in the longer bills.

Despite the escalation of the War in Vietnam in July 1965 the situation with respect to the usual measures of market receptivity did not
change appreciably.

During this period rates on 3 and 6-month bills gradu-

ally rose and were about 4-1/8 and 4-1/4% by early December before the
discount rate was increased to 4-1/2%.




- 45 Following the discount rate rise, bill rates again rose rapidly and
after a pause during the first half of 1966, jumped to the highest levels
in 40 years.

In the meantime, dealer net positions in bills dwindled in

response to expectations of higher rates in the short-term area and by June
1966 they were at the lowest points since such statistics became available
in I960.

Weekly offerings of 3-month bills had again increased to $1.3

billion but the spread between the two maturities gradually widened and
reached a high of 50 basis points in early September 1966, during the period
of extreme tightness that developed in the credit markets.

Two weeks later,

following vigorous action by the Administration to allay apprehensions and
relieve the pressure of Federal Agency borrowings and PC offerings, the
average levels in the auctions reached peaks of 5.59% on the 3-month bill
and 6.04% on the 6-month.

The jump in bill rates was touched off by the

realization that a part of the burden of Government financing and foregone
PC sales would have to be borne by the bill market.

Market hesitance in

the auctions was demonstrated by the widened range from the average rate to
the stop-out, which in the case of 6-month bills fluctuated sharply from 1
to more than 6 basis points in the 3rd quarter.

Oddly enough, however,

during this period the ratio of subscriptions to allotments on both the 3
and 6-month bills remained remarkably constant, hovering around 170% for
the 3-month bill and around 200% for the 6-month.

In the Fall of 1966, as tightness in the credit markets was gradually
eased, bill rates began to decline and with that, the spreads between average rates on 3 and 6-month bills in the weekly auctions dropped to less




- 46 than 10 basis points by the year end.

In further evidence of the return

to more normal conditions, the range of bids from the average to the stopout was reduced to less than a basis point in November and December.

At

the same time, dealer positions in bills maturing beyond 92 days rose
sharply, indicating again the greater gain potential on longer bills.

In summary, the market has adjusted extremely well to the increased
volume of 6-month bills.

In the process, the amount of weekly bills out-

standing grew from $23-1/2 billion in December 1958 at the start of
the 6-month bill cycle to nearly $43 billion at the end of 1966.
billion, 60% of the total, originated in 6-month bills.

$26

During the same

period the weekly offerings increased only from $1.8 billion to $2.3
billion.

The 1-year bill:

The 1959 offerings in the first quarterly cycle av-

eraged about 330 days to maturity, amounting to $2.0 billion per quarter.
Each offering was adequately covered by the subscriptions with an average
coverage ratio of 176%.

This is not surprising because payment through

tax and loan account credit was permitted.

The new bill cycle was expen-

sive by comparison with coupon issue rates in the market.

The 4.20% aver-

age bank discount rate in the auctions adjusted to a coupon equivalent
basis of 4.41% was 38 basis points more than comparable coupon issue yields.
And that did not include the value of the tax and loaji account credit created, which would have added an estimated 31 basis points to the spread.

It

should be recalled, however, that 1959 was a year of rapidly rising interest




- 47 rates, an environment not very conducive to the successful introduction,
of a new instrument.

(For detail on annual bills see Appendix table 4.)

On the first rollover of the 1-year bill cycle in January 1960 the
amount of the issue was cut back to $1.5 billion.

Despite this, the cost

of the January 15, 1960, 1-year bill (average discount rate) was 5.07%,
equivalent to a coupon yield of 5.36%.

This was the highest rate of in-

terest paid by the Treasury for any issue in the 1958-61 interest rate
cycle.

»

The next 1-year bill auction in April 1960, with $2.0 billion offered,
resulted in a coupon equivalent yield of 4.84% but produced a spread of
1.03% above the comparable 1-year coupon issue rate.

This was the largest

spread in the quarterly cycle, if the value of tax and loan account credit
in the first four auctions in 1959 is disregarded.

The apathetic bidding

in this auction is easily seen in the range of bids from the average to the
stop-out, a high for the 1-year bill cycle of 13 basis points in terms of
yield.

Thereafter, the amounts in the next 3 offerings were cut back to

$1.5 billion, but were restored to $2.0 billion through July 1962.

During

this period the coverage ratio picked up from an average of 148% in the
first two auctions of 1960 to 209% in the next three, but ranged from 173%
to 208% when offerings were increased to $2.0 billion.

Following the cut-

backs to $1.5 billion, the concentration of bids around the average returned
to more normal ranges.




For the remaining years of the quarterly cycle through July 1963, the

- 48 amount offered in 3 of the 4 quarters was raised to $2.5 billion while the
other quarter stayed at $2.0 billion.

Thus, by the time the monthly cycle

was introduced, the total amount of annual bills outstanding had risen to
$9.5 billion.

During this period the coverage ratio did not change signi-

ficantly on the average but other measures indicated improving market acceptance.

For the quarterly cycle as a whole;nonbank dealer awards ranged from
19 to 35% of total public allotments—excluding the offerings paid through
tax and loan account credit, which were awarded almost entirely to commercial banks.

The average of 25% for nonbank dealer awards to total allot-

ments for the quarterly bills compares with 21% on 3 and 6-month bills
during the same period.

This indicates a greater participation of sophis-

ticated bidders for the 1-year bills.

From July 1960 to July 1963 the average range of bids in the quarterly
auctions from the mid-point to the stop-out declined to about 1/2 of 1
basis point.

However, the coupon equivalent rate spreads fluctuated sharply,

ranging from 4 basis points less than 1-year coupon issue yields to 52 basis
points more.

The higher spreads generally coincided with efforts to raise

short-term rates to be more competitive with rates abroad.

The $1.0 billion per month cycle which began in August 1963 met a much
better market reception than the quarterly cycle.

The subscription coverage

averaged about 225% from the Fall of 1963 through the end of 1964.

While

this is not significant in viex* of the smaller amounts offered, other measures




- 49 of market acceptance clearly showed the preference for the monthly cycle.
Spreads above coupon issue rates narrowed significantly, averaging about 12
basis points through the middle of 1966 as compared with more than twice
that average spread for all of the issues in the quarterly cycle.

Moreover,

nonbank dealer awards as a percentage of total public allotments in the
monthly cycle through mid-1966 Increased to an average of 43% from 25% for
the quarterly offerings.

Under the extreme monetary tightness that developed in the Summer of
1966, the spread above comparable coupon issue yields rose to a high of 44
basis points in August and remained fairly high for the next 3 issues, following the introduction of the 9-month bill.

However, the range of bids

from the average to the stop-out rose to 10 basis points in June 1966 but
the range in other monthly auctions did not exceed 4 basis points.

In De-

cember the spread above coupon issue yields declined to normal levels once
again as market expectations improved in an environment clearly reflecting
moves toward further monetary ease.

In the second half of 1966, public al-

lotments dropped to 75% of total offerings and during this period, the percentage of nonbank dealer awards to public allotments in the August auction
fell to 23%, but picked up again when the credit markets began to improve.

In summary, as a monthly cycle the 1-year bill has performed quite well
in the market by any standard of measurement.

Because it is an auction

instrument, however, it tends to get relatively expensive in a tight money
market environment or when confidence in the going structure of interest




- 50 rates has been shaken.

The 9-month bill:

Its brief history starting in September 1966 pro-

vides only a short run opportunity for analysis.

Coverage ratios on the

four $500 million monthly offerings in 1966 averaged 217%.

However, only

83%, or $1.7 billion of the $2.0 billion total, was allotted to public
holders.

Of the $1.7 billion in public allotments 41% was awarded to non-

bank dealers.

In comparison, the simultaneous 1-year bill auctions pro-

duced an average coverage ratio of 210% for the four $900 million offerings.
In those auctions 79% or $2.8 billion was allotted to the public, of which
the dealers got 44%.

(See Appendix table 5.)

In the four 1966 9-month auctions, the range of successful bids from
the average to the stop-out was somewhat greater than for the annual bills.
The average range was nearly 3 basis points as against 2 basis points for
1-year bills, but the difference may easily be attributed to the newness of
the 9-month instrument.

In comparison with coupon issue yields in the market, the four 9-month
bills averaged 5.72% (coupon equivalent) for a spread of 26 basis points
above comparable coupon issues, while the annual bills auctioned at the
same time averaged 5.74%, about 27 basis points above 1-year coupon issue
yields.

Thus, the early performance of the 9-month bill was about on a par
with the annual bill by any of these standards of comparison, which implies
that the relative sizes of the amounts offered—$500 million per month of




- 51 the 9-month bill vs. $900 million of the 1-year—represented a good balance
between the two.

Bill strips:

Through 1966, 6 bill strips for $6.8 billion have been

issued since they were first offered in June 1961.

Included in that amount

is a $1.2 billion strip of 3 month-end bills issued last November as part
of the 9-month cycle.

(For bill strip detail see Appendix table 6.)

The first bill strip covered 18 maturities of $100 million each, with
terms ranging from 8 to 25 weeks, and was sold at an average bank discount
rate of 2.31% with payment through tax and loan account credit at an estimated value of 50 basis points.

Taking that into account, the spread above

the average of going rates on comparable bill maturities was 35 basis points.

In June 1961 when the first bill strip was offered, short-term rates
were declining and the strip had no significant effect in turning rates upward.

Subsequent strips of weekly bills, however, had substantial impacts

on the market.

For example, in November 1961 the 3-month bill rate rose

14 basis points between the bill strip announcement date and the day of
the auction, and rose another 17 basis points between the auction and the
payment date.

The degree of market impact is difficult to assess in each case because some of the strip offering effects were anticipated by the market
as an aftermath of pre- or junior advance refundings which tended to put
downward pressure on bill rates as rights were liquidated by holders not
interested in the advance refunding offer.




All of the strips were well covered, with subscriptions ranging from
190% to 259% of allotments.

Official accounts did not take part in the strip

offerings; all of the offerings were publicly allotted.

Awards to nonbank

dealers averaged 55% of total allotments for the 4 strips, for which payment
through tax and loan accounts was not permitted.

In the last 2 of these,

nonbank dealers accounted for 67% of total allotments, indicating that sophisticated bidders were getting an increasing share of bill strip awards.

Bill innovations in summary:

The increase to 2-1/2 times the amount of

regularly issued bills outstanding between November 1958 and December 1966,
beginning with the advent of the 6-month bill, was generally absorbed by the
market smoothly.

For the most part the increase occurred in an 8-year period

which included a very wide variation in market rates.

During the latest econ-

omic expansion beginning in 1961 the auction averages on 3 and 6-month bills
ranged from 2.2 and 2.3% at the 1961 low to 5.6 and 6.0% at the peak in September 1966, and the range on annual bills was almost as great.

About one-

half of the 3-1/4 to 3-3/4% rise in bill rates took place in the 9 months
after the discount rate increase in December 1965.

Even so, the bill market

operated with little strain until the period of sharp market tension in the
late summer of 1966.

After Administration action to dispel fears and relieve

some of the pressure of Agency borrowing and PC sales, the normal flow of
bills into and out of the market was quickly restored.

This occurred des-

pite some apparent increase in the impending burden on the bill market resulting from the reduced pressures of Government financing elsewhere on the
credit markets.




- 53 -

Chart 5

INCREASES IN REGULAR BILLS OUTSTANDING
November 1958 - December 1966

Nov. 1958Dec. 1962

Dec. 1962Dec. 1966

Nov. 1958Dec. 1962

Dec. 1962Dec. 1966

An important aspect of the 2-1/2 fold increase in regularly issued
bills should be pointed out.

In the 4 years or so from the end of November

1958 to December 1962, total regularly issued bills outstanding increased
by $21.8 billion.

Of that amount public investors absorbed $20.5 billion

or 94% of the total increase, while the Federal Reserve System and the
Government Investment Accounts picked up $1.3 billion, or about 6% of the
total.

In the next 4 years to December 1966, regular bills outstanding

grew by $12.5 billion.

But of that amount public holders acquired only

$2.7 billion or 22% while the official accounts absorbed $9.8 billion,
or 78%.




(For details see Appendix Table 7.)

- 54 In the first four years, a substantial part of the big rise in public
holdings came in 1959 when the brunt of deficit financing was largely
borne by the bill market in a tight monetary environment.

But a greater

part occurred in 1961 and 1962 when official action was directed toward
increasing the amount of liquidity in the economy in the early years of
the latest expansion.

During the second four years, the System again be-

gan to increase its bill holdings as the need for "operation twist" waned.
Also during this period, business corporations increasingly found other
short-term investments such as commercial bank CD's more profitable than
Treasury bills , and later in the period from mid-1965 through most of 1966
the banks found it desirable to reduce their bill holdings to meet the insatiable private demand for bank credit.

From 1964 on^the Federal Reserve

increasingly acquired bills in open market operations to replace gold
losses and build the reserves needed for the continuation of economic
expansion.

However, even during the period of rapid increase in the bill holdings
of official accounts, the commercial banks and the dealers continued to
act as the major "underwriters" for new bills.

The fact that the Federal

Reserve found it expedient to buy more bills than coupon issues in its open
market operations does not detract from the bill market's ability to undertake the distribution of the added supply.




- 55 Cash refunding
When the Treasury began in 1960 to refinance through cash subscriptions instead of rights exchanges in its quarterly refinancings, the
change in technique gave rise to a number of questions.

After some 6-1/2

years and ten quarterly cash refundings in which $71-1/2 billion worth of
new securities were issued, answers to a number of the questions are
reasonably clear.

Among these questions are the following:

Is cash refinancing a complete substitute for rights refundings?
Which does a better job of restructuring the debt?
Which is more expensive for the Treasury?
How do they compare with regard to the participation and activity
of the dealer market?

Here are some of the comparisons:
Of the $71-1/2 billion issued in quarterly cash refinancings through
1966, $35-1/2 billion was awarded to public subscribers (other than the
Federal Reserve and Government Investment Accounts).

During the same

period $141 billion of new securities were issued in 16 rights
refundings.JL^

Of these, public holders received $75 billion for

an average exchange of $4.7 billion.

In the cash refinancings

the average amount allotted to public subscribers was $3.5 billion, indicating the Treasury tended to use the exchange approach for the larger
operations.

1/




For details see Appendix Table 8.

- 56 In six of the ten cash operations only one shorter-term anchor issue
was offered.

In three others, two options were offered; and in one opera-

tion there were three options.
tions in the rights refundings.
were limited to one option.

The Treasury provided more extension opOf the 16 exchange operations, only two

In each of these cases public holdings of the

maturing issues were about $2-1/2 billion, which was considered too small
to warrant more than a single option.

Of the 14 remaining rights opera-

tions, 10 provided two options and four had three options.

The average length of the issues offered in rights exchanges was 28
months as against 22 months in the cash operations.

But this greatly under-

states the difference in the contribution of the two types of offerings to
debt extension.

Nearly $42-3/4 billion in securities other than anchor

options was issued in rights refundings while about $7-3/4 billion was
allotted in cash subscriptions.

The average length of these longer issues

in rights refundings was close to 60 months or nearly 5 years, and in
terms of debt extension equal to $42-3/4 billion times 5 years or $212
billion bond-years.

The average length in cash operations was 70 months,

but the effective debt extension was only $45 billion bond-years.

More-

over, of these longer issues the public allotment in rights was $35-1/2
billion as against $7-3/4 billion in cash operations.

Thus, rights re-

fundings were far more effective in extending the length of those holdings
which are not automatically rolled over at maturity.




- 57 One attribute of cash financings which has no counterpart in rights
refundings is the control of the Treasury to predetermine the amounts
offered, including additional cash or planned attrition.

About $3.1 bil-

lion of new money was raised in seven of the 10 cash refundings, while in
the first operation,

instead of raising new cash there was about $660

million of planned payoff.

In the other two cases, offerings just about

replaced the maturing amounts without attrition or additional cash.

The variation in the allotment ratios illustrates one of the chief
disadvantages of cash refinancings.
to total public subscriptions

The ratio of total public allotments

on the 15 individual issues offered in the

cash refundings ranged from 12 to 100%.

The 100% allotment was on a small

$365 million issue of long-term bonds in August 1962, of which $315 million was subscribed for and allotted to the public.

In November 1965, a

very cautious market environment produced an allotment ratio of 48% on a
single option 18-month note.

In this case many subscribers received much

more than they wanted of the total $3.2 billion awarded to the public,
which contributed to a very weak secondary market in the new issue.

Even

without those two cases, however, the variation in allotment ratios to
public investors was still quite large and ran from 12% to about 35%, with
an average ratio of 21%.

The cost of "underwriting spreads11 to the Treasury was slightly less on
cash than on rights refundings.

These are the spreads of offering rates

above market yields on comparable maturities to make the new issues more




- 58 attractive.

The average of such spreads was about 10-1/2 basis points in

the cash operations as against 11-1/4 basis points in the rights exchanges.
This was not due to the greater proportion of longer-term issues offered
in the rights refundings.

There has been no discernible pattern on the

spreads with respect to maturity.

However, the spreads on both kinds of

offerings declined substantially from early 1963 to late 1966.

The participation and activity of the dealer market in cash as against
rights refundings shows no clearcut differences.

Statistics on dealer ac-

tivity compiled by the Federal Reserve Bank of New York begin in 1961 and
include 9 of the 10 cash refinancings through 1966 and 13 of 16 rights operations during the same period.

Dealer activity varied widely in finan-

cings within each type of offering, but the averages were not far apart.
(See Appendix Tables 9 and 10,)

For example, awards to reporting dealers through cash subscriptions
ran from 6-1/2 to 20% of total allotments to the public for an average of
12-1/2%.

Issues to dealers in rights refundings ranged from 9 to 26-1/2%

of issues to the public and averaged 14-1/2%.

The small difference between

the two averages reflects the dealers1 willingness to participate about as
much in one type of operation as in the other.

Another comparison of activity is the maximum dealer net long position
in when-issued securities in a cash refinancing and the maximum position in
rights plus when-issued securities in a rights operation.




This indicates

- 59 the dealers1 degree of exposure to market risk in or immediately following
a financing.

Expressing the exposure in each financing as a percentage of

allotments, the range in the case of cash refundings was 6 to 22% for an
average of 11%, and on the rights approach the range was 7 to 20-1/2% of
total issues to the public with an 11-1/2% average.

Here the difference

in the two averages is negligible, indicating that the dealers were generally equally willing to take risks in either type of financing.
A third index of dealer activity is the volume of trading in whenissued securities during or immediately after a financing.

Data are

available for nearly all of- the refundings through the 7th day following
the announcement of terms.

Although trading in cash operations did not

start until after the subscription books closed, while in rights refundings
trading began immediately after the announcements, this difference in procedure
is not considered significant due to the high concentration of trading in
the first few days.

Trading in rights, mainly accumulations by dealers prior

to exchange, was excluded since that can be considered equivalent to dealer
awards in cash refinancings.

The volume of trading in each financing has

been related to the total amount of securities issued to the public, to
allow for differences in the size and in the number of refundings in the
two types of operations.
The average trading volume in cash refinancings ran from 14-1/2 to
43% but six out of the eight for which data are available ranged from 21
to 32-l/270.

The average was 26%.

In rights operations the range was

fairly well strung out from 13-1/2 to 31% and the average was 19-1/2%.




The

- 60 difference between the two averages is not large.

One possible explanation

stems from the circumstance that unsophisticated investors -- the smaller
banks, for example -- ordinarily prefer rights refundings to cash refinancings.
Guessing the probable percentage allotment in a cash operation requires a
high degree of money and capital market sophistication.
is often wrong.

Even expert appraisal

Rather than guess incorrectly and receive possibly much

more or possibly much less of the new securities than they wish to hold, many
investors may prefer to acquire the exact desired amount in the secondary
market.




- 61 Advance Refunding

Scope:

Between June 1960 and August 1966 the Treasury conducted 13

advance refunding operations.

In magnitude a total of about $286 billion

in outstanding issues was made eligible for exchange offers and of these,
about $204 billion was in public hands.

Slightly over $69 billion or more

than 1/3 of public holdings was exchanged JL^The scope of these operations
can be judged from the fact that the average of the marketable coupon debt
outstanding at each midyear during the 6-1/4 year period was about $154
billion, of which about $117 billion was publicly held.

Thus, the advance

refundings during the period represent offers to roll over some 1-3/4 times
the marketable debt in the publicfs hands, with the turn-ins amounting to
about 60%.
These advance refundings include a veritable multiplicity of offerings
with respect to rates and maturities of the eligible and offered issues.
In all, more than 65 outstanding issues and about 25 newly offered issues
were involved, with several of these eligible and offered issues used again
in succeeding operations.

The maturities of new issues offered in exchange

ran from a little less than 4 years to more than 38 years, while outstanding
eligible issue maturities ranged from less than a month to more than 10-3/4
years.

The percentages of public holdings of eligible issues exchanged

covered a range of 8.6 to 72.2%.
These advance refundings all occurred within the term of the last peak
to peak interest rate cycle which spanned a period from early January 1960
to late August 1966.
1/

The offering yields on the new issues ran from a low

Table 11 provides detailed information on each advance refunding and the
totals for 1960-1966.




- 62 of 3.63% in March 1961 to a high of 5.24% in August 1966, while the range
of eligible issue coupon rates went from 2-1/4 to 5%.

Performance factors;

With such wide variations in rates and terms,

some degree of segregation of these operations into more comparable groups
is necessary for analytical purposes.

Thus, for most analyses the advance

refundings have been grouped into three categories, two of which were described in the Advance Refunding "White Paper11 released prior to the full
scale advance refunding of October 1960.

The three categories are pre-,

junior, and senior advance refundings, based on the terms to maturity of
the eligible issues involved.

Prerefunding refers to eligible issues with

remaining terms to maturity of less than 1 year; junior advance refunding
refers to those maturing between 1 and 5 years; and senior advance refunding
to those longer than 5 years.

These are arbitrary distinctions, particu-

larly when it is found that 7 of the 18 junior refunding issues had remaining terms of 1 to 1-1/2 years, while the 32 prerefunding issues had
remaining terms ranging from 3/4 of a month to 9-3/4 months.

For the purposes of this paper, the measure of performance in advance
refundings has been based primarily on the percentage of publicly held issues exchanged.

In this regard, performance is complicated by the fact

that a number of the prerefunding and junior refunding issues were made
eligible in more than one advance refunding.

Moreover, some eligible is-

sues were reopened, that is, the outstanding amounts were added to, between
advance refundings.




- 63 Over all, about 34% of the issues publicly held which were made eligible
for advance refunding in 1960-1966 were exchanged, if the eligible issues
are all regarded as not having been previously included in an earlier advance
refunding.

If such double counting is eliminated the average percentage

exchanged would be about 46%A^For purposes of simplicity, however, and with
the extensive changes in ownership as maturities shorten, in the analyses
which follow, allowance is made for double counting only within category
groups.

For example, an eligible issue in £ junior refunding category (1 to

5-year maturity) which has been hit twice without having been added to in
the meantime, is either treated as one eligible issue merely having been
offered additional options or for some purposes the second hit will be disregarded.

However, a junior refunding issue which became eligible again in

the prerefunding category (under 1-year maturity) will be regarded as one
not subject to a previous advance refunding.

Account is also taken of addi-

tions to eligible issues between advance refundings.

In the case of senior

refundings none of the eligible issues involved (the World War II 2-1/2 f s)
was made eligible more than once.

As shown on Chart 6, prerefundings with nearly 45% of eligible public
holdings exchanged were the most successful category if account is taken
of the same issue having been involved in more than one advance refunding.
Junior refundings are the next most successful category with 37-1/2% exchanged and senior refundings are last with 32-1/2%.

This strongly implies

that the shorter the length of the eligible issue, the larger the percentage
that will be exchanged.
1/

As a broad generalization that is the case.

Based on figures in Appendix Table 11.




- 64 -

Chart 6
EXCHANGES OF PUBLICLY HELD ISSUES IN
ADVANCE REFUNDINGS 1960-66

X
Percent exchanged

Amounts involved

-

75.1

IS

~

W L ^
i

A
Amount
held
w

10

bo

m

>-40

-

Amount
exchanged
/A 4.1
' / / / ; // y

- 20

21 v';/ /

Pre, Junior,
under
1-5
1 yr.
yrs.

Senior,
over
5 yrs.

Pre,
under
1 yr.

Junior^
1-5
yrs,

Senior,
over
5 yrs.

_Term to maturity of eligible issues

However, other factors also have a bearing on performance in advance
refundings.
issue.

One such factor is the coupon rate of the eligible

In making this comparison, the total amount exchanged of all

issues in a coupon size was divided by the sum of the amounts of those issues in public hands before the refundings, providing a weighted average
percentage of each coupon size exchanged.
each individual issue was considered.

First, only the initial use of

Generally when an issue was made

eligible more than once it was closer to maturity, hence more apt to have




- 65 a higher turn-in rate based on the amount remaining in public hands.
Moreover, in prerefundings many investors assumed that when the issues
reached maturity, the refunding offer might include a short-term option
only or that the operation might be a cash refinancing with no right to
exchange.

Chart 7 shows the relationship of coupon size to the percentage exchanged.

The top tier of bars gives only a hint of any significant re-

lationship if all of the issues involved in the advance refundings are
lumped together.

But when they are divided into pre-, junior, and senior

operations, it is fairly apparent that a rough inverse correlation exists
between the size of the eligible issue coupon and the percentage exchanged.
The tendency is more evident in the qase of prerefundings than in junior
advance refundings 1/ while the senior refundings show no tendency because
only one coupon size was made eligible.

On the basis of preliminary studies, the correlations in the pre- and
junior refundings are not precise enough for truly predictive purposes.
Such studies of the results in advance refundings through July 1964 indi2
cate a coefficient of correlation squared (r ) of .565 in the case of

1/ The one issue clearly out of line in the junior refunding is the 3-7/8%
note of February 15, 1965, with 67% exchanged in the January 1965 advance
refunding. It was barely over 1-year to maturity at thie time and was held
largely by banks and corporations willing to turn them in for the rights
value involved. In addition, dealers were more satisfied to position them
until maturity since they carried the second highest coupon rate in the refunding, thus reducing their cost of carry. The issue carrying the highest
coupon rate, 4%, was not as readily available and relatively fewer rights
were turned in to the market.




- 66 :hart 7
SIZE OF ELIGIBLE ISSUE COUPONS IN ADVANCE REFUNDINGS
AND PERCENT OF PUBLIC HOLDINGS EXCHANGED
(First Offerings Only)
% exchanged
Averages for all
40advance refundings*

Prerefunding averages*

&

Junior refunding
averages*

Senior refunding average

S




th.

3
l\
l\
4
A%
Etujifel*. I$SU< Caupon R ^ c (»A) •
^Excluding exchanges in succeeding advance refundings.

- 67 prerefundings and only about .243 in the case of junior operations.

It

is quite possible that as the number of advance refundings grows and additional refinements are used, the statistics Will yield more favorable results.

In those cases where the same issue was made eligible again in a later
advance refunding, no pattern emerges with respect to size of coupon, mainly
because there are too few observations to permit any meaningful conclusions.
It is evident, however, that other factors, such as the coupon size of the
offered issue, its length, and the shortness of the eligible issue's remaining term to maturity are also significant.

And, of course, with only

limited observations the general monetary policy and interest rate environment at the time of a refunding becomes overriding.

Another apparently important factor is the length of extension.

As

shown on Chart 8, the greater the extension the less proportionately is
likely to be taken in pre- and junior refundings.

In senior operations no

truly significant pattern emerges except that performance in the first
senior refunding was better than in the second, and the second better than
the third.

Here again the correlation between years of extension and per-

centages exchanged even in the pre- and junior operations is imprecise and
cannot be used with any appreciable degree of confidence for predictive
purposes.

Still another factor which logically should have a substantial bearing
on the percentage exchanged is the increase in coupon rate from the eligible




- 68 :hart 7
PERCENT OF ELIGIBLE ISSUES EXCHANGED RELATED TO THE
LENGTH OF EXTENSION IN ADVANCE REFUNDINGS
(First Offerings*Only)
% exchanged
Averages for all advance refundings

Prerefunding averages

Junior refunding averages

EL
Senior refunding averages

0 I—I




z

*

1 1

I L.

1

s

*

t

1

?

1
r

10
Y

\1

\A

14

I?

zo

11

IA

24

1

*From each number of years to, but not including
the next number.

28
'

30

it

- 69 to the offered issue.
ments into account.

This, of course, has to take adjustment (boot) payAs with the other factors mentioned, a very rough re-

lationship appears to exist, but again it is imprecise and does not stand
the test of correlation significance.

Preliminary studies failed to turn up any conclusive evidence that the
attractiveness of the offerings in terms of the yield spread on the offered
issues above the prevailing market pattern of rates had any appreciable
effect on the proportion exchanged.

When measured against another variable—the size of the offered issue
coupon—the percentage taken showed an inverse relationship.
is not too surprising.

However, this

With an upward sloping yield curve, although gradu-

ally diminishing in slope, the higher coupons were on the longer options
during most of the active advance refunding period of June 1960 to January
1965 and apparently the length of the extension was a stronger factor than
the size of offered coupons.

In attempting to find useful relationships following the July 1964
refunding, a multiple correlation study yielded no significant results
primarily because the amount of data then available was too small to provide a sufficient number of degrees of freedom.

It may be that as experi-

ence with advance refundings grows, the data will provide more precisely
useful statistical conclusions.




- 70 Investor participation:
fundings through 1965.

The following analyses cover the advance re-

The last two in 1966 were combinations of regular

refundings at maturity and prerefundings, thus precluding the investor
classification of the offered issues which originated from the regular as
against the prerefunding issues.

This still leaves over $62-1/2 billion

of public exchanges for analysis.—^
The ownership pattern in those exchanges closely follows the division
between the 3 senior refundings and the pre- and junior refundings.

The

senior operations included as eligible issues, the World War II 2-1/2's, all
with remaining terms of over 5 years.
cluded all other eligible issues.

The pre- and junior refundings in-

(See Appendix Table 13.)

As indicated in the following table, insurance companies and mutual
savings banks acquired about 50% of the $7.6 billion in new 3-1/2% bonds in
the senior refundings.

In the first 2 senior operations these investors

accounted for more than 58% of the 3-1/2's taken; but in the third, life
companies and mutual savings banks could not participate more fully because
their holdings of the 2-1/2's eligible in that refunding had been largely
depleted by conversion into nonmarketable 2-3/4% bonds in 1951 and 1952.

State and local pension funds exchanged over $800 million of the wartime 2-1/2's, picking up the next largest part of the offered long-term
3-1/2's.

Other State and local funds accounted for nearly $650 million or

8-1/2% of the senior exchanges.

Among other public investors, commercial

banks 2J exchanged $630 million, picking up 8-1/4% of the 3-1/2's and
individuals acquired more than $400 million or 5-1/2%.
1/

Exchanges in the 1960-1965 advance refundings, by investor classes, are
covered in Appendix Table 12.

2/

This includes exchanges by bank dealers also.

As reported to the

Treasury, commercial bank allotments are not subdivided into
dealer banks and other banks.



- 71 -

Public Participation in Advance JEtefundings 1960-1965
Amounts of offered issues acquired, by class of investor 1/

•

Investor class:

Amounts exchanged in
: Pre- and :
Senior
junior : Total
refundings : refundings:
(In billions of dollars)

Commercial banks 17..
Dealers & brokers 1/.
Corporations
Insurance Co's.
Mutual Savings
Private pension
funds
State and local:
Pension funds
Other
Individuals
All other
Total exchanged
by public

1/

Source:
Note:

.6
.4
.1
2.6
1.2

.

Percentage distribution
: Pre- and
Senior : junior : Total
refundings :refundings

32.9
8.2
1.6
2.1
1.2

33.5
8.6
1.8
4.7
2.4

.5

.6

1.7

.9

1.0

.8
.6
.4
.6

.5
2.0
1.4
4.6

1.4
2.7
1.8
5,2

10.7
8.4
5.5
8.4

1.0
3.7
2.5
8.3

2.1
4.3
2.9
8.3

7.6

55.0

62.6

8.3%
5.2
1.6
33.9
16.3

100.0%

59.7%
14.9
3.0
3.8
2.2

100.0%

53.5%
13.7
2.8
7.5
3.9

100.0%

Treasury Bulletin; bank dealers included with commercial banks.
Detail may not add to totals due to rounding.

In the pre- and junior advance refundings commercial banks were by
far the major participating class in acquiring nearly $33 billion or 60% of
the offered issues.

Dealers and brokers took $8.2 billion or about 15% of

the total offerings in those refundings as against less than $400 million
or 5% in the senior operations. (The dealers1 role in advance refundings
is more completely detailed in the section on dealer participation and
activity.)




Corporations which averaged less than 3% of all exchanges participated

- 72 more fully in the first junior advance refunding, accounting for 6% of the
total exchanged in that refunding.

While holding sizeable amounts of many

of the eligible issues in later refundings they showed relatively little
interest even in the shortest (3 year-11 month) issues offered.

Individuals participated most heavily in the 3rd senior refunding, in
which the eligible issues included the June and December 1972 tap 2-1/2 f s.
The amounts of these issues remaining after the conversions into the nonmarketable 2-3/4 f s, mainly by institutional investors, were relatively
heavily concentrated in individuals1 holdings.
State and local pension funds which had participated quite actively
in the senior operations did not acquire any substantial portion of the
long bonds offered in pre- and junior refundings, mainly because they
held relatively few of the eligible issues.
The following table shows the extent to which public investors preferred the shorter options in the 1960-65 advance refundings.

However,

the dollar amounts exchanged into the two maturity categories under 10
years were not very far apart in proportion to the total amount of eligible
issues in each case.

In fact, of the public holdings eligible for the

under 5-year offered issues, 33% was exchanged; and of those eligible for
the 5 to 10-year issues 24% was exchanged.

Similarly, with respect to the

two maturity groups over 10 years, 10% of the total eligible for the 10 to
20-year maturities was exchanged as compared with 11% of those eligible for
the 20-year and over category.




- 73 Maturity Distribution of Offeted Issues Acquired by the Public
in Advance Refundings 1960-1965, By Class of Investor
(In billions of dollars)

.
.
Commercial banks
Dealers and brokers...
Corporations
Insurance companies...
Mutual savings
Private pension funds.
State and local:
Pension funds
Other
Individuals
All other
Total public

Under
5 years

8.9
1.3
.5
.4
.2
.1

:
:

5-10
years

21.0
3.9
1.0
1,4
.8
.3

.4
.2
1.3
13.3

*

:
:
:

10-20
years

.9
.7

:
:
:

20 years
or over

.

. Total
.

.5
.1
.1

2.7
2.6
.2
2.4
1.3
.2

33.5
8.6
1.8
4.7
2.4
.6

.3
1.4
1.0
3.0

.2
.2
.1
.2

.9
.7
.4
.7

1.4
2.7
1.8
5.2

34.1

3.1

12.1

62.6

*

Total publicly held issues eligible for exchange JL/:
40.7

140.2

31.9

110.5

188.6 1/

1/

Maturity detail will add to much more than the total, as most eligible
issues were exchangeable into 2 or more options.

*

Less than $50 million.

Note:

Figures may not add to totals due to rounding.

As might have been expected, commercial banks, the largest participating class, chose under 10-year maturities for almost 90% of their exchanges.
Their takings of $3.6 billion in the over 10-year area, three-quarters of
which was 20 years and longer, partly reflected bank dealer positioning
of longer issues.




Nearly 60% of insurance company and mutual savings bank participation

- 74 fell into the over 10-year area, most of which was in over 20-year maturities.

The remaining 40% of insurance company and mutual savings bank ac-

quisitions which went into the under 10-year area, was partly due to exchanges by fire and casualty insurance companies which normally hold
shorter-term issues.

State and local pension funds concentrated close to 80% of their $1.4
billion participation in the long-term area.

Individuals, on the other

hand, placed about 70% of their $1.8 billion participation into under 10year maturities, despite their relatively larger holdings in the War Loan
2-1/2 f s which were eligible for exchange only into long-term bonds.
the
With respect to/percentage of investor holdings of eligible issues exchanged, the data available are not wholly comparable as between holdings
and allotments.

Moreover, coverage is incomplete for some of the investor

groups.
Commercial banks with fairly good coverage apparently turned in about
32-1/2% of their eligible issue holdings.

Insurance companies exchanged

about 42% and mutual savings banks about 38% of their eligible holdings.

Figures for State and local funds cover only the last seven of the
1960-65 advance refundings.

If the figures are comparable, th* indicated

turn-in rate was about 60% for State and local pension funds and 21% for
the other funds in those operations.




Available figures for all but the first advance refunding indicate

- 75 that corporations exchanged about 13% of their eligible issues while private pension funds exchanged about 30%.

Figures on eligible issues of

individuals are not available.

In summary, commercial banks and dealers accounted for over 2/3 of
the offered issues taken by public subscribers in the 1960-65 advance refundings.

This included about $33.5 billion allotted to the commercial

banks and $8.6 billion to the dealers.

At the end of the 1960-65 advance refunding period the commercial
banks surveyed by the Treasury (representing some 80 to 85% of total commercial bank holdings) held $3.2 billion fewer coupon issues than at the
beginning.

Moreover, their holdings in 1 to 5-year maturities de-

clined by nearly $13 billion over the period.

This is the maturity area

into which much of the commercial bank acquisitions in the advance refundings would have fallen with the passage of time.

Since they acquired

almost $30 billion of issues in the 4 to 10-year maturity area, it would
seem that the banks, like the dealers, were generally acting in an underwriting capacity in these operations.

In addition, the mechanism for

distributing these securities was through the dealer market.

Thus, in

large measure, the success of the advance refunding technique was due to
the underwriting and distributing functions of these two groups.

Market impact:

In its White Paper, Debt Management and Advance Re-

funding, the Treasury held that the impact on long-term rates would be
much smaller with advance refunding than with ordinary cash financing or




- 76 maturity refunding, given equal volumes of long-term debt extension in
either case.

The discussion in the White Paper centered primarily on the

contrast between exchanging intermediate-term issues for long-term (senior
refundings) bonds on the one hand, and finding new long-term funds for issuing long-term bonds for cash or in refundings at maturity, on the other.

It was thought, in the latter case, that new cash borrowing would
absorb long-term funds otherwise available for private or State and local
needs and that the added supply of long Treasury bonds would exert upward
pressure on interest rates generally.

It was also felt that this would

occur in regular refundings at maturity.

By the time originally long-term

issues reached maturity, they would be held mostly by short-term holders
or held as liquidity reserves by other investors and neither of these would
want long bonds in exchange.

In that case, new long-term funds would be

required for the purchase of the "rights11 or the "when issued11 new securities, thus paralleling the effect of new long-term issues sold for cash.

In a senior advance refunding, it was thought, long-term investors
would be given the opportunity to extend their intermediate-term holdings
before those securities had largely gravitated into the hands of shortterm investors.

In general, the inducement to extend would be provided

by higher coupon rates of interest, based on the higher investment yields
resulting from an upward sloping market pattern of rates curve.

Moreover,

in such an exchange the injection of new long-term funds would be substantially smaller than in a regular maturity refunding, hence the




- 77 upward pressure on long-term rates would be minimized.

These tenets remained generally in effect through the March 1962
combination junior-senior refunding.
was discontinued.

Thereafter, senior advance refunding

Not only was there Congressional criticism, but

once all the holders of the wartime 2-1/2fs had been given an opportunity
to exchange, few alternative low coupon issues remained as candidates for
senior advance refundings in the immediate future.

In the meantime, from the Fall of 1960 to the Spring of 1962, $8.0
billion of existing publicly held issues had been extended into new longterm bonds maturing beyond 15 years.

OfMc* of th* StcrtUty of tht Inuury




Despite this substantial volume of

- 78 -

debt extension, yields on mortgages and on long-term corporate and municipal bonds continued to decline.

During the following period through January 1965, the Treasury revised
its position on the circumstances under which long-term bonds might be ismost of
sued in advance refundings.
March 1962,

the

In/the combination junior and prerefundings after

existing issues involved were made eligible for exchange

into long-term bonds.

Consequently, a substantial expansion in the role of

the dealer market was required in the transfer of rights, in helping to underwrite the refundings, and in distributing the new issues to firm holders.
Although relatively little net new money was needed, the revised procedure
induced a considerable degree of market churning and a substantial amount
of overhang of the new securities in the after market.

Nevertheless, it

was felt that these pre- and junior refundings would act as catalysts to
reduce market hesitance and to increase activity and interest in the longterm securities in general.

Thus, it was expected that the upward impact

on long-term rates would continue to be small.
Expectations based on the newer concepts were fairly well realized.
During the March 1962 to January 1965 period, average long-term Treasury
yields rose 13 basis points from 4.01 to 4.14%, but private and municipal
rates either increased very nominally or declined.

The monthly average of

new Aa corporate reoffering rates rose only 4 basis points, while mortgage
rates in the secondary market declined 25 basis points and new municipals
went down about 9 basis points.

(See Appendix Table 14.)

During this

period an additional $6.3 billion of publicly held Treasury issues were




- 79 -

extended beyond 15 years.

While the more prolonged effect of advance refundings on long-term
Treasury rates is not readily discernible in a period of slowly rising
bond yields, the immediate impact of such operations on long-term Treasury
yields was clearly minimal.

This is illustrated on Chart 10. After the

initial jump following the announcement in most cases, long-term yields
either leveled off or declined in 5 of the 8 refundings in which long bonds
were issued. Also in 5 of the 8 cases long-term rates were back to, or under
the levels before the announcement by the time the subscription books
closed, and continued to be flat or to decline thereafter.




Chnrf-fO

LONG-TERM TREASURY YIELDS DURING RELEVANT
ADVANCE REFUNDINGS
„„

4.2

Jan.

221964\

• >Books C o i g D t *
lsn a e
i

4.1
4.0
Mar. 15,1963

3.9

t

3.8
o'1 I1
5
^
f

octimcr

1 1

1

0

'

• • • » 1 1 1 1 • 1 • 1 • • 1 1 ' • •
5
1 0 1 5
20
Market Days Before ond After Announcement Dote
1

~ 1"

1

1

25
'

Issue or interest adjustment daks.
the September 1961, Morch 1962ond March 1963 nfundings, books dosed for
investors other thon individuals about one week earlier.

Office of the StfrHMy of tht Ireuury

F-S49-4

- 80 In the 3 refundings in which long-term rates were slightly higher 15
market days after the announcement, the rates were up less than 5 basis
points from the level before the announcement.
mained level for some time thereafter.

In most cases, yields re-

Obviously, market trend comparisons

cannot be carried much further in this connection, as other factors would
increasingly influence the interest rate environment soon after a refunding.

One interesting point shown on the chart is that market yields remained
remarkably stable for the most part from one refunding to another.

Except

for the October 1960 and March 1963 operations, long-term Treasury yields
were within an 11 basis point range immediately following the announcements.

The experience with long bonds issued in the advance refundings through
1965 amply demonstrates that debt extension can be accomplished with relatively little impact on long-term rates.

Between October 1960 and January

1965 about $14.3 billion in publicly held eligible issues was extended into
maturities ranging from nearly 17 to more than 38 years, during a period of
substantial economic expansion.

In fact, average market rates on mortgages

and yields on corporate and municipal bonds were generally lower at the end
of this period than at the beginning, while Treasury long-term rates were
less than 1/4% higher.

Only after the enlargement of the war in Vietnam

in July 1965, followed by the increase in the discount rate in December,
did interest rates begin to rise sharply.

The accelerating rise in interest rates produced by the war and the
overheating economy was not fully reflected in the increase in long-term
Treasury yields because the 4-1/4% interest ceiling brought to an abrupt




- 81 -

halt the chance of any increase in the supply of long bonds.

The upward

pressure on Treasury yields was reflected more fully in the intermediateterm area.

In response to the sharp increase in market yields, a 5-1/4%

rate was required in the August 1966 maturity and prerefunding combination on a 4-3/4 year note.

During the extreme credit squeeze which fol-

lowed the refunding announcement in late July, the market yield on the
new 5-1/4fs hit a high of 5-3/4% on August 29.

Dealer participation and activity:

Available dealer statistics com-

piled by the Federal Reserve Bank of New York give the clear impression
that dealers' participation in the first 5 advance refundings was relatively small as compared with the next 6. —^

(For details on dealer ac-

tivity in advance refundings see Appendix Table 15.)

Reporting Dealers—Allotments, Maximum Net Position, and Trading Volume
as Percentages of Total Public Allotments
1960-1965
Percent of total public allotments
Issues
to
dealers

Maximum
position in
rights plus
new issuest

Cumulative
volume of
tradingt*

First 5 advance refundings:
June 1960-March 1962
Next 6 advance refundings:
Sept. 1962-Jan. 1965

28.0

13.4

19.3

Average

21.2%

10.7%

14.4%

f
*
**
1/




6.9%**

4.8%

3.9%

Includes positions and trading in outstanding reopened issues.
Through the 5th day after announcement.
Partly estimated.

The comparison excludes the 1966 maturity and prerefunding combinations
because the dealer position and trading figures on the new issues are
not classified according to the eligible issues of origin. In 'any case,
the available data suggest that most of the dealer allotments originated from the, maturing issues.

- 82 The June 1960-March 1962 refundings cover not only the first 2 senior
refundings but also the junior-senior combination and 2 separate junior
operations.

The data indicate that the dealers were some 3 to 5 times as

active in the last 6 advance refundings as in the first 5.

It is not clear

just x f y the dealers remained much more aloof from the earlier junior as
th
well as senior operations.

One possible explanation is that the earlier

refundings generally included low coupon eligible issues, which made the
cost of carrying the rights to the issue dates of the new securities more
expensive than in the later operations.

It is also possible that the

generally higher coupon rates in the later advance refundings and the relative stability of longer-term yields gave the dealers a greater incentive
to position the new issues.

However, even in the 6 later advance refundings the dealers were
relatively much more heavily involved in the longer offered issues than
in the shorter ones.

Their turn-in rate for new under 15-year maturities

ranged from about 8 to 39% of the total issued to the general public while
their takings of over 15-year maturities ran from 61 to 74%.

As indicated

in the following table, their dollar acquisition of under 15-year maturities totaled $7.6 billion for an average participation rate of 21% and
their over 15-year maturities were $4.3 billion or nearly 69% of all issues to the public.

Despite the lack of dealer involvement in the 5 earlier advance
refundings, over-all public participation was quite high.

Public allot-

ments as a percentage of their holdings of eligible issues were 32% in




- 83 -

Total Issues to the Public and Dealer Allotments 1960-1965

Total issues
to public
($ bil.)
First 5 advance refundings:
Maturities: under 15 years....
over 15 years.....
Next 6 advance refundings:
Maturities: under 15 years....
over 15 years

6.5%
7.4

.8 1/
.6 1/

11.9
8.0
36.5
6.3

7.6
4.3

21.0
68.7

62.6

Total

1/
Note:

Dealer allotment as % of
total public

Dealer
allotment
($ bil.)

13.3

21.2

Partly estimated.
Figures may not add to totals due to rounding.

those advance refundings as against 34% in the 6 later operations.

Ap-

parently the dealer market became an increasingly important factor in the
later advance refundings.

(For details see Appendix Table 16.)

Another point might be made.

In the 6 later operations bank dealer

participation was much greater relative to nonbank dealer participation
than in the earlier refundings.

Allotment figures published in the

Treasury Bulletin and the statistics on dealers reporting to the New York
Federal Reserve Bank

which include

bank dealers, indicate that the bank

dealers increased their share of total dealer participation from about 18%
in the earlier operations to 37% in the 6 later ones..

A comparison of dealer participation in advance refundings and in
regular maturity refundings, shows that during fairly similar periods
they were much more heavily involved in advance refundings.




On average,

- 84 they acquired 21% of total issues to the public in the advance operations
through January 1965, as compared with 14-1/2% in the quarterly rights refundings from August 1961 through May 1966.

One index of dealer activity is their maximum net long position in
rights plus when-issued securities, which measures the degree of their
exposure to market risk.

As a percentage of total public allotments, this

was about the same in both types of operations.

In the quarterly rights

refundings during the period mentioned, their maximum net positions per
refunding averaged 11.3% of total public allotments, as against 10.7% in
the advance refundings.

But, excluding the first 5 advance refundings

their maximum net positions in the other 6 averaged 13.4%.

Another measure of dealer activity is the volume of trading in whenissued securities during or immediately after a financing.

Comparable

data indicate that dealers traded the new issues more actively in the advance refunding operations than in the quarterly refundings.

Figures

available for trading through the 7th day following the announcement of
terms show that the accumulated volume of trading in the advance refundings
was 24.8% of total issues to the public as compared with 19.4% in the quarterly rights operations.

Excluding the first 5 advance refundings the

trading volume rises to 27.8% of the new issues taken by all public
holders.
Note:




For a discussion of the longer-run effect of advance
refunding on dealer trading volume in the intermediate- and
long-term areas o£ the market, see the analysis entitled
16th Lowest Daily Volume of Trading by Louise Ahearn,
page 21 of the study paper, Market Performance as
Reflected in Aggregative Indicators.

- 85 Cost of advance refunding:

It is virtually impossible to quantify the

"true" net extra cost or saving resulting from advance refunding.

Once

such a refunding has been consummated no one can know, or even guess with
confidence, what would have happened without it or by attempting to accomplish the same degree of debt extension in another way.
to escape the conclusion

But it is difficult

that the issuance of long-term bonds in cash finan-

cings or through regular refundings at maturity, in the same volume as
through advance refundings would either have been impossible under the 4-1/4%
ceiling, or without that would have been far more expensive.

The experience

with regular financings in comparison with advance refundings in the 1960fs
clearly points to that conclusion.

As indicated in the table below, the total amount of bonds longer than
10 years issued in the 3-year period from April 1960 through April 1963 in

Issues of Over 10-Year Treasury Bonds 1960-1965

Amount
issued
($ mil.)
In cash financings and regular
refundings at maturity,
April 1960-April 1963
In advance refundings:
Oct. 1960-Sept. 1963
Oct. 1963-Jan. 1965 2/
Total in advance refunding...




1/
2/

Average
term to
maturity
(years)

Average
offering
yield

Average
offering
yield
spread 1/

1,902

24.4

4.13%

.12%

13,597
4,200

27.1
26.6

4.10
4.25

.11
.06

17,797

27.0

4.13

.10

Spreads above market yields on outstanding ipsues of comparable
maturity.
No bonds longer than 10 years were issued in cash financings or
regular tefundings at maturity in this period.

- 86 cash financings or regular maturity refundings was $1.9 billion.

During

this period the Treasury made the last strenuous attempts to issue long
bonds without resort to advance refunding.

It was also the period during

which the bond auction was introduced and then abandoned as a practical
means of producing debt extension on a substantial scale.

In these fi-

nancings the Treasury offered long-term bonds on 5 separate occasions for
an average issuance of about $380 million per offering.—^

During a closely similar period the Treasury conducted 5 advance refundings in which bonds longer than 10 years were offered.

The total

amount extended was $13.6 billion, averaging nearly $2.7 billion per operation.

The average term to maturity of these bonds was about 2-1/2 years

longer and their interest yield was about 3 basis points (.03%) less than
on the bonds issued for cash or in regular refundings.

Thus, although the

two methods achieved roughly comparable degrees of debt extension at closely
similar interest costs, the amounts extended in advance refunding were more
than 7 times greater.—^

In the remaining advance refundings the Treasury found it possible to
increase the over 10-year debt by another $4.2 billion without offering an
investment yield higher than 4.25%.

In all, about $17-3/4 billion of long-

term debt was advance refunded between October 1960 and January 1965 before
the rise in interest rates in the summer of the latter year effectively
foreclosed the issuance of over 5-year debt.

1/

For details see Appendix Table 17.




- 87 In terms of spreads above existing market yields on comparable maturities, long bonds issued for cash and in regular refundings appeared to be
about as attractive as those in advance refundings.

The average of offering

yield spreads was 12 basis points in the cash and maturity refundings and
11 basis points in the advance refundings.

Looking behind these statistics, it seems probable that regular operations on the scale of advance refundings could not have succeeded.

Long-

term bonds offered in two of the regular refundings during the 1960-63
period were for cash subscription.

In both of these cases the allotment

ratio was 100%, indicating a considerable degree of unwillingness on the
part of investors to subscribe for long-term issues.

It seems reasonable to infer that massive amounts of debt cannot be
extended at long-term through regular means, except possibly during a fairly
protracted recession.

Despite the claims from time to time that Treasury

debt operations have little impact on economic cycles, debt management could
not comfortably ignore even the marginal procyclical effect of a large scale
absorption of long-term funds in cash financings or regular maturity refundings during a recession.

Moreover, as indicated earlier the effect on

interest rates, including other long-term rates than on governments, would
also be a strong procyclical influence.
the relative cost of
As in the case of long-term issues,/advance refunding offerings in
the intermediate maturity area also appears to compare favorably with those
issued in regular financings.




For this comparison new issues maturing in

- 88 -

3 through 10 years offered through cash subscription or in regular refundings
were matched against similar Issues offered in advance refundings.

As shown in the accompanying table, from May 1960 through November 1966,
about $45 billion of 3 to 10-year securities were issued at an average offering rate of 4.15% with an average term of 5.6 years in regular financings.
In comparison, similar term issues, offered in advance refundings, totaled
$56.5 billion, at an average investment yield of 4.11%, with an average maturity of 6.4 years.

(For details see Appendix Table 18.)

In this case, the average spread of the offered yields above market
rates on issues of comparable maturity was slightly more in the advance refundings than in cash financings and regular refundings.

In practice, how-

ever, such spreads have not been an important factor in determining the
exchange percentage in advance refundings.

Moreover, the yield spreads

in financings for new cash do not reflect the value of the tax and loan
account credit involved.

Treasury Issues with Maturities over 3 but not over 10 years, 1960-1966
Amount
issued
($ bil.)

Average
term to
maturity
(years)

Average
offering
yield

Average
offering
yield
spread 1/

In cash financings and
regular refundings
at maturity,
May 1960-Nov. 1966....

44.9

5.6

4.15%

.10%

In advance refundings
June 1960-Aug. 1966...

56.5

6.4

4.11

.11

1/




Spreads above market yields on outstanding issues of comparable
maturity.

- 89 It should be noted, however, that in the case of the regular financings
the debt extended was for the full term of 5.6 years while not all of the
6.4 years in advance refunding represents debt extension.

In advance re-

funding the debt extension is reduced by the remaining terms of the eligible issues.

In the case of junior advance refunding

issues this can reduce the debt extension considerably.

into intermediate
But even with full

allowance for this, the average extension on 3 to 10-year issues in the advance refundings was 5.3 years.

Thus the bond-years of extension (amounts

times years) in the regular financings was $250 billion-years and in the
advance refundings, $299 billion-years.

It would seem, therefore, that advance refunding was also successful
in extending debt into the intermediate area at an interest rate which was
comparable to and in fact slightly less than in issuance for cash or in
maturity refunding.

One approach toward determining the cost of advance refunding is the
budget or dollar cost concept as shown in the report of the Senate Finance
Committee hearings on advance refunding, March 14, 1962

In this ap-

proach it is implicitly assumed that advance refunding is not mandatory as
is the refunding of a maturing issue.

Thus, the budget effect is logically

measured on the basis of not doing anything until an issue reaches maturity.
But since the reason for having an advance refunding in the first place, is
to improve the maturity structure of the marketable debt, it seems appropriate
1/




Pages 14 and 15, Hearings on Advance Refunding and Debt Management
March 15 and 16, 1962, before the Senate Finance Committee.

- 90 -

to assume that at maturity, the eligible issues would be extended to the
same point of time as in the actual advance refundings.

More explicitly, the additional cost (per $100) is the difference between the interest rate on the outstanding eligible issue, and the rate on
the new issue offered in exchange, applied for the remaining term of the
old issue.

The saving (per $100) is the difference between the interest

rate on the new issue offered in the exchange, and the rate that would be
required to reopen the same new issue when the remainder of the old issue
reaches maturity.

This difference is applied to the period from the matu-

rity of the old issue to the maturity of the new.

The following analysis includes only those eligible issues which matured before December 1966.

This not only covers about 80% of all exchanges,

but also precludes any need to guess the interest rates required to refund
the remainder of the eligible issues maturing in the future.

It is abundantly clear that by advance refunding, the Treasury has
saved very substantially on the eligible issues maturing through 1966.

This

is true whether or not the 4-1/4% interest ceiling on over 5-year offerings
is taken into account.
Under assumption "A11 in the accompanying table, if the Treasury had
waited and could have refunded into the new issues offered in the advance
refundings at rates above 4-1/4%, the over-all net saving would have totaled more than $700 million.




This is the theoretical amount saved by

- 91 Estimated Interest Cost or Savings in Advance Refunding
of Eligible Issues which Matured before Dec, 31, 1966
Additional cost based on the difference in interest rate between the eligible and the offered issues
Assumption A on interest saving: Savings based on difference between rate
on the new security offered in the advance refunding and the market rate
required to reopen the offered issue when the eligible issue reached
maturity 1/
(In millions of dollars)
Added cost
Eligible
Saving, from
Total
Saving less cost:
for period
issues
eligible issue maamount
net saving (+)
to eligible turity to offered
maturing
exchanged
or cost (-)
issue maturity
in:
issue maturity
1961

-80

196 3
196 4
196 5
196 6

4,214
2,473
16,257
11,232
8,513
16,226

74
47
119
41
78
84

-6
25
75
170
166
719

-44
+130

Total....

58,915

443

1,149

+706

1962

-22

+88
+635

Assumption B on interest saving: Same as f,Afl except when market rate
required on an offered issue maturing in more than 5 years was over
4-1/4%, the length of the new issue was limited to 5 years or made as
long as possible at 4-1/4%. (Total amounts exchanged and additional
cost are the same as above).
(In millions of dollars)
Discounted values of added cost
Total saving and
Eligible
and of savings under "B" 2/
net saving or cost
issues
maturing
Added
Total
Total
Net saving (+)
Net saving (+)
in:
saving
or cost (-)
cost
saving
or cost (-)
1961
1962
1963
1964
1965
1966

-6
25
75
77
88
467

-80
-22
-44
+37
+10
+384

72
45
113
39
72
79

-6
21
66
68
73
400

-78
-24
-47
+29
+1
+321

Total....

726

+283

421

622

+202

1/
2/
Note:



Market rate on offered issue plus .12%, regardless of whether
issues over 5 years would require more than 4-1/4%.
Discounted at 3.5%, see footnote 3, appendix table 19.
Figures may not add to totals due to rounding.

- 92 having refunded earlier.
net loss.

Through 1963 the Treasury would have incurred a

But as rates rose during the course of the interest rate cycle

the net costs turned into net savings.

With interest rates continuing to

rise sharply, particularly after the increase in the discount rate in
December 1965, the theoretical net savings increased almost astronomically
to $635 million on the amounts which would have matured in 1966,

Even

excluding the 1966 maturities and eliminating the upsurge in interest
rates during 1966 the Treasury would have had a theoretical net saving of
about $70 million through 1965."^
However, well before ~the end of 1965 the increase in rates above
4-1/4% had already precluded the issuance of maturities over 5 years.

It

is evident, therefore, that the figures under assumption f!A!f are unrealistic.

At best they merely provide some measure of the value of the debt

extension which actually took place.

A more realistic figure for what

would have happened without the advance refundings is indicated under
assumption MB".
In

f! ff

B , when market rates rose above the 4-1/4% limit, the length of

a hypothetical refunding issue was either limited to 5 years or was made
as long as possible at 4-1/4%.

Under this assumption the net savings

would have been drastically reduced from over $700 million to about $280
million as a result of the foreshortened terms of these hypothetical
issues.

1J

i/

For cost details on each eligible issue in advance refundings maturing
through 1966, see Appendix Table 19.




- 93 -

If these more realistic figures are discounted to the dates of the
advance refundings, the savings would be discounted more than the added
costs, because the savings are further in the future.

Nevertheless, the

discounted values still produce a net over-all savings of more than $200
million on the amounts exchanged, which would have matured by the end of
1966.

Thus, even under the more realistic assumption regarding the 4-1/4%

interest ceiling the Treasury undoubtedly saved on interest cost as a result of having previously extended debt through advance refunding.

From this, it may be inferred that the Treasury is bound to benefit in
the long run, only if interest rates are in an ever upward trend.
is a superficial view.

But that

The fact is that the figures in assumption ffB,f tend

to understate the benefits of advance refunding.

Not only have the amounts

extended been placed well beyond the need to refund them at the present
historically high rate levels, but also the probability is that that much
of the $59 billion maturing through 1966 would have been refunded and most
likely re-refunded by this time.

This most certainly would have added to

the upward pressure on the rates for refunding the issues which did actually
mature.
point
From a budget cost/of view, approximately $185 billion of marketable
coupon
/debt came to maturity and was refunded in the regular way during the 5-1/2
years from mid-1961 through 1966.

About $99 billion of this was publicly

held and the part of total eligible advance refunding issues maturing
through 1966 in public hands was over $50 billion.

It seems reasonable

to suppose that the net effect of reducing the publicly held refunding




- 94 -

load by more than 1/3 should have produced some lowering of interest rates
required for the regular refundings.

If that lessening of the rate re-

quired, averaged as little as 5 basis points, the budget savings based on
total maturities would come to over $90 million a year.

In summary, it seems almost certain that massive debt extension
through cash financing or refunding at maturity on a scale matching advance refunding would have been far more expensive and would have produced
much greater repercussions in the other capital markets, if indeed, it
would have been possible at all.

It also appears certain that through 1966,

advance refunding has produced interest savings for the Treasury, even if
the early benefits of an improved debt structure are ignored.

Moreover,

any reasonable assumption on the interest saving involved in having reduced
publicly held short-dated coupon debt, would add considerably to the interest
which was saved directly as a result of advance refunding.

Tax consequences of advance refunding;

There have been two types of

tax treatment of exchanges in advance refunding:

Nontaxable exchanges with

the tax effect on gains or losses generally postponed; and taxable exchanges
with an immediate tax effect on gains or losses.

Beginning with the July 1964 advance refunding, taxable exchange treatment has been accorded to the prerefunding eligible issues maturing in 6
months or less.

From that time on, the Treasury decided that issues as

close to maturity as 6 months sho.uld be regarded as maturing issues for
tax purposes.




Under such tax treatment any gain or loss is recognized

- 95 immediately for tax purposes and is reportable for the year in which the
exchange took place.

Exchanges are designated as nontaxable by the Secretary of the Treasury
under the authority of Section 1037 of the Internal Revenue Code as amended
in September 1959.

As defined in the Code, any gain or loss in such an ex-

change is not recognized for tax purposes at the time of the exchange, but
instead, is postponed until the new securities received by the taxpayer are
sold, redeemed, or otherwise disposed of, whichever comes first.

The

designation of an exchange as nontaxable is not permissive; it must be
treated as such by all taxpayers.

In a nontaxable exchange, any subsequent gain or loss upon the sale,
redemption, or other disposal of the new issues is a capital gain to a
taxpayer unless the securities are stock in trade, as in the case of
dealers.

The holding period which determines whether the capital gain is

short or long-term, is measured from the purchase date of the eligible issue turned in by the taxpayer, to the disposal date of the new issue offered
in the exchange.

If the period of holding is greater than 6 months, any

gain (or loss) is a long-term capital gain (or loss).

To commercial banks—and also to mutual savings banks and savings and
loan associations—losses in excess of gains ii* a given year on coupon issues, whether acquired in advance refundings or otherwise, are considered
to be ordinary losses for tax purposes; while gains in excess of losses




- 96 are capital gains.

Because of this provision, commercial banks tend to

segregate gains in one year and losses in another in order to take greater
advantage of the unsymmetrical tax treatment of gains and losses on coupon
securities.

This practice is mostly confined to their holdings of Govern-

ments and advance refunding allows considerable latitude in this regard
during the term to maturity of the offered issues.

The September 1959 Act covering nonrecognition of gains or losses in
advance refundings also amended the Code with respect to the cost basis of
the eligible and offered issues.

In a par for par exchange, without ad-

justment (boot) payments, the cost basis of the eligible (old) issue becomes the cost basis of the new issue received by the investor.

However,

when an adjustment payment is made by the investor to the Treasury, the
boot is invariably added to the cost basis of the old issue to determine
the basis of the new issue.

When boot is paid by the Treasury to the investor, the payment is
ordinarily subtracted from the cost basis of the old issue to determine
the basis of the new issue.

But, this procedure holds only if the total

value received by the investor in the exchange is less than the cost basis
of his old issue.

This is determined by comparing the sum of the boot re-

ceived by the investor and the fair market value of the new issue at the
time of exchange, with the cost basis of the old issue.

If the sum of the

boot plus the new issue value Exceeds the old issue basis, the excess is
recognized immediately.




But in no case can the amount recognized be

- 97 greater than the amount of the boot received by the taxpayer.

(For examples

of the tax treatment of boot see Appendix page 37.

The tax consequences of boot in advance refunding can be quite complex.

One generalization that may be made, however, is that boot paid to

a taxpayer by the Treasury improves his yield after tax as compared with
providing the same investment yield on the offered issue before tax, but
without boot.

Boot paid by a taxpayer to the Treasury has the opposite

effect.

As a fairly simple illustration, let us assume that a 5-year 3% existing issue currently priced in the market at 96.20 (decimal price,
yield about 3.84%) is made eligible for exchange into a 25-year 4% bond
without boot.

Based on the price of the eligible issue, the offering

investment yield before tax on the 25-year 4 f s, would be 4.25%.

Given

these assumptions, the "minimum reinvestment rate" before tax for the
20-year extension would be 4.41%.

This is the minimum rate at which an

investor who elects not to exchange, would have to reinvest the proceeds
of his 3% issue when it matures, in order to equal the return on the 4%
bond, had he accepted the exchange offer.^

The table below shows the effect of tax on the offering investment
yield and the reinvestment rate if boot is used to equate the terms of the
exchange (before tax) when the coupon rate is reduced or increased by 1/8%.
In this case the boot equates the terms of the exchange using a 3-7/8%
or a 4-1/8% coupon rate instead of 4%.
A/For a fuller explanation of the reinvestment rate see Appendix pages 38
and 39, excerpts from advance refunding offer of Feb. 20, 1963 paragraphs
12 and 13.




- 98 Tax Effect of Boot Payments on Investment Yield
and Reinvestment Rate
Assumptions; The tax rate is 48% (the corporate rate) on the coupon income
and 25% on long-term capital gain. The taxpayer is a commercial bank. The
cost basis of the 5-year 3% issue outstanding is 98 per $100; and its current market price is 96.20. The exchange is nontaxable.

Coupon rate
on 25-year
bond
3-7/8%
4%
4-1/8%
1/
2/

Boot
paid to
taxpayer
(per $100)
+1.91
0
-1.91

Investment yield 1/
After
Before
Taxable
tax
tax
equivalent 2/
4.25%
4.25
4.25

2.21%
2.19
2.17

4.24%
4.20
4.17

Reinvestment rate
Before
tax

4.41%
4.41
4.41

Taxable
equivalent 2 ,
_

4.40%
4.35
4.30

To maturity date of the new.
On a hypothetical issue at par.

The advantage to the taxpayer of receiving a boot payment clearly shows
up in the figures.

On the 3-7/8% bond, providing the same yield as the 4%

before tax, the after tax yield is greater by 2 basis points, and the taxable equivalent rate on a hypothetical par issue is greater by about 4
basis points.

The minimum reinvestment rate for the extension is better

by 5 basis points.

These earning rates are correspondingly lower on the

4-1/8% bond with boot paid by the taxpayer.

This effect of boot on the after tax yield is due to the difference
in tax treatment between boot payments and coupon income.

The coupon is

subject to the full ordinary income tax rate, while the cash payment of
boot is considered a change in capital value.




- 99 The payment of boot to, or by* the investor is a substitute for a
decrease or an increase in the offered coupon rate.

Thus, when boot is

received by the taxpayer in compensation for a smaller coupon rate than
he would otherwise be entitled to, the effect is the conversion of a
fraction of what would have been ordinary income into capital gain.

When

boot is paid by the taxpayer the effect is opposite and he pays ordinary
income tax rates on the small additional part of his coupon income which
his boot has paid for.

There is little evidence to indicate that taxable investors have been
greatly influenced by the effect of boot payments.

It is a fact, however,

that the Treasury has paid out considerably more boot than it has received
in its nontaxable advance refundings.

On more than $57-1/2 billion of

eligible issues exchanged in those refundings, boot paid to public holders
totaled about $231 million as against $77 million paid by public investors
to the Treasury.

(For details see Appendix Table 20.)

A conservative rough estimate indicates that upwards of 90% of these
boot payments were made to, or by, taxable investors.

It seems clear that

the Treasury has provided a tax boon to those investors, even if the period
of holding the offered issues is not to maturity.

In addition to the ad-

vantage of capital gains treatment on the boot received, in many cases
taxpayers are provided free use of the capital gains tax during the postponement of recognition.




The obvious conclusion from this

is that, on equity grounds, boot

- 100 -

should be reduced to the barest minimum needed to equate the terms of exchange in advance refundings involving more than one eligible issue. Furthermore, the eligible issues should be chosen with this in mind.




- 101 Participation Certificates
Opinions differ sharply on the "true" nature of participation
certificates.

The economic, accounting, and statistical aspect of the

problem helped to trigger a major study of budget concepts and practice,
while the political problems and implications have sharply divided the
Congress on the subject.
Proponents hold that the sale of PCfs, as shares in the principal
and interest income of an irrevocably pledged pool of loans, represents
the sale of assets.

They further say that under the PC procedures

the costs of credit programs to the Federal Government are more truly
reflected than if the programs are financed through Treasury advances
to agencies at rates below Treasury borrowing costs.

Moreover, they

say that PCfs provide a means for attracting private funds into the
credit areas represented by the pool of loans at less cost than
afforded by other alternatives.

They point out that the cost of

selling PC!s is less than the cost of selling assets directly, even
in those cases in which the Federal Government retains full servicing
responsibility and provides a full guarantee.
Those on the other side feel strongly that a PC is a somewhat thinly
disguised device for selling a debt instrument.

The new funds attracted

by the fully guaranteed PC's free of servicing costs
the attraction is indeed a Government security.

merely prove that

Moreover, all of the im-

provements in the terms and conditions since early 1967 to improve marketability




make the PC's resemble direct debt obligations more and more

- 102 and to resemble sales of assets

less and less.

As a matter of fact, PCfs did not become a significant issue until
after the advent of the FNMA-type offerings in November 1964.

Before that

such instruments had been sold by the Commodity Credit Corporation for
many years without repercussions, while the early Export-Import Bank PCfs,
which date back to May 1962, were also distributed without fanfare, although
it should be noted they were sold to a rather select group of commercial
banks.

Other PC's were sold in the process of liquidating the RFC.

The FNMA offerings of PC's, which began in November 1964, followed
legislation empowering FNMA to act as trustee for pooling Federal Agency

Chart-II

PUBLIC HOLDINGS OF MARKETABLE TREASURY AND
FEDERAL AGENCY OBLIGATIONS
IBil.

•i.
Bl

Treasury Securities
Dec.

Federal Agency Obligations

$4-J

163.3

160

150
Securities

.6

7.9
0

I ' •I•' '
I960
'62
'64

'66

-J

Ot-j
I960
Clna Yas
aedr er

'62

'64

'66

*CCC, Export-Import and FNMA participations
OflM of tt» SMfMvy Of »N ftMMffy




»-l50«-«-3

- 103 held mortgages.

Although these offerings started in a period of slowly

rising Treasury and Federal Agency market yields, the major impact of the
PC's came in 1966 after the escalation of the war in Vietnam followed by
the discount rate rise in December.

Increased sales of PC's had been fore-

cast in the budget for fiscal 1966 with a substantially larger increase
in fiscal 1967.

During the December 1964-June 1966 period PC's held by the public more
than doubled, from $2.0 billion to nearly $4.4 billion.

In the same period,

public borrowing by Federal Credit Agencies also rose sharply.

In fact,

during the 1-1/2 years from December 1964 through June 1966, Federal Agency
debt held by the public increased from $12.1 billion to $17.6 billion, at
roughly 3-1/2 times the annual rate of increase in the preceding four years.

To a considerable extent, the expansion of Agency borrowing resulted
from a swelling demand for credit generally.

Commercial banks and other

lending institutions facing heavy borrowing requirements in a tightening
money and credit market environment, began to ration credit and choose
among borrowers.

Unsatisfied borrowers, including farmers and small busi-

nessmen, turned to the Federal Agencies to meet credit needs ordinarily
supplied by the private institutions.

In addition, the tightening situ-

ation produced a sharp reduction in the supply of mortgage money.

The

savings and loan associations experienced particularly heavy withdrawals
of funds, seeking higher rates of return elsewhere.

As a result, the as-

sociations increased their borrowing from the Federal Home Loan Banks.
At the same time FNMA increased its purchases of mortgages in attempting
to support the secondary market.




- 104 -

Thus, these Federal Agencies faced with expanded credit demands
sharply increased their market borrowing.

Also during this period the

increased demand for bank credit for business loans and other private
needs, plus the burgeoning corporate and municipal long-term borrowing,
added to the burden on the credit markets.

Moreover, the expanded role

of PC's envisaged in the Participation Sales Act of May 1966 and called
for in the budget for fiscal 1967, added to heightened expectations of
still tighter markets and higher rates.

As a result, a near crisis atmosphere developed in the extremely
tightened environment of July and August 1966, and interest rates generally reached the highest levels in 40 years or more.

Although the $9.7

billion reduction in public holdings of marketable Treasury debt, from
the end of 1964 through mid-1966 as shown on Chart 11, more than offset
the stepped up Federal Agency net borrowing plus increases in outstanding
PC's, it was apparently not enough to enable lenders to meet the soaring
demands from private borrowers.

The market rate on 1-year Federal Agency issues reached a peak of close
to 6-3/8% on August 30, 1966; the 5-year rate rose above 6-1/8%; and the
rate in the 10-year area increased to more than 5-7/8%.

Treasury rates at

the same time had also risen swiftly and by the end of August had sharply
cut the yield spreads between Treasury and Agency issue rates from the peak
spreads in late June and early July.

The peak spreads occurred when expec-

tations of higher Agency and PC rates were at full tide.—^
1/




At times market

For market yields on Agency and Treasury issues and differentials;at
constant maturities, see Appendix Table 21.

- 105 yields on Agency issues in the 10-year maturity area were nearly as high
as reoffering rates on new Aa corporate bonds without deferred call protection.

(See Chart 12.)

Yields on outstanding PC's were generally

higher than Agency yields during 1966.

In this situation, the steps taken by the Administration in early September 1966 to allay apprehensions and to ease the pressures on the credit
markets were directed mainly toward diminishing Federal Agency borrowing
and PC sales.

On September 8, in addition to other fiscal measures the

President called for the curtailment of public borrowing by the Federal
Agencies and the next day the Treasury announced that scheduled sales of

Chart 12

_ MARKET YIELDS ON FEDERAL AGENCY AND T R E A S U R Y SECURITIES AND NEW CORPORATE REOFFERING RATES*
%
6

5 Year Maturity
Agency

10 Year Maturity
(Agency and Treasury)

Agency

( • " " 1 •11 " • •1111111 11 " " •111' " " 1" 1 "1 " o
V
1963
1964
1965
1966
1963
*For selected dates.
Offtct o* tl» StcnUry of tht Waviry




f

Issues y

NwAa
Corporofes'^/j
(Long-Term)

Issues

1964

Treasury estimates of reoffering rates.

1965

1966

- 106 PC's would be postponed until the credit markets improved and that any
new borrowing for Agency needs in excess of maturities would be absorbed
by the Government Investment Accounts.

As a result of these measures, market fears were calmed, the tightness was eased, and interest rates quickly receded from the near-crisis
peaks.

By December 1966 the situation had improved enough to permit the

announcement of a new PC offering.

The evolution of the present participation certificates, aside from
the short-term CCC offerings, began in May 1962 with the introduction of
the Eximbank type PC's.

The market features of these PC's was thought to

make them comparable with prime rate bank loans, as much as with Federal
Agency issues.

Some of the terms and conditions of the Eximbank PC's sold before
1967 tended to reduce their comparability with Agency issues.

The prin-

cipal amounts of the PC's were subject to semiannual amortization generally in conformity with the loans in the pool.

Their negotiability was

quite limited and to compensate for the lack of liquidity, holders were
given the option (the Eximbank also) of redeeming the PC's in part or in
full on each interest payment date, beginning 2-1/2 years from the date
of issue.

The redemption option time was reduced on the last 2 issues to

18 and 15-1/2 months, primarily to make them easier to sell.

The full

term to maturity was 10 years on the first PC's but this was reduced to 7
years thereafter.




- 107 About $2.1 billion of these Eximbank PC's were issued but by December
1966 about $1.0 billion had been retired, mostly through the exercise of
the redemption option.

The Exim-type PC's were relatively expensive instru-

ments as indicated in the following table.

Export-Import Bank PC Offerings, Rates, and Spreads, 1962-1966 A/

Issue
Date

Amount
($ mil.)

Hay 1962
May 1963
Apr. 1964
Nov. 1964
Feb. 1966
June 1966

300
250
372
450
365
396

Term to
earliest
redemption
(yrs.-mos.)
2-6
2-6
2-6
2-6
1-6
1-3-1/2

Interest
cost to
Eximbank

4.25%
4.00
4.50
4.50
5.50
5.60 1/

Cost spread above
'
Prime
Federal
Treasury
commercial
Agency
market
market
bank
yields —/
yields —/
rate
.72%
.50
.22
.37
.29
.20

.93%
.64
.34
.50
.49
.67

.25%
-.50
0
0
.50
.10

1/

Excluding rollover of $107 million of the April 1964 issue turned in for redemption in October 1966.

2/

At Eximbank PC terms to earliest redemption date at holder's option.

3/

Including $1.25 per $1,000 commission.

As a new untried instrument the Exim PC's started with a fairly high
yield spread above Federal Agency market rates and even above the commercial bank rate.

In subsequent offerings, the spreads above Agency issue

rates declined, partly as a result of a somewhat improved customer reception, but mainly as a result of mounting upward* rate pressures in the Agency
market.

Comparisons with the prime rate do not indicate a close relation-

ship, primarily because the prime rate was held at artificial levels with
compensating balances providing the finer tuning needed for rate flexibility.




- 108 -

Attempts to raise target amounts through Eximbank offerings in 1966
proved unsuccessful.

As a result, beginning in 1967 the terms and condi-

tions of Eximbank PC's were changed to conform with the newest FNMA type
PC's.

In contrast to the Exim PC's the first 3 offerings of FNMA PC's were
fairly well received at rates generally in line with yields on existing
Agency issues.

This occurred despite the underwriters' dislike of some

features such as small serial maturities extending over a 10 to 15-year
period and the availability of the obligations only in registered form.
Moreover, in the belief of some bond counsel there was a definite need
for an Attorney General opinion that Treasury funds, if required, would
be guaranteed to meet interest and principal payments.

As indicated in the table below, the interest costs on the first 3
PC's averaged between 7 and 9 basis points above comparable Agency market
yields and between 1/4 and 3/8% above Treasury yields.

These costs seemed

to be quite reasonable in view of the newness of the offered instruments.
However, the two offerings in the first half of 1966 were relatively much
more expensive in the rapidly rising interest rate environment at the
time.

It should be mentioned that the comparison of PC costs with yields
on outstanding Agency issues depends on the validity of dealers' quotations in the Agency market.

If it can be argued that dealers' quotations

are not much further out of line with "true" market values at any one time
than at another, the changes in the spreads are a reasonable index of




- 109 relative additional costs needed to ensure market acceptance.

In 1965-66,

the spreads above Treasury rates on the parts of PC offerings maturing
after 5 years reflect the lack of any possible increase in the supply of
over 5-year Treasury bonds in the immediate future.
FNMA PC Offerings, Rates, and Spreads, 1964-1966 1/

Total
amount
($ mil.)

Issue
Date

Nov.
July
Dec.
Apr.
June
Jan.

1964
1965
1965
1966
1966
1967 1/

1/
2/

No. of
maturities

300
525
375
410
530
600 2/

10
15
15
15
8
3

Average
term
(yrs.)

5.5
8.0
8.0
9.3
6.7
11.2

Average
interest
cost

4.37%
4.54
4.76
5.44
5.57
5.25

Average cost spread above
Federal
Treasury
Agency
market
market
yields
yields
.08%
.09
.07
.26
.28
.09

.25%
.35
.31
.55
.72
.57

Including the Jan. 1967 offering announced Dec. 19, 1966.
Public portion of offering; in addition $500 million was taken by Government Investment Accounts.

The first FNMA PC's following the postponement of scheduled offerings
by the Secretary in September 1966 carried revised terms and conditions
strongly recommended by market professionals during the summer.

In the

improved market environment at the end of the year, the average interest
cost spread above Federal Agency rates on the new PC's was back to the
the
pre-1966 levels.

However,/average spreads above Treasury yields remained

large, reflecting the continuing substantial differentials between Treasury
and Agency issues.




- 110 In summary, the FNMA-type PC's, particularly the models following
the September 1966 postponement, appear to have earned a place in the
roster of regular Agency issues.

To that extent the nature of PC's as

viewed by the market has been resolved.







APPENDIX

NEW TECHNIQUES IN DEBT MANAGEMENT
SINCE THE LATE 1950fS

Table l--Monthly Average Rates* in the 3-Month and 6-Month Bill Weekly Auctions, November 1958-December 1966
(Per cent per annum)
Auction
month

3month

Nov.
Dec.

2.756
2.814

Jan.
Feb.
Mar.
Apr.
May
June
July
Aug.
Sept.
Oct.
Nov.
Dec.

2.837
2.712
2.852
2.960
2.851
3.247
3.243
3.358
3.998
4.117
4.209
4.572

1959
3.097
3.166
3.159
3.277
3.368
3.531
3.885
3.840
4.626
4.646
4.585
4.915

Jan.
Feb.
Mar.
Apr.
May
June
July
Aug.
Sept.
Oct.
Nov.
Dec.

4.436
3.954
3.439
3.244
3.392
2.641
2.396
2.286
2.489
3.426
2.384
2.272

1960
4.840
4.321
3.693
3.548
3.684
2.909
2.826
2.574
2.803
2.845
2.650
2.530

6month

3month

6month

Spread

3month

6month

Spread

3month

6month

Spread

.260
.454
.307
.317
.517
.284
.642
.482
.628
.529
.376
.343

2.302
2.408
2.420
2.327
2.288
2.359
2.268
2.402
2.304
2.350
2.458
2.617

1961
2.496
2.601
2.591
2.493
2.436
2.546
2.457
2.670
2.689
2.702
2.686
2.875

.194
.193
.171
.166
.148
.187
.189
.268
.385
.352
.228
.258

2.914
2.916
2.897
2.909
2.920
2.995
3.143
3.320
3.379
3.453
3.522
3.523

1963
2.962
2.970
2.950
2.988
3.006
3.078
3.272
3.437
3.494
3.573
3.648
3.667

.048
.054
.053
.079
.086
.083
.129
.117
.115
.120
.126
.144

3.828
3.929
3.942
3.932
3.895
3.810
3.831
3.836
3.912
4.032
4.082
4.362

1965
3.944
4.003
4.003
3.992
3.950
3.872
3.887
3.938
4.050
4.197
4.238
4.523

.116
.074
.061
.060
.055
.062
.056
.102
.138
.165
.156
.161

.404
.367
.254
.304
.292
.268
.430
.288
.314
.419
.266
.258

2.746
2.752
2.719
2.735
2.694
2.719
2.945
2.837
2.792
2.751
2.803
2.856

1962
2.965
2.955
2.883
2.838
2.789
2.804
3.085
3.005
2.947
2.859
2.875
2.908

.219
.203
.164
.103
.095
.085
.140
.168
.155
.108
.072
.052

3.529
3.532
3.553
3.484
3.482
3.478
3.479
3.506
3.527
3.575
3.624
3.856

1964
3.652
3.664
3.740
3.676
3.612
3.572
3.566
3.618
3.666
3.729
3.794
3.971

.123
.132
.187
.192
.130
.094
.087
.112
.139
.154
.170
.115

4.596
4.670
4.626
4.611
4.642
4.539
4.855
4.932
5.356
5.387
5.344
5.007

1966
4.731
4.820
4.825
4.742
4.814
4.696
4.982
5.189
5.798
5.652
5.604
5.108

.135
.150
.199
.131
.172
.157
.127
.257
.442
.265
.260
.101

Spread

1958
1 /
3.065^
.251

*Bank discount rates.




1/ 3-week average.

Table 2--91-Day Treasury Bills—Quarterly Averages of Auction Results, 1958-66
(Dollar figures are in millions)

Date

Total
Total
NonCompetitive Bids
Coverage
tenders tenders r
competitive Nonbank dealers
Others
accepted received! ratio
bids
Received Accepted Received Accepted

1958
I
II
III
IV

$1,724
1,701
1,746
1,755

$2,510
2,522
2,528
2,707

1959
I
II
III
IV

1,431
1,101
1,139
1,136

1960
I
II
III
IV

Discount rates and spreads
High to
Average
Average
low
rate
to high

146%
148
145
154

$337
264
276
298

n.a.
i
t
n
i
t

n.a.
i
i
ii
ii

n.a.
ii
ii
ii

n.a.
i
t
ii
ii

1.896%
1.020
1.653
2.788

.094%
.103
.108
.089

.024%
.021
.035
.021

2,301
1,968
1,865
1,900

161
179
164
167

261
223
223
235

i
t
i
t
i
t
i
i

ii
ii
ii
ii

n
ii
i
t
n

ii
i
t
i
t
i
t

2.803
3.014
3.511
4.306

.114
.065
.136
.108

.017
.019
.065
.044

1,139
1,123
1,047
1,047

1,909
1,817
1,843
1,873

168
161
176
179

248
211
206
214

$528
566
569
591

$226
288
232
220

$1,133
1,030
1,067
1,069

$665
624
609
613

3.904
3.057
2.393
2.354

.104
.133
.067
.050

.050
.065
.030
.039

1961
I
II
III
IV

1,076
1,093
1,101
1,109

1,959
2,016
1,962
2,073

182
185
178
187

215
203
218
221

585
647
621
660

231
254
250
251

1,159
1,166
1,123
1,192

630
636
633
637

2.380
2.327
2.331
2.473

.056
.044
.053
.042

.019
.017
.020
.014

1962
I
II
III
IV

1,170
1,247
1,301
1,301

2,182
2,296
2,190
2,198

187
184
168
169

214
208
240
249

610
672
644
659

191
244
272
283

1,358
1,416
1,306
1,290

765
795
789
769

2.738
2.714
2.856
2.803

.042
.034
.043
.033

.014
.011
.014
.010

1963
I
II
III
IV

1,301
1,301
1,301
1,285

2,169
2,177
2,127
2,102

167
167
164
164

256
238
254
254

608
632
591
651

243
303
288
324

1,305
1,307
1,282
1,197

802
760
759
707

2.910
2.940
3.284
3.495

.038
.028
.042
.030

.010
.007
.019
.009




Table 2--91-Day Treasury Bills--Quarterly Averages of Auction Results, 1958-66

Date

(Dollar figures are in millions)
Competitive Bids
NonTotal
Total
Coverage
competitive Nonbank dealers
tenders tenders
Others
ratio
accepted received
bids
Received Accepted Received Accepted

1964
I
II
III
IV

$1,286
1,216
1,224
1,223

$2,271
2,108
2,105
2,146

1965
I
II
III
IV

1,186
1,201
1,201
1,201

2,192
2,149
2,087
2,048

1966
I
II
III
IV

1,302
1,301
1,301
1,302

2,237
2,159
2,200
2,277

n.a.

Not available.




$250
230
244
246

$619
590
559
576

$310
279
230
231

$1,402
1,287
1,302
1,324

$727
709
749
747

185
179
174
171

248
240
260
254

522
503
485
495

180
181
198
232

1,423
1,407
1,342
1,299

172
166
169
175

264
249
260
266

538
519
488
563

254
234
214
267

1,434
1,391
1,451
1,448

177%
173
172
175

Discount rates and spreads
High
Average
Average
to low
rate
to high

3.537%
3.482
3.502
3.689

. 024%
.024
.029
.034

. 007%
.009
.009
.014

757
780
743
715

3.901
3.873
3.867
4.175

.024
.022
.031
.048

.009
.008
.013
.016

784
817
827
769

4.630
4.593
5.071
5,228

.037
.041
.095
.056

.015
.016
.041
.021

Table 2--91-Day Treasury Bills--Quarterly Averages of AuctionResults,1958-66

Date

(Dollar figures are in millions)
NonCompetitive Bids
Total
Total
Coverage
competitive Nonbank dealers
Others
tenders tenders
ratio
Received Accepted Received Accepted
accepted received
bids

1958
T
X
II
III
IV

$400

1959
I
II
III
IV

890

222%

400
423
408
429

750
825
807
763

1960
I
II
III
IV

400
470
478
470

1961
I
II
III
IV

$39

n.a.

n.a.

n.a.

n.a.

188
195
198
178

26
27
43
50

i
i
i
i
i
i
i
t

i
i
ii
ii
ii

ii
ii
ii
i
t

842
831
986
1,043

210
177
206
222

60
43
45
48

$258
267
310
355

$ 72
121
91
93

492
485
569
593

1,058
1,051
1,069
1,197

215
219
188
202

46
46
42
54

319
343
337
359

1962
I
II
III
IV

600
631
701
747

1,192
1,292
1,354
1,469

199
205
197
198

51
52
58
61

1963
I
II
III
IV

800
801
800
800

1,353
1,527
1,396
1,435

169
191
174
179

55
58
57
67




$

Discount rates and spreads
Average
High
Average
to high
to low
rate

3.065%

. 031%

.010°/

ii
ii
i
t
ii

3.137
3.383
4.099
4.724

.095
.056
.089
.076

.026
.018
.038
.038

525
520
631
640

$268
305
341
329

4.239
3.344
2.740
2.664

.050
.091
.045
.045

.020
.040
.014
.013

62
78
129
114

693
662
690
784

384
361
398
425

2.565
2.496
2.609
2.749

.041
.032
.038
.030

.013
.010
.015
.011

364
438
392
448

115
155
116
166

777
802
934
960

434
424
527
520

2.930
2.809
3.012
2.880

.030
.022
.032
.021

.013
.007
.012
.006

408
452
462
467

189
178
223
200

890
1,017
877
901

556
565
520
533

2.961
3.023
3.404
3.625

.029
.017
.032
.027

.010
.005
.016
.010

$

Table 2--91-Day Treasury Bills--Quarterly Averages of AuctionResults,1958-66

Date

19 64
I
II
III
IV

(Dollar figures
Total
NonTotal
Coverage
tenders tenders
competitive Nonbank
ratio
Received
accepted received
bids

$

.006%
.006
.009
.010

551
592
626
608

3.984
3.929
3.970
4.335

.014
.013
.022
.024

.004
.005
.008
.009

591
570
592
545

4.791
4.746
5.359
5.428

.023
.026
.062
.033

.014
.012
.028
.011

$562
599
515
613

$239
345
264
311

$1,089
1,629
1,033
1,145

$559
490
573
593

2,218
2,030
1,806
2,046

221
203
180
204

96
99
97
124

293
675
544
578

354
310
278
270

1,328
1,256
1,165
1,345

2,033
2,046
2,056
2,186

203
205
205
218

124
130
138
761

613
665
568
704

286
299
271
295

1,296
1,250
1,350
1,643

19 65
I
II
III
IV

1,002
1,001
1,001
1,001

1966
I
II
III
IV

1,001
1,000
1,001
1,001

Not available.




. 020%
.018
.023
.025

$64
65
64
84

$1,715
1,695
1,621
1,841

Discount rates and spreads
High
Average
Average
to low
to high
rate

3.683%
3.624
3. 613
3.834

199%
188
180
187

862
901
901
987

n.a.

are in millions)
Competitive Bids
dealers
Others
Accepted Received Accepted

Table 4--Auction Results on Quarterly and Monthly 1-Year Treasury Bills

Dat e of:
Issue
[uarterly:
4/1/59
5/11/59
7/15/59
12/2/59

Maturity

Subscriptions
Coverage
Total Accepted
ratio

1/15/60 $3,445
4/15/60 3,461
7/15/60 3,173
10/17/60 3,965

2/$2,006
2/ 2,003
2/ 2,001
2/ 2,004

172%
173
159
198

(Dollar figures are in millions)
Allotments to:
Com 1 1 Nonbank Other
Official
banks dealers public accounts.!/
n.a.
$1,952
1,981
1,982

n.a.
$1
1

n.a.
$50
20
24

n.a.

Discount rates and spreads
Average High to Average to
rate
low
high
3.386%
3.835
4.728
4.860

. 186%
.125
.472
.207

.050%
.030
.092
.033

1/15/60
4/15/60
7/15/60
10/17/60

1/15/61
4/15/61
7/15/61
10/16/61

2,303
2,857
3,036
3,302

1,504
2,001
1,501
1,502

153
143
202
220

567
1,069
612
723

294
402
290
334

525
295
363
363

$118
235
236
82

5.067
4.608
3.265
3.131

.160
.302
.074
.075

.083
.132
.024
.019

1/15/61
4/15/61
7/15/61
10/16/61

1/15/62
4/15/62
7/15/62
10/15/62

3,078
4,116
4,174
3,757

1,502
2,000
2,004
2,003

205
206
208
187

651
896
917
939

406
448
536
667

242
330
476
286

203
326
75
111

2.679
2.827
2.908
2.975

.055
.054
.061
.058

.021
.017
.012
.013

1/15/62
4/15/62
7/15/62
10/15/62

1/15/63
4/15/63
7/15/63
10/15/63

3,651
3,454
3,722
4,535

2,001
2,001
2,004
2,500

182
173
186
181

1,078
925
952
1,209

404
506
379
574

302
407
629
437

217
163
44
280

3.366
2.943
3.257
2.969

.041
.039
.048
.039

.015
.014
.016
.010

1/15/63
4/15/63
7/15/63

1/15/64
4/15/64
7/15/64

5,244
4,048
4,495

2,496
2,501
1,998

210
162
225

1,331
1,192
844

516
628
538

587
569
593

62
112
23

3.015
3.062
3.582

.020
.018
.069

.005
.006
.016

Monthly:
9/3/63
10/1/63
11/4/63
12/3/63

8/31/64
9/30/64
10/31/64
11/30/64

2,632
2,395
1,891
2,795

1,001
1,002
1,000
3/ 1,005

263
239
189
278

364
387
401
964

543
461
429
16

87
139
158
20

7
15
12
5

3.575
3.586
3.633
3.590

.019
.022
.025
.029

.004
.006
.007
.009

Footnotes at end of table.




Table 4--Auction Results on Quarterly and Monthly 1-Year Treasury Bills

Date of:
Issue

Maturity

Subscriptions
Coverage
ratio
Total Accepted

Monthly: (Contd.)
1/3/64 12/31/64 $2,113
2/6/64
1/31/65 2,212
3/3/64
2/28/65 2,412
4/8/64
3/31/65 2,568
5/6/64
4/30/65 1,884
6/2/64
5/31/65 2,208

$1,000
1,000
1,001
1,001
1,001
1,000

(Dollar figures are in millions)
Allotments to:
Official
Com11 Nonbank Other
public accounts.!/
banks dealers

211%
221
241
257
188
221

$423
340
664
992
458
332

$426
463
222

$ 10
9
14

411
503

$141
188
101
9
132
155

*

10

Discount rates and spreads
Average to
Average High to
low
high
rate

3.707%
3.680
3.765
3.719
3.705
3.719

.020%
.023
.018
.028
.020
.013

.007%
.008
.007
.006
.009
.004

7/7/64
8/4/64
8/31/64
9/30/64
10/31/64
11/30/64
12/31/64

6/30/65
7/31/65
8/31/65
9/30/65
10/31/65
11/30/65
12/31/65

2,393
2,080
1,940
1,849
2,350
2,497
2,311

1,001
1,000
1,000
1,001
1,000
1,001
1,003

239
208
194
185
235
249
230

287
621
400
514
367
354
458

540
232
425
323
408
418
282

154
147
126
132
113
137
233

20
•
/
V
49
32
112
92
30

3.691
3.644
3.688
3.773
3.790
4.068
3.972

.010
.023
.018
.020
.013
.088
.022

.003
.007
.009
.006
.003
.020
.008

1/31/65
2/28/65
3/31/65
4/30/65
5/28/65
6/30/65

1/31/66
2/28/66
3/31/66
4/30/66
5/31/66
6/30/66

2,908
2,023
2,241
2,573
2,752
2,191

1,000
1,001
1,000
1,001
1,001
1,001

291
202
224
257
275
219

374
473
365
98
55
378

342
355
420
650
724
349

182
131
142
99
86
163

102
42
73
154
136
111

3.945
4.062
3.987
3.996
3.954
3.807

.009
.030
.023
.005
.003
.031

.002
.008
.008
.003
.000
.014

7/31/65
8/31/65
9/30/65
10/31/65
11/30/65
12/31/65

7/31/66
8/31/66
9/30/66
10/31/66
11/30/66
12/31/66

1,714
1,927
2,970
2,304
1,949
2,720

1,000
1,000
1,000
1,000
1,001
1,001

171
193
297
230
195
272

293
311
339
314
453
291

420
408
264
281
256
459

127
92
114
203
121
188

160
189
283
202
171
63

3.875
4.006
4.236
4.192
4.277
4.731

.021
.018
.024
.013
.028
.018

.006
.007
.007
.005
.011
.006

Footnotes at end of table.




Table 4--Auction Results on Quarterly and Monthly 1-Year Treasury Bills

Date of:
Issue

Maturity

(Dollar figures are in millions)
Subscriptions
Allotments to:
Discount rates and spreads
Coverage Com11 Nonbank Other
Official . Average High to
Average to
ratio
Total Accepted
banks dealers public accounts—
rate
high
low

Monthly: (clontd.
1/31/66
1/31/67 $1,917
2/28/66
2/28/67 1,771
3/31/66
3/31/67 1,571
4/30/66
4/30/67 1,834
5/31/66
5/31/67 2,013
6/30/66
6/30/67 1,569
7/31/66
8/31/66
9/30/66
10/31/66
11/30/66
12/31/66

7/31/67
8/31/67
9/30/67
10/31/67
11/30/67
12/31/67

1,869
2,237
1,473
2,272
2,164
1,665

$1,001
1,000
1,000
1,001
1,001
1,001

192%
177
157
183
201
157

$486
314
397
332
302
383

$176
352
374
302
347
406

$147
210
154
177
154
162

$192
124
75
190
198
50

4.699%
4.945
4.739
4.773
4.966
4.697

. 025%
.032
.060
.039
.035
.165

.011%
.012
.040
.016
.014
.098

995
1,000
900
905
901
901

188
224
164
251
240
185

236
403
308
189
243
238

307
150
212
535
275
217

187
97
195
97
106
215

265
350
185
84
277
231

4.9 64
5.844
5.806
5.544
5.519
4.820

.048
.054
.081
.011
.016
.076

.024
.019
.039
.005
.002
.030

n.a. Not available.
1/ Federal Reserve and Government Investment Accounts.
2/ 100% Tax-and-loan-account credit.
3/ 50% Tax-and-loan-account credit.




Table 5--Auction Results on Monthly 9-Month Treasury Bills

Date of:
Issue

Maturity

.Subscriptions
Coverage
ratio
Total Accepted

Discount rates and spreads
Allotments to :
Com' 1 Nonbank Other
Official . Average High to
Average to
Banks dealers Public accounts—
rate
low
high

Monthly:
9/30/66

6/30/67 $

985

$500

197%

$235

$158

$27

$ 80

5.808%

.086%

. 042%

10/31/66

7/31/67

1,076

500

215

221

149

23

107

5.567

.046

.019

11/30/66

8/31/67

1,183

501

236

167

187

9

138

5.552

.036

.019

12/31/66

9/30/67

1,093

500

219

280

186

17

17

4.920

.111

.035

1J Federal Reserve and Government Investment Accounts.




Table 6--Treasury Bill Strip Auction Results

Date of:
Issue

Maturity

(Dollar figures are in millions')
Average
Subscriptions
Allotments to 1/:
length
Coverage Com11 Nonbank Other
banks dealers public
(days)
Total Accepted
ratio

8/ 3/61- $4,673 2/$1,802
11/30/61

2597,

11/15/61

12/ 7/611/25/62

1,519

800

190

361

11/15/62

1/17/633/21/63

2,410

1,001

241

10/28/63

2/ 6/644/ 9/64

2,108

1,001

7/29/64

10/15/6412/17/64

2,147

6/14/61

11/25/66

$ 10

109.6

$333

106

575

414

211

269

1,001

215

308

3/31,4/30, 2,987 2/ 1,202
5/31/67

249

1,196

2.3087o

. 0437,

. 0187»

46.5

2.277

.148

.046

12

94.5

2.866

.049

.010

699

33

132.5

3. 601

.041

.007

650

43

109.6

3.505

.040

.013

6

156.3

5.318

.120

.028

$1,792

1/ None to Federal Reserve and Government Investment Accounts,
2/ 100% Tax-and-loan-account credit.




Discount rates and spreads
Average High to
Average to
low
rate
high

A -11

Table 7--OUTSTANDING AMOUNTS OF REGULARLY ISSUED BILLS
(In millions of dollars)

Total

November 1958-

Levels
Holdings of:
Official ,
Public
accounts—

Total

Yearlv Chanses
Holdings of:
Official^,
Public
accounts—

23,416

2,141

21,275

1958

24,016

2,331

23,985

+

600

+

190

+2,710

1959-

33,637

2,812

30,825

+9,621

+

481

+6,840

I960

32,431

3,713

28,718

-1,206

+

901

-2,107

1961

37,430

3,708

33,722

+4,999

-

5

+5,004

1962

45,246

3,475

41,771

+7,816

-

233

+8,049

1963

49,538

5,466

44,072

+4,292

+1 ,991

+2,301

1964

52,468

7,572

44,896

+2,930

+2 ,106

+

1965

53,651

9,800

43,851

+1,183

+2 ,228

-1,045

1966-{

57,760

13,254

44,506

+4,109

+3 ,454

+

-

December:

1/
2/

Federal Reserve and Government Investment Accounts.
Includes a net increase of $400 million in bills dated December 3,
delivered January 3, 1967.




824

655

A "12

Table 8--TREASURY COUPON SECURITIES--ISSUANCES IN RIGHTS
AND IN CASH QUARTERLY REFINANCINGS, AUGUST 1960-DECEMBER 1966
(Dollar figures are in millions)

Issue
date

8/15/60

Description

Rights refunding
Cash refinancing
Term
Allotments
Total 1 j Issued
Subscrip(yrs.-mos.)
issued— to public tions.^/ Totall/1 To public"
$11,848
5,158

3-1/8% CI 8/1/61
0-11-1/2
3-7/8% Bd. 5/15/683/ 7-9

$7,829
1,070

$2,288
1,045

11/15/60 3-1/4% Nt. 2/15/62
3-3/4% Bd. 5/15/66

1-3
5-6

2/15/61

3-1/4% Nt. 8/15/62

1-6

15,375

7,325

3,720

5/15/61

3%
CI 5/15/62
3-1/4% Nt. 5/15/63

1-0

2-0

12,001
12,110

5,509
2,753

3,691
1,916

16,351
6,643
315

6,852
1,844
365

3,048
1,744
315

8/1/61

3-1/4% Nt. 11/15/62
3-3/4% Nt. 8/15/64

1 1 / 1 5 / 6 1 3-1/4% Nt. 2/15/63

u

3/
3-3/4% Bd. 5/15/66^,
3-7/8% Bd. 11/15/74-

$9,098
1,213

$3,996
1,207

•3-1/2
-0-1/2
•9-1/2

6,082
5,019
749

2,696
3,419
691

1-3
4-6
13-0

3,642
2,384
517

3,574
2,380
381

2/15/62

3-1/2% CI 2/15/63
4%
Nt. 8/15/66

•0
•6

6,862
4,454

3,451
2,936

5/15/62

3-1/4% CI 5/15/63
3-5/8% Nt. 2/15/66
3-7/8% Bd. 11/15/71

•0
•9
•6

6,686
3,114
1,204

4,356
3,097
1,140

8/15/62

3-1/2% CI 8/15/631 1-•0
6
4%
Bd. 2/15/69
6-•
•0
4-1/4% Bd. 5/15/8 7-92

11/15/62 3-1/8% CI 11/15/63
3-1/2% Nt. 11/15/65
4%
Bd. 2/15/72

•0
•0
•
3

4,856
3,286
2,344

1,060
3,285
2,338

2/15/63

3-1/4% CI

•0
•
6

6,741
2,490

2,818
2,475

5/15/63

0
3-1/4% CI 5/15/64
3-5/8% Nt. 2/15/661/ 2-9
9

5,693
3,273

2,366
3,188




2/15/64

A-2 3

Table 8--TREASURY COUPON SECURITIES--ISSUANCES IN RIGHTS
AND IN CASH QUARTERLY REFINANCINGS, AUGUST 1960-DECEMBER 1966
(Dollar figures are in millions)

Issue
date
8/15/63

Description

3-3/4% Nt. 11/15/64

Rights refunding
Cash refinaneing
Term
Total
Issued
Allotments
Subscrip(yrs. -mos . )
issued^/ to public tions^/ Totall/ To public
1-3

$6,398

$2,249

11/15/63 3-7/8% Nt. 5/15/65

1-6

2/15/64

3-7/8% Nt. 8/13/65
4%
Nt. 8/15/663/

1-6
2-6

6,202
1,810

2,188
1,810

5/15/64

4%
Nt. 11/15/65
4-1/4% Bd. 5/15/74

1-6
10-0

8,560
1,532

2,177
1,503

8/15/64

3-7/8% Nt. 2/15/66

11/15/64 4%

$16,064

$7,977

$3,972

1-6

12,985

4,040

2,173

Nt. 5/15/66

1-6

15,458

9,519

3,077

Nt. 11/15/66

1-9

10,149

2,253

1,766

5,490

9,748

3,171

5,016
14,029

2,635
1,734

1,791
1,734

$158,992 $71,453

$35,451

2/15/65

4%

5/15/65

4%
Nt. 8/15/66|/
4-1/4% Bd. 5/15/74-

1-3
9-0

5,904
2,062

1,651
1,997

8/13/65

4%
4%

1-6
3-6

5,151
1,884

2,100
808

Nt. 2/15/67
Bd. 2/15/692'

11/15/65 4-1/4% Nt. 5/15/67

1-6

2/15/66

4-7/8% Nt. 8/15/67
5%
Nt. 11/15/70

1-6
4-9

4/2,117
-2,839

867
1,819

5/15/66

4-7/8% Nt. 11/15/67

1-6

8,135

1,450

8/15/66

5-1/4% CI 8/15/67
5-1/4% Nt. 5/15/71

1-0
4-9

5,919
i/2,578

1,440
1,059

11/15/66 5-5/8% Nt. 2/15/68
5-3/8% Nt. 11/15/71

$140,798 $74,971

Total - •
Average term:

total- - - -

Other than anchor issues:
Amounts - - - - - - - - - Average term total- - - - 1/
2/
3/
4/

1-3
5-0

2 yrs.--4 mos.

1 yr.-lO mos.

42,752 35,533
5 yrs.-- 0 mos.

38,255
7,766
6,754
5 yrs.-10 mos.

Including issues to Federal Reserve System and Government Investment Accounts.
Public only.
Reopening.
Excluding prerefundings.




TABLE 9:

Dealer Activity in Quarterly Rights Refundings, 1961-1966(Dollar figures are in millions)
Maximum position in

Issues to:
Refunding
Dealers as
per cent
of public

rights and new issues2/
Per cent of
issues to
Amounts
public

Cumulative Volume of Trading
Rights 3/

New Issues 4/

Amounts

Per cent of
issues to
public

Amounts

Per cent of
issues to
public

12.7

$1,455

20.4

n.a.

i . a.
i

760

12.1

1,748

27.6

$1,252

19.8

9.1

458

7.2

n.a.

n. a.

1,006

15.8

1,037

12.1

766

8.9

1,329

15.5

1,193

13.9

6,683

838

12.5

651

9.7

1,478

22.1

1,201

18.0

2/15/63

5,293

814

15.4

469

8.9

1,343

25.4

1,134

21.4

5/15/63

5,554

713

12.8

707

12.7

1,265

22.8

754

13.6

8/15/63

2,249

231

10.3

233

10.4

543

24.1

402

2/15/64

3,998

716

17.9

575

13.4

1,088

27.2

956

23.9

5/15/64

3,680

594

16.1

464

12.6

769

20.9

843

22.9

5/15/65

3,648

963

26.4

659

18.1

981

26.9

956

26.2

8/13/65

2,907

409

• 14.1

351

12.1

1,205

41.5

846

29.1

5/15/66

1,450

334

23.0

294

20.3

386

26.6

447

30.8

$63,583

$9,354

14.7

$7,254

11.3
«?10,989

19.0

Date

Total
public

Dealers

$6,806

$1,013

14.9

$867

11/15/61

6,335

1,112

17.6

2/15/62

6,387

580

5/15/62

8,593

11/15/62

8/1/61

Total or
average

56,777

- -

- -

2/15/62 57,196

- -

- -

w/o 8/1/61
w/o

Z ]

__

- -

- -

- -

$13,590

23.8

1/ Excluding combination maturity and prerefundings in February and August 1966.
2/ Includes position in outstanding reopened issues except in August 1961 refunding.
3/ While books were open.
4/ Through 7th day after announcement.
5/ Dealers reporting to the Federal Reserve Bank of New York,
n.a. - Not available.




- -

- -

±

A-2 3

Table 10--Dealer Activity in Quarterly Cash Refinancings, 1961 - 1966
(Dollar figures are in millions)

Allotments to:
Refunding date

Total
public

Dealers

2/15/61

$3,720

n.a.

5/15/61

5,607

$406

8/15/62

5,107

11/15/63

1/

Dealers
as per cent
of public

n.a.

Maximum positions*
in new issues —'
Per cent of
Amount
public
allotments

Cumulative volume*
of trading^./
Per cent of
Amount
public
allotments

$180

4.8

$1,004

27.0

7.2

548

9.8

1,383

24.7

340

6.7

312

6.1

1,516

29.7

3,972

556

14.0

444

11.2

928

23.4

8/15/64

2,173

431

19.8

479

22.0

936

43.1

11/15/64

3,077

355

11.5

260

8.4

867

28.2

2/15/65

1,766

284

16.1

209

10.8

571

32.3

11/15/65

3,171

397

12.5

357

11.3

454

14.3

11/15/66

__3^525

735

20.9

_692_

19.6

738

2CK9

$3,481

10.8

$8,397

26.1

Total or
average " $32,118
w/o 2A561 $28,398

$3,504

12.3

— In total new issues (where more than one).
2/

— Trading through 7th day after announcement.
3/
— Dealers reporting to the Federal Reserve Bank of New York.
* Includes position and trading in outstanding reopened issues,
n.a. Not available.




Triple I - Advance Refundings Since June i960
t
New issues

Old issues
Amount
outstanding
Description

Publicly
held
(m. of d.)

Total

Term to
maturity
(Yrs. Mos.)

Description

Term to
maturity
(Yrs. Mos.)

Extension
(Yrs. Mos.)

Amount
exchanged
Publicly
held
(m. ol: d.)

Total

Effect
"Boot"
on
paid
average
*
exchanged
to
length
Treasury
of
Pubmark(+)
licly
Total
etable
per
held
debt
$100
(Mos.)

_

June 1960:

2-1/2% II/15/6I
Total

$11,177 $;0,994

1-5

[3-3/4*
13-7/8*

5/15/64
5/15/68

3-11
7-11

2-6
6-6
2-10

$ 3,893
320
4,214

•3,814
264
4,077

34.8*
2.9
37.7

34.7*
2.4
37.1

13-5
21-2
29-5
28-11
24-7

643
993
1,095
1,248
3,979

512
777
993
1,113
3,395

30.5
35.3
29.3
32.7'
31.9

27.8
32.5
30.3
33.9
31.4

5-5
4-11
4-9
3-3
4-4

1,296
1,177
1,131
2,438
6,041

1,226
819
998
2,399
5,442

24.6
34.1
28.5
36.1
31.1

19ft}? ,
2-1/2* 6/15/62-67
2-l/2* 12/15/63-68
2-l/2* 6/15/64-69
2-1/2* 12/15/64-69
Total
March 1961:
2-1/4* 6/15/59-62
2 - l A * 12/15/59-62

2-5/8* 2/15/63
2-1/2* 8/15/63
Total.....

10,994

2,109
2,815
3,738
3,812
12,474

1,839
2,391
3,281
3,288
10,801

6-8-1/2
8-2-1/2
8-8-1/2
9-2-1/2

5,262
3,449
3,971
6,755
19,436

4,743
2,710
3,799
6,696
17,947

1-3
1-9
1-11
2-5

3,351

8-6

f3-l/2* 11/15/80
^3-1/2* 2/15/90
13-1/2* 11/15/98

19-2
28-5
37-2

10-8
19-11
28-8

1,035
722
495

589
622
469

22.1
15.4

1.
06

9-6

19-2
28-5
37-2

9-8
18-11
27-8
19-2

238
576
692
3,757

203
515
428
2,826

8.1
19.7
23.6
49.3

9.3
23.6
19.6
51.1

7-6
6-6
15-0
17-8
26-5
17-5
26-2
17-2
25-11
13-0

1,154
1,651
563
233
180
345
420
322
333
5,201

1,104
1,293
386
198
165
185
266
299
281
4,176

29.9
23.9
8.2
13.3
10.2
12.7
15.5
9.2
9.5
27.8

29.9
21.2
6.3
12.6
10.5
7.9
11.3
9.3
8.7
24.7

11/15/67
11/15/67
11/15/67
11/15/66

6-8
6*8
6-8
5<r8

36J

3.92
3.96
3.97
3.99

4.23
4.17
4.09
4.14

3.75
3.75
3.75
3.63

3.98
4.10
4.08
4.09

4.16
4.23
4.19

4.31
4.36
4.28

+ 3.50
+ 0.25
- 1.00

4.15
4.21
4.19

4.30
4.36
4.30

4.11
4.10
4.20
4.21
4.19
4.21
4.19
4.19
4.17

4.32
4.36
4.36
4.37
4.30
4.38
4.30
4.38
4.30

0.8

M.O

f3-1/2* 11/15/80
<3-1/2* 2/15/90
[3-1/2* 11/15/98

3-5/8*
3-5/8*
3-5/8*
3-3/8*

11/15/80 20-1-1/2
2/15/90 29-4-1/2
11/15/98 38-1-1/2
ll/l5/98 38-1-1/2

4.51*
4.22

—

17.6

4,688

3-1/2*
3-1/2*
3-1/2*
3-1/2*

4.24*
4.14

+ 2.25
- 1.00
- 2.00

25.9
30.2
26.3
35.8

11,177

For nontaxable holders
or before tax
Approximate Approximate
investment minimum reyield from investment
rate for
exchange
extension
date to
period adj.
maturity
for "boot11
1/

-

6.3

+$0.30

1.6

September 1961:
2-1/2*

2-1/2*

3/15/65-70.....

Total
March 1962:
3*
2/15/64

2,927

2,180

7,615

3/15/66-71

5,531

3,854

3,688

- L-ll-l/2

6,896

6,088

2-1U1/2

2-1/2* 6/15/67-72

1,757

1,575

10-3-1/2

2-1/2*

2,716

2,356

10-6-1/2

2-5/8*

2/15/65

9/15/67-72

2-1/2* 12/15/67-72
Total

3,515
18,739

3,227 10-9-1/2
16,935

4*
f4*
14*
f 3-1/2*
13-1/2*
/ 3-1/2*

8/15/71
8/15/71
2/15/80
2/15/90
11/15/98
2/15/90
I3-I/2* 11/15/98
f 3-1/2* 2/15/90
13-1/2* 11/15/98

9-5-1/2
9-5-1/2
17-11-1/2
27-11-1/2
36-8-1/2
27-11-1/2
36-8-1/2
27-11-1/2
36-8-V2

1.
86

4.5

+ 2.00
+ 0.25
+ 1.25
+
+
+
+

1.50
0.25
1.75
0.50

4.1

Office of the Secretary of the Treasury
Office of Debt Analysis.
]/
Based on price of bonds eligible for exchange—mean of bid and ask prices at noon on day before announcement, adjusted for "boot" payments.
Note: All items on table were made public or are derivable from public sources.
*
Less than .05*.




"TV<j

it'

Advance Refundings Slnoe June i960 New issues

Old issued

Amount
exchanged

Amount
outstanding
Publicly
Total
held
(m. of d.)

Description

Term to
maturity
(Yrs. Mos.)

Description

Term to
maturity
(Yrs. Mos.)

September 1962:
3-1/2*

2/15/63.

$ 6,862

$ 3,354

0-5

2-5/8*

2/15/63.

2,839

2,597

0-5

3-1/4*

2/15/63.

3,642

3,381

0-5

3-1/4*

5/15/63.

6,685

4,119

0-8

3-1/4*

5/15/63.

5,047

3,975

0-8

4*

5/15/63

1,743

1,649

0-8

26,819

6,851

3,017

p-3/4*
14*
(3-3/4*
14* ,
(3-3/4*

U*
p-3/4*

U*
P-3/4*
14*
p-3/4*

Extension
(Yrs.
Mos.)

8/15/67
8/15/72
8/15/67
8/15/72
8/15/67
8/15/72

4-11
9-11
4-11
9-11
4-11
9-11

4-6
9-6
4-6
9-6
4-6
9-6

8/15/67
8/15/72
8/15/67
8/15/72
8/15/67
8/15/72

4-11
9-11
4-11
9-11
4-11
9-11

4-3
9-3
4-3
9-3
4-3
9-3

19,074

Total

(Continued)

6-0

Publicly
held
(m. of d.)

Total

$

772
370
1,093
259
981
402
953
449

1,301

720
181
379

I

772
370
1,091
259

966

For nontaxable holders
Effect
or before tax
"Boot"
on
paid
average
Approximate
*
to
length
investment
exchanged
Treasury yield from
of
Pub(+)
markexchange
Total licly etable
per
date to
held
$100
debt
maturity
(Ifos.)
J J
11.3*
5.4
38.5
9.1
27.0

367

11.0

952

14.2

480

181
339'

7,860

7,519

960

954
664
17
2,273
532
49
194
94
2
845
196
24

-10.50
- 0.70
- 0.10

11.0
42.0
10.0
28.6

4.05

10.9

- 0.60

23.1

- 0.40
- 0.60

3.81
4.06

- 0.60

- 1.00

4.06

- 1.20

3.83
4.07

.50

3.65
3.97
4.04
3.65
3.97
4.04
3.64
3.96
4.04
3*63
3.96
4.03

14.3
10.4
21.7
29.3

39.4

14.0
10.1

22.0

1.10

.6
57.5
13.5

-.90
-.10
-.70
-.50
-.30
-.90
-.70
-.10
-.70
-.50

25.8

3.B1*

4.06
3.80

- 0.30
- 0.40

10.8
32.6
12.1
11.0
20.6

6.7

1,297

23.0*

- 0.40

3.81
4.06

3.81

2.9

March 1963*. Pre-refunding
3-1/2*

8/15/63.

2-1/2*

8/15/63.

3-1/8* 11/15/63.

4,317

4,856

3,952

0-5

0-5

1,061 0-8

'3-5/8*
3-7/8*
4*
'3-5/8*
3-7/8*
4*
3-5/8*
3-7/8*
.4*
3-5/8*
3-7/8*
4*

2/15/67
11/15/71

2/15/80

2/15/67
11/15/71

2/15/80

2/15/67
11/15/71
2/15/80
2/15/67
11/15/71

3-11
8- 8
16-11
3-11
8- 8
16-11
3-11
8- 8
16-11
3-11

3-6
8-3
16-6
3-6
8-3
16-6

3-3
8-0

206

.2
52.7
12.3
1.1
4.2
1.9
*

31.6

1.2

18.3
8.9
.2
32.7
7.6
.9

2/15/80

16-11

16-0

94
2
845
196
24

[3-7/8* 11/15/74

11- 8
16-11
11- 8
16-11
11- 8
16-11
11- 8
16-11

9-0
14-3
8-9
14-0
8-3
13-6
8-0
13-3

136
195
314
420
251
210
373
213

135
195
213
420
251
98
323
201

4.1
5.9
10.1
13.5
16.9
15.3
8.7

14.6

4-10

5,893

2,112

5,844

1,836

31.5
20.5

55.0
18.9

8,005

7,680

27.6

37.8

16-3
3-0
7-9

2,700

2,588

0-11

3-1/2* 11/15/65.

3,286

3,268

2-8

[4*

3-5/8*

2/15/66.

3,114

2,891

2-11

/3-7/8* 11/15/74

3*

8/15/66.

1,484

1,337

3-5

2,438

2,205

3-8

p-7/8* 11/15/74
14*
2/15/80
J 3-7/8* 11/15/74

18,724

10,618
9,701

11-1

29,045

20,319

6-6

2/15/64

3*

693
17
2,275
532
49

8- 8

31.3
7.3
.9

"Junior" refunding

3-3/8* 11/15/66
Pre-refunding
"Junior" refunding.
Total.

10,321

\4*

\4*

2/15/80

2/15/80

2/15/80

14.2

6.0

1.50
1.00

7.4
14.5

1.70
1.20

4.1

18.8
+.50
.90
.40

7.3

9.1

3.1

Office of the Secretary of the Treasury
Office of Debt Analysis
Based on price of bonds eligible for exchange—mean of bid and ask prices at noon on day before announcement, adjusted for "boot" payments.
Note: All items on table were made public or are derivable from public sources.
*
Less than.05*




3:98
4.04
3.98
4.04
3.97
4.03
3.97
4.03

TVrU'll -

Advanced Refundings Since June i960 -

Ilew Issues

Old Issues
Amount
outstanding
Description
Publicly
Total
held
(m. of d.)
September 1963: Pre-refunding
3-1/4* 5/15/64
$ 5,693

3-3/4*

4-3/4*

5/15/64

5/15/64

Junior" refunding
3 - 3 / ^ 5/15/66

3,893

4,933

3,597

$ 2,370

3,585

2,070

3,254

Term to
maturity
(Yrs. -

Description

Mos.)
0
0-8

0-8

0-8

2-8

2,703

2-11

4,287

^,122

3-5

5,282

4,926

14,519
17,620
32,139

8/15/64

$ 5,019

$ 3,279

8/15/64

2,316

2,093

3-3/4* 11/15/64

6,398

2,245

4-7/8* 1 1 / 1 5 / 6 4

4,195

1,864

2-5/8*

4,682

4,097

f
|

3-7/8$

W

4-1/8*
3-7/8*
| U*
4-1/8*
3-7/8%
| H
4-1/8*
f
[

W

4-1/8*
{ 4*
4-1/8*
4*
{ 4-1/8*

11/15/68
8/15/73
5/15/89-94
11/15/68
'8/15/73
5/15/89-94
11/15/68

8/15/73

5/15/89-94
8/15/73
5/15/89-94
8/15/73
5/15/89-94

Term to
maturity
(Yrs. Mos.)

4,454

3-5/8* 2/15/67
3-3/4* 8/15/67
Subtotals:
Pre-refunding
"Junior" refunding.

3-11

{ ^ ,„
4-1/8*

S/15/T3

5/15/89-94
3/15/73
5/15/89-94

4-6
9-3

5-2
9-11

5*

4-5/8*

2/15/65
5/15/65

Total.

2,113

1,685

15,263

Publicly
held
(m. of d.)

Total

"4-6
9-3

30-8
30-8

5-2
9-11

30-8

9-11

30-8

9-11

30-8

9-11

30-8

9-11

30-8

$

30-0
4-6
9-3
30-0

u*
0-6- 3 /U{ 4-1/4*
0-6-3/lt| u*
4-1/4*
4*
0 - 9 - 3 A { 4-1/4*
u*
0-9-3/"t{ 4-1/4*
4*
l-0-3/u{ 4-1/4*
4* .
l-3-3A{
4-1/4*

8/15/70
5/15/75-85
8/15/70
5/15/75-85
8/15/70
5/15/75-85
8/15/70
5/15/75-85
8/15/70
5/15/75-85
8/15/70
5/15/75-85

6-6-3/4
21-3-3/4
6-6-3/4
21-3-3/4
6-6-3/4

5-9
21-3-3/4 20-6
6-6-3/4 5-9
21-3-3/4 20-6
6-6-3/4 5-6

21-3-3/4 20-3

6-6-3/4
21-3-3/4

5-3

20-0
9-5

$

618
500
*375
756
782
317
194

198

126

588
114

272
105

For nontaxable holders
Effect
or before tax
"Boot"
on
paid
average
Approximate
length
to investment
*
Treasury
of
yield from
exchanged
(+)
markexchange
per
etable
date to
Pub$100
debt
maturity
lic^
Total
(mos.)
1/
held
10.9*
8.8
6.6
20.0
20.1
8.1
3.9
4.3
2.6
17.2
3.1
7.6
2.4

721

706

16.8

91
716
132

6-0
26-9

6-0
20-9
6-0
20-9

620
500
375
777
782
317
194
214
126
621
114
340
105

7-3
28-0
7-0
27-9
6-6
27-3

11-8
9-10
10-10^

January 1964
3-3/4*

Amount
exchanged

Extension
(Yrs.
Mos.)

5-2
9-11

8,025
15,005
23,030

8/15/66

4*

(Continued)

91
674

2.1

132

2,838

3,867
2,681

6,742

6,548

3,905

$

695

238
164
106
277
158

211
116

*

695
238
109
72
277
158
201
103

13.6

26.1*
21.1
15.8
21.1
21.8
8.8
9.U
9.6

-$0.65
- 1.15
- 1.35
- 0.95

4.oe*
4.15

- 1.1*5

4.14

6.1

- 2.30

- 16
.5

4.20
4.02

- 2.10

4.14
4.20

3-5

- 1.15
1.35

3.9

- 1.80
- 2.00

4.15
4.21
4.15
4.21
4.15
4.21
k.lk
4.20

- I.60

18.1
10.1
17.1
2.2

- o.4o

- 0.60
- 0.70

13.7

2.5

2.7

26.9
16.1
21.0

17.9
28.4

13.8*
4.7
7.1
4.6
4.3
2.5
5.0
2.8
14.0

- 0.90

U8.2

21.2*

221

122

1.1

76

23

10.5
3.6

2,971

2,657

12.0

17.4

U.25

- 1.85
- .95

7.0

10.8

4.25
k.16

0
- .5

12.3

27

630

U.l6*

-$0.95
- .05
- 1.65
- .75
- .95

7.3
5.2
3.4

5.5
15.4
.7
7.2
1.4

655
53

4.21
02

4.15

• .5
2

4.25

41
.5

4.25
4.15

H 1.15
- 1.80

4.25

- .0
9

U.25

4.16

1.6

Office of the Secretary of the Treasury
Office of Debt Analysis
1/ Based on price of bonds eligible for exchange—Mean of bid and ask prices at noon on day before announcement, adjusted for "boot" payments.
Note: All items on table were made public or are derivable from public sources.




T f r ' v l c II -

Advanced Refundings Since June i 9 6 0 - (Continued)

Nev Issues

Old Issues
Amount
outstanding
Description

Publicly
Total
Held
(m. of d.)

July 1964: 1964 Maturit e s
i
5*
8/15/64
$ 2,045
3-3/4*

8/15/64
4,086

4-7/8*

11/15/64
3,867

3-3/4*

11/15/64
5,961

s
1965-*67 Maturitie:
3-7/8*
5/15/65

IO/1/69
11/15/73
8/15/87-92
IO/1/69
11/15/73
8/15/87-92
10/1/69
11/15/73
8/15/87-92
10/1/69
11/15/73
8/15/87-92

5-2-1/4
9-3-3/4
28-0-3/4
5-2-1/4
9-3-3/4
28-0-3/4
5-2-1/4
9-3-3/4
28-0-3/4
5-2-1/4
9-3-3/4
28-0-3/4

5-1-1/2 $
9-3
28-0
5-1-1/2
9-3
28-0
4 - 1 0 - 1 / 2i
9-0
jI
27-9
11
4 - 1 0 - 1 / 2!
9-0
27-9

4*
4-1/8*
4-1/4*
4*
1 - 6 - 3 / 4 ' 4-1/8*
4-1/4*
4*
1-9-3/4 ' 4-1/8*
4-1/4*
4*
2-0-3/4 < 4-1/8*
4-1/4*
4*
2-6-3/4 | 4-1/8*
4-1/4*

10/1/69
U/15/73
8/15/87-92
10/1/69
U/15/73
8/15/87-92
10/1/69
U/15/73
8/15/87-92
IO/1/69
U/15/73
8/15/87-92
IO/.I/69
11/15/73
8/15/87-92

5-2-1/4
9-3-3/4
28-0-3/4
5-2-1/4
9-3-3/4
28-0-3/4
5-2-1/4
9-3-3/4
28-0-3/4
5-2-1/4
9-3-3/4
28-0-3/4
5-2-1/4
9-3-3/4
28-0-3/4

5,095
5,653

3-3/4*

5/15/66

2,540
2,862

4*

8/15/66

4,135
5,820

3-5/8*

2/15/67

1964 Maturities
1965-7 Maturities....
Total

Term to
Extenmaturity
sion
(Yrs. - (Yrs. Mos.)
Mos.)

4*
4-1/8*
4-1/4*
4*
2,347 0 - 0 - 3 / 4 « 4 - 1 / 8 *
4-1/4*
4*
1,558 0 - 3 - 3 / U « 4 - 1 / 8 *
4-1/4*
4*
1,809 0 - 3 - 3 / 4 1 4 - 1 / 8 *
4-1/4*
3,917 0 - 9 - 3 A '

2/15/66

Description

$ 1,911 0-0-3/4 '

7,977
3-5/8*

Term to
maturity
(Yrs. Mos.)

*
exchanged

Amount
exchanged
Publicly
Held
(m. 0t d. )

Total

287 $
362
197
637
344
196
250

Total

Publicly
held

ble holders
For nontaxa]
Effect
or bef<are tax
"Boot"
on
paid
Approximate Approximate
average
to
investment minimum relength
Treasury yield from investment
of
rate for
exchange
mark(+)
extension
date to
per
etable
period adj.
maturity
$100
debt
for "boot"
(mos.)
y

15.0*
18.9
10.3
27.1
14.7
8.4
16.0
14.9
7.6
9.0
11.8
8.0

.45
- .90
- .05
- .30
- -75
+ .10
- .80
-1.25
- .40
- .45
- .90
- .05

4.06*
4.22
4.24
4.06
4.22
4.24
4.06
4.22
4;24
4.06
4.22
4.24

4.07
4.23
4.25
4.12
4.27
4.26
4.12
4.27
4.26

- .50
- .95
- .10
- .10
- .55
+ .30
- .25
- .70
+ .15
- .65
-1.10
- .25
+ .30
- .15
+ .70

4.08
4.23
4.25
4.09
4.24
4.25
4.08
4.23
4.25
4.08
4.23
4.25
4.08
4.23
4.25

4.15
4.29
4.27
4.22
4.34
4.29
4.23
4.36
4.30
4.24
4.36
4.30
4.28
4.39
4.31

U8
162
213
145

4-4-1/2
8-6
27-3
3-7-1/2
7-9
26-6
3-4-1/2
7-6
26-3
3-1-1/2
7-3
26-0
2-7-1/2
6-9
25-6

399
769
188
942
1,303
147
294
297
22
179
334
151
578
503
35

399
769
188
942
1,303
147
294
297
17
179
333
134
578
500
35

5.0
9.6
2.4
16.7
23.O
2.6
10.3
10.4
.8
3.1
5.7
2.6
16.6
14.5
1.0

10.2
19.6
4.8
18.5
25.6
2.9
11.6
U.7
.7
4.3
8.1
3.2
17.5
15.2
1.1

22
3

3,475

3,301

15,959
25,787

7,625
18,988

11-3
7-8

3,143
6,l4i

3,143
6,115

19.7
23.8

41.2
32.2

41,746

26,613

8-11

9,284

9,258

22.2*

34.8*

4.8

Office of the Secretary of the Treasury
Office of Debt Analysis
1/ Based on price of bonds eligible for exchange—Mean of bid and ask prices at noon on day before announcement, adjusted for "boot" payments.
Mote: All items on table were made public or are derivable from public sources.




4.08*
4.24-

14.0*
17.7
9.6
15.6
8.4
4.8
6.5
6.0
3.1
2.7
3.6
2.4

287
362
197
637
344
196
250
232
118
162
213
145

4.25

l a to I e /( -

Advanced Refundings Since June i 9 6 0 - (Continued)

Nev Issues

Old Issue8
Amount
outstanding
Description
Publicly
Total
held
(m. of d.)
January 1965:
£-5/8* 2/15/65 2/..

Term to
maturity
(Yrs. Mos.)

r
$ 3,976

Nov. 1965-Nov. 1967 Mat urlties
3-1/2* 11/15/65
2,95*

• 3,**2

0-1

3-5/8*

3-7/8*

0-10 ' *-l/8*
*-l/**

8,560

2,253

0-10

2/15/66

3,260

2,6*9

1-1

2/15/66

If,0*0

**

*-l/8*
I *-l/**

**

2,869

11/15/65

4*

Description

2,133

1-1

**

*-l/8*
*-l/**

**

*-l/8*
*-l/**

**
*-V8*
*-l/**

3-3/**

3-3/**

5/15/66

8/15/67

3-5/8* 11/15/67

2,250

*,*33

3,60*

1,931
*,072

2,775

1-4

**

4-1/8*
*-l/**

**

2-7
2-10

*-l/8*
*-l/**
4*
*-l/8*

2/15/70

2/15/7*
8/15/87-92
2/15/70
2/15/7*
8/15/87-92
2/15/70
2/15/7*
8/15/87-92
2/15/70
2/15/7*
8/15/87-92
2/15/70
2/15/7*
8/15/87-92
2/15/70
2/15/7*
8/15/87-92
2/15/70

2/15/7*
8/15/87-92
2/15/70
2/15/7*
8/15/87-92

Term to
maturity
(Yrs. Mos.)

Extension
(Yrs. Mos.)

Amount
exchanged
Publicly
held
(m. of d.)

Total

5-1
9-1
27-7

5-0
9-0
27-6

$ 67*

5-1
9-1
27-7
5-1
9-1
27-7
5-1
9-1
27-7
5-1
9-1
27-7
5-1
9-1
27-7
5-1
9-1
27-7
5-1
9-1
27-7

*-3
8-3

6*0

*93
6*1

For nontaxable holders
or before tax
"Boot"
paid
Approximate Approximate
to
investment minimum re*
0
1 Treasury yield from investment
exchanged
\ * /
rate for
exchange
etable
per
extension
date to
Pubdebt
$100
period adj.
maturity
licly
Total
(mos.)
for "boot"
held
1/
Effect
on
average
length

673
*93
6*1

17.0*
12.*
16.1
21.7
14.1
9.5
2.1
1.6
1.7

*-3
8-3
26-9

588

*8l 18.0

8-0
26-6
*-0
8-0

33*
144
379
*00

26-6

665
300

211
144
369
39*

*-0

3-9
7-9
26-3
2-6
6-6
25-0

2-3
6-3
2*-9

250
176
139
1*5

665

1*7
116
903
46l

257
113
116
810
*61

1*0
72*

1*0
670

738

577
99

122

10.2

*.*

9.*
9.9
16.5
13.3
6.5
5.2
20.*
10.*
3.2
20.1
20.5
3.*

19.9
11.3
3.*
2*.l
20.8
3.6

•total

1*-1
9-3

$,0
188
7,957

$1,807
7,257

*5-5*
27.3

10-2

$9,765

$,6
903

29.5*

*1.0*

4.23
4.28
4.26
4.24
4.28
4.27
4.23
4.28
4.26
4.24
4.28
4.27
4.25
4.29
4.27
*.31
*.32
4.28
*-37
*.35
*.29

-.05
-.10
+.80
+3
.0
+2
.5
+.5
11

52.5*
38.8

$22,12*

4.18
4.24
4.25
4.18
4.24
4.25
4.18
4.24
4.25
4.18
4.24
4.25
4.18
4.24
4.25
4.18
4.24
4.25
4.17
4.24
4.25

-.75
+.15
-.50
-.55
+.35

6.0

$ 3,**2
IB,682

4.16*
4.23
4.24

-.70

31.2
13.3
5.9

$ 3,976
29,101

*.23
4.2*

-.*5
-.50
4.1*0
-.90
-.95
-.05
-.40
-•*5
+.*5

18.5

•33,077

2/15/65
1/51/7 Mt
16-16 a

2-5/8*

*.l6*

-.65
+ .25

21.7
1*.5
8.7
7.8
6.2
6.*
18.2
8.0
5.*
17.3

4l6
282
176
1*0
1*5

26-9

$ -.60

19.6*
1*.3
18.6

62*
*l6

$

5.6

Office of the Secretary of the Treasury
Office of Debt Analysis
1/
2/

Based on prices of Issues eligible for exchange--Man of bid and ask prices at noon on day before announcement, adjusted for "boot" payments.
lot eligible for nontaxable exchange privilege.

Bote:

All items on table vere made public or are derivable from public sources.




Table 11 - Advanced Refundings Since June 1960 - (Continued)

New Issues

Old Issues

Amount
outstanding
Description

Total

Publicly
held

(m. of d.)

February

1966:

3 - 3 / 4 %

Description

$1,688

5 / 1 5 / 6 6

Amount
exchanged
Publicly
Total
held
(m. of d.)

Extension
(Yrs.
Mos.)

9 , 5 1 9

4

-

6

$ 6 5 7

$ 6 5 2

4

-

6

1 , 2 3 0

9 7 2

4

-

3

5 , 1 1 8

4

-

$ 1 0 , 4 8 7

4

-

$ 1 , 4 1 5
2 , 9 8 2

570 11/15/70
37o

8 / 1 5 / 6 6

1 , 0 2 4

4%

8 / 1 5 / 6 6

11,060

Total

Term to
maturity
(Yrs. Mos.)

%
exchanged
PubTotal
licly
held

"Boot"
paid
to
Treasury
(+)
per

$100

For nontaxable holders
or before tax
Approximate
investment
yield from
exchange
date to
maturity

i/

Pre-refunding

5 / 1 5 / 6 6

4%

Term to
maturity
(Yrs. Mos.)

Effect
on
average
length
of
marketable
debt
(mos.)

. . .

$ 2 3 , 2 9 1

August

1966:
1 1 / 1 5 / 6 6

$

4 6 . 1 %

+ $ 0 . 3 0

4 . 9 8 %

1 , 2 0 6

1 2 . 9

4 0 . 4

+

0 . 2 5

4 . 9 8

3 2 4

3 2 4

3 1 . 6

3 3 . 3

+

0 . 9 0

4 . 9 8

3

2 , 6 2 5

2 , 5 5 5

2 3 . 7

4 9 . 9

+

0 . 4 5

4 . 9 7

4

$ 4 , 8 3 6

$ 4 , 7 3 7

20.8%

4 5 . 2 %

4 - 9

1.2

Pre-refunding

4 - 3 / 4 %

3 8 . 9 %

1 , 6 5 2

$ 1 , 6 3 7

1 1 / 1 5 / 6 6

4%
3 - 3 / 8 %

2 , 2 5 4

1 , 6 6 9

1 1 / 1 5 / 6 6

1 , 8 5 1

1 , 5 9 5

$

Total

5 , 7 5 7

$4,901

0

-

4-6

3

0 - 3'
0 - 3]

5 - 1 / 4 %

5/l5[7l

4

-

9

4

-

6

4-6
4

517 ; $

517

3 1 . 3 ° /

3 1 . 6 %

+ 0.10

5 . 2 4 %

584 |

$

576

2 5 . 9

3 4 . 5

+

0 . 3 5

5 . 2 3

+•

0 . 5 5

5 . 2 4

5 8 6

-

6

$1,687

-

3

$74,343

581
$lj~674

3 1 . 7

3 6 . 4

2 9 . 3 %

3 4 . 2

$ 6 9 , 0 5 3

2 6 . 0 %

%

0 . 4

Total June
1 9 6 0

-

Aug.-1966

1/

$ 2 8 6 , 0 3 7

$ 2 0 4 , 0 1 9

9

3 3 . 9 %

4 1 . 2

Based on price of bonds eligible for exchange—mean of bid and ask prices at noon on day before announcement, adjusted f o r "boot" payments-




TABLE 12 -- EXCHANGES BY INVESTOR CLASSES IN ADVANCE REFUNDINGS, 1960 - 1965
(In millions of dollars)
Advance
Refundings

Commer- Dealers Corpora- Insurance Mutual Private State & local Indivi- All
Total
cial
Companies Svgs. Pension
funds
and
tions
duals Other Public
Banks
Brokers
Funds Pension Other
Banks
Public

Fed. Reserve
and Govt.
Inv. Accts.

Total

196Q--June

2,685

160

228

204

71

41

39

202

148

300

4,077

137

4,214

Oct.

267

154

55

1,090

823

66

292

275

120

254

3,395

583

3,979

1961--Mar.

3,378

324

185

328

150

41

54

302

173

508

5,442

599

6,041

192

132

24

1,337

363

34

280

228

81

156

2,826

431

3,757

1,877

348

89

308

132

75

290

270

369

419

4,176

1,024

5,201

Sept, 4,731

1,194

185

149

186

57

44

222

113

639

7,519

341

7,860

Sept,
1962--Mar.

1963--Mar.

4,403

1,567

237

99

238

68

106

143

133

687

7,680

325

8,005 :

Sept

3,365

1,539

174

192

210

56

125

277

132

480

6,548

197

6,745

1964--Jan.

1,442

658

82

109

42

15

29

72

56

153

2,657

314

2,971

July

5,501

1,086

289

326

240

125

18

422

313

935

9,258

26

9,284

5,650 1,426

214

376

148

54

74

262

175

684

9,063

702

9,765

1,762

4,695

2,427

632

1,351 2,675

1,813

5,213

62,644

5,176

67,820

1965--Jan.
Total

Note:

33,490

8,587

Figures may not add to totals due to rounding.




A-2 3
TABLE 13-- Exchanges in Senior and in Pre- and Junior Advance Refundings
By Class of Investor, 1960 - 1965
(In millions of Dollars)
Senior Refundings 1/
Investor Classes

Oct

1960 Sept. 1961 Mar. 1962 Total

Pre- and Jr.
Refundings 2/

Total

Commercial banks

267

192

156

630

32,861

33,490

Dealers and brokers

154

132

110

396

8,192

8,587

55

24

40

119

1,643

1,762

1 ,090

1 ,337

156

2 ,583

2,112

4,695

823

363

58

1 ,244

1,183

2,427

66

34

32

132

500

632

292
275

280
228

243
138

815
641

536
2,034

1,551
2,675

Individuals

120

81

215

416

1,397

1,813

All other public

254

156

231

641

4,573

5?213

3 ,395

2 ,826

1,394

7 ,615

55,030

62,644

583

931

439

1 ,953

3,222

5,176

3 ,979

3 ,757

1,833

9 ,569

58,253

67,820

Corporations
Insurance companies
Mutual savings banks
Private pension funds
State and local:
Pension funds-Other

Total public
Federal Reserve and
Govt. Inv. Accts.
Total

1/ Eligible issues with remaining terms to maturity over 5 years.
7j Eligible issue maturities in pre-refundings under 1 year; in junior refundings,
1 - 5 years.
Note:

Figures may not add to totals due to rounding-




TABLE 14:

Month
1960
Jan.
Feb.
Mar.
Apr.
MayJune
July
Aug.
Sept.
Oct.
Nov.
Dec.
1961
Jan.
Feb.
Mar.
Apr.
May
June
July
Aug.
Sept.
Oct.
Nov.
Dec.
1962
Jan.
Feb.
Mar.
Apr.
May
June
July
Aug.
Sept.
Oct.
Nov.
Dec.

A-2 3
YIELDS ON LONG-TERM TREASURY, MUNICIPAL, AND PRIVATE SECURITIES

Monthly Averages, 1960-1966
(In per cent)
FHA.
LongNew
New Aa
New
FHA
LongNew A a
Term
Term
Corporates Municipals MortCorporates Municipals Mortgages Month
2/
gage s3/
2/
3/
Treasury
Treasury
1/
i/
1963
5.52
3.10
4.22
3.89
3.72
6.24
Jan.
5.25
4.37
5.50
3.92
3.15
6.23
Feb.
4.25
3.60
4.22
5.02
Mar.
5.47
4.26
3.05
3.93
6.22
3.56
4.08
4.89
5.44
3.10
Apr.
6.21
4.35
3.97
3.56
4.94
4.18
5.44
May
3.11
6.21
4.35
3.60
3.97
4.95
4.16
3.21
5.44
4.32
June
4.00
6.19
3.55
4.85
3.98
5.44
3.22
July
4.34
4.01
6.18
3.50
4.68
3.86
5.44
4.34
3.13
3.99
6.14
Aug.
3.34
4.48
3.79
5.43
3.20
Sept. 4.04
4.40
3.42
6.11
4.58
3.84
5.43
4.36
3.19
Oct.
4.07
3.53
6.09
4.68
3.91
5.44
4.42
3.29
Nov.
4.11
3.40
6.05
4.76
3.93
5.44
Dec.
4.14
4.49
3.27
6.04
3.40
4.93
3.88

3.89
3.81
3.78
3.80
3.73
3.88
3.90
4.00
4.02
3.98
3.98
4.06

4.63
4.43
4.36
4.56
4.66
4.75
4.74
4.76
7.67
4.45
4.48
4.58

3.40
3.31
3.45
3.50
3.43
3.52
3.52
3.52
3.53
3.42
3.41
3.47

6.00
5.89
5.82
5.77
5.75
5.72
5.70
5.71
5.72
5.72
5.72
5.71

1964
Jan.
Feb.
Mar.
Apr.
May
June
July
Aug.
Sept.
Oct.
Nov.
Dec.

4.15
4.14
4.18
4.20
4.16
4.13
4.13
4.14
4.16
4.16
4.12
4.14

4.49
4.38
4.45
4.49
4.48
4.49
4.43
4.43
4.49
4.49
4.47
4.47

3.22
3.14
3.28
3.28
3.20
3.20
3.19
3.19
3.23
3.25
3.18
3.13

5.44
5.44
5.44
5.44
5.44
5.44
5.44
5.44
5.44
5.44
5.44
5.43

4.08
4.09
4.01
3.89
3.88
3.90
4.02
3.98
3.94
3.89
3.87
3.87

4.55
4.53
4.45
4.31
4.26
4.30
4.41
4.39
4.28
4.26
4.23
4.28

3.34
3.21
3.15
3.06
3.11
3.26
3.28
3.23
3.11
3.02
3.04
3.07

5.72
5.70
5.68
5.65
5.61
5.60
5.60
5.58
5.56
5.55
5.53
5.53

1965
Jan.
Feb.
Mar.
Apr.
May
June
July
Aug.
Sept.
Oct.
Nov.
Dec.

4.14
4.16
4.15
4.15
4.14
4.14
4.15
4.19
4.25
4.28
4.34
4.43

4.44
4.44
4.49
4.48
4.52
4.57
4.57
4.66
4.71
4.69
4.75
4.90

3.06
3.09
3.18
3.15
3.17
3.24
3.27
3.24
3.35
3.40
3.46
3.54

5.43
5.43
5.43
5.43
5.43
5.43
5.43
5.45
5.46
5.49
5.51
5.63

For footnotes see next page.




A-2 3

TABLE 14:

YIELDS ON LONG-TERM TREASURY, MUNICIPAL, AND PRIVATE SECURITIES
Monthly Averages, 1960-1966
(In per cent)

Month

1966
Jan.
Feb.
Mar.
Apr.
May
June

1/
2/
3/
4/
5/

New Aa
New
LongLongFHA
New Aa
New
FHA
Corporates Municipals Mortgages Month
Term
Term
Corporates Municipals Mort2/
2/
Treasury
Treasury
i/
1/
gage s^,
l !

4.43
4.61
4.63
4.55
4.57
4.63

4/
-4.93
5.09
5.33
5.38
5.55
5.67

3.52
3.65
3.72
3.56
3.65
3.77

5/
~5. 70
5.85
6.00
6.16
6.32
6.45

1966
July
Aug.
Sept.
Oct.
Nov.
Dec.

4.75
4.80
4.79
4.70
4.74
4.65

5.80
6.04
6.14
6.04
6.11
5.98

3.95
4.12
4.12
3.94
3.87
3.86

Average of weekly new Aa corporate reoffering rates estimated by the Treasury.
Bond Buyer 20 bond index.
Average yield on new 25-year mortgages as of the first of the succeeding months.
Compiled by FHA (Figures published by FHA are rounded to the nearest . 057o).
Adjusted to reflect value of deferred call provisions beginning in 1966.
Yields on new 30-year mortgages beginning in 1966.(See note in parentheses in
footnote 3.)




6.51
6.58
6.63
6.72
6.81
6.77

A -26
Table 15--Dealer Activity in Advance Refundings, 1960-1965
(Dollar figures are in millions)

Issues to
Maximum positions
Cumulative volume of trading
Refunding Total
Dealers as
in rights & new
Rights^/
New :.ssues
date
public Dealers % of public
is sue&i'
Amounts %, of issues Amounts % of issues
Amounts % of issues
to public
to public
to public
6/23/60

$4,077

n.a.

n. a.

10/ 3/60

3,396

n.a.

197

4.8%

n. a.

80

2.4

334

$

$

292

7.2%

*$ 119
+ n.a.

2.9%

55

1.6

*
+

50
102

1.5
3.0

6.1

563

10.3

*
+

174
n. a.

3.2

4.2

3/30/61

5,443 $

364

6.7%

9/29/61

2,827

163

5.8

57

2.0

150

5.3

*
+

119
n. a.

3/ 9/62

4,178

450

10.8

279

6.7

n.a.

n.a.

*
+

312
504

7.5
12.1

9/20/62

7,520

1,515

20.1

772

10.3

2,163

28.8

*1,029
+1,286

13.7
17.1

3/15/63

7,681

2,288

29.8

983

12.8

3,773

49.1

*1,996
+2,412

26.0
31.4

9/18/63

6,551

2,210

33.7

967

14.8

2,043

31.2

*1,042
+1,840

15.9
28.1

1/29/64

2,658

1,052

39.6

716

26.9

1,141

42.9

* 554
+1,170

20.8
44.0

7/24/64

9,255

2,433

26.3

1,107

12.0

2,702

29.2

788
+2,519

19.3
27.2

1/19/65

9,063

2,447

27.0

1,184

13.1

2,833

31.3

*1,829
+2,642

20.2
29.2

$15,715

26.9

Total or
>62,649 $13,315
Average
w/o 3/1/62 58,471

21.2%

$6,676

10.7%

6/23/603/ 1/62

19,921

1,365

6.9

947

4.8

*$ 774

3.9

9/15/621/19/65

42,728
42,728

11,945

28.0

5,728

13.4

*8,238
+11,869

19.3
27.8

J./ Includes position in outstanding reopened issues.
2/ Through 4th day after announcement.
* Available through 5th day after announcement.
+ On 7th day after announcement,
 n.a. Not available.
http://fraser.stlouisfed.org/
Source: Federal Reserve Bank of New York,
Federal Reserve Bank of St. Louis

A -27

Table 16--New Issues Offered in Advance Refundings, 1960-1965,
Terms to Maturity, Allotments to Total Public and Dealers

Advance
refunding
6/23/60

10/ 3/60

3/30/61

9/29/61

3/ 9/62

9/20/62

3/15/63

9/18/63

New issue offered
3-3/4% Nt.
3-7/8% Bd.

5/15/64
5/15/68

3-1/2% Bd. 11/15/80
3-1/2% Bd. 2/15/901/
3-1/2% Bd. 11/15/98

3-5/8% Bd. 11/15/67
3-3/8% Bd. 11/15/66

3-1/2% Bd. ll/15/80i/
3-1/2% Bd. 2/15/901/
3-1/2% Bd. 11/15/981/

4%
4%
3-1/2%
3-1/2%

Bd. 8/15/71
Bd. 2/15/801/
Bd. 2/15/90l/
Bd. 11/15/981/

3-3/4% Nt.
4% Bd.

3-5/8%
3-7/8%
3-7/8%
4%

8/15/67
8/15/72

Nt. 2/15/67
Bd. 11/15/711/
Bd. 11/15/741/
Bd. 2/15/80l/

3-7/8% Bd. 11/15/68
4% Bd. 8/15/73
4-1/8% Bd. 5/15/89- .
941/

For footnotes see next page.




Term
(yrs.-mos.)

Issues (in
millions of
dollars) to:
Public Dealers.1/

Dealers as
per cent of
public

3-11
7-11

3,814
263
4,077

n.a.
n.a.

n.a.
n.a.

20- 1%

512
777
2,107
3,396

n.a.
n.a.
n.a.

n.a.
n.a.
n.a.

3,044
2,399
5,443

210
154
364

6.9 %
6.4
6.7

793
1,137
897
2,827

10

1.3

153

7.5

163

178

163
23
98
450

6.8
43.0
3.4
13.7
10.8

754
761
1,515

14.3
33.7
20.1

890
574
214

29- 4%
39-

6- 8

5- 8

19- 2
28- 5

37- 2

9- 5%
17-11%
27-11%
36- 8%

2,398
386
682
712
4,178

4-11
9-11

5,261

3-11

4,267
1,485
922
1,007
7,681

611
2,288

20.9
38.7
23.2
60.7
29.8

1,568
3,723
1^260
6,551

446
919
845
2,210

28.4
24.7
67.1
33.7

8-

8

11-

8

16-11

5- 2
9-11
30- 8

2,259
7,520

166

A -28

Table 16--New Issues Offered in Advance Refundings, 1960-1965,
Terms to Maturity, Allotments to Total Public and Dealers

Advance
refunding

New issue offered

Dealers as
per cent of
public

8/15/701/
&/

6- 6-3/4
21- 3-3/4

2,035
623
2,658

626
426
1,052

30.8
68.4
39.6

7/24/64

4 » Bd. 10/ 1/691/
7
4-1/8% Bd. 11/15/73
4-1/4% Bd. 8/15/8792—'

5- 2-1/4
9- 3-3/4
28- 0-3/4

3,726
4,353
1,176
9,255

429
1,179
825
2,433

11.5
27.1
70.2
26.3

1/19/65

4% Bd.
4-1/8% Bd.
4-1/4% Bd.

5- 1
9- 1
27- 7

4,059
2,805
2,199
9,063

332
518
1,597
2,447

8.2
18.5
73.6
27.0

First 5 refundings:

Under 15 yrs. 11,918
Over 15 yrs. 8,003

1/ 770
l 1 595

6.5%
7.4

Last

Under 15 yrs. 36,463
Over 15 yrs. 6,265

7,641
4,304

21.0%
68.7

1/29/64

470 Bd.
4-1 /47c Bd.

Term
(yrs.-mos.)

Issues (in
millions of
dollars) to:
Public Dealersi/

6 refundings:

-i'

5 / 1 5 /

2/15/70
2/15/74
8/15/87921/

Reopened issue.

—f Partly estimated,
n.a. Not available.
Source: Federal Reserve Bank of New York




A-2 3

Table 17--Treasury Bonds with Over 10 Years to Maturity Issued in Cash Financings
and Regular Refundings, and in Advance Refundings

Term
(y^s.mos.)

Issue
date

Amount
issued
($ mil.)

Type of
financing

Offering
yield
(per cent)

470
517
365
250
300

New cash
Rights
Cash rfdg.
Auction
Auction

4. 25
3.975
4. 19
4.008
4. 093

.15
.14
.13
.08
.08

4. 13

.12

Spread above
outstanding
issue yields

Cash Financings and Regular Refundings:
4-1/47, Bd. 5/15/75-85
3-7/87, Bd. 11/15/74
4-1/47, Bd. 8/15/87-92
47,
Bd. 2/15/88-93
4-1/87, Bd. 5/15/89-94

25 -1-1/2
13 -0
30 -0
30 -1
31 -1

Total or average - - -

4/ 5/60
11/15/61
8/15/62
1/17/63
4/18/63

24 -4

1,902

Advance Refundings:
10/ 3/60

3-1/27, Bd. 11/15/80
3-1/27, Bd. 2/15/90
3-1/27, Bd. 11/15/98

20 -1-1/2
29 -4-1/2
38 -1-1/2

643
993
2,343

Senior
Senior
Senior

3.92
3.96
3.98

.05
.09
.12

9/29/61

3-1/27, Bd. 11/15/80
3-1/27, Bd. 2/15/90
3-1/27, Bd. 11/15/98

19 -2
28 -5
37 -2

1,273
1,298
1,187

Senior
Senior
Senior

4.155
4.22
4.19

.125
.14
.13

3/ 9/62

Bd. 2/15/80
47,
3-1/27, Bd. 2/15/90
3-1/27, Bd. 11/15/98

17 -11-1/2
27 -11-1/2
36 - 8-1/2

563
900
933

Junior
Senior
Senior

4.20
4.205
4.185

.13
.125
.135

3/15/63

3-7/87, Bd. 11/15/74
Bd. 2/15/80
47,

11 -8
16 -11

1,074
1,130

Junior
Pre and Jr.

3.975
4.036

.085
.086

9/18/63

4-1/87, Bd.

30 -8

1,260

Pre and Jr.

4.207

.127

- 27 -1

13,597

4.10

.115

4.25
4.245
4.247

.06
.095
.047

5/15/89-•94

Subtotal or average
1/29/64
7/24/64
1/19/65

4-1/4% Bd.
4-1/4% Bd.
4-1/4% Bd.

-

•

747
5/15/75--851 21 -3-3/4
8/15/87--92 28 -0-3/4 1,199
2,254
8/15/87--92 27 -7

Subtotal or average

-

•

Total or averages -

-

.




Pre and Jr.
Pre and Jr.
Pre and Jr.

- 26 -7

4,200

4.25

.06

- 27 -0

17,797

4.13

.10

A-2 3

Table 18--Issues Maturing in 3 Through 10 Years in Cash Financings
and Regular Refundings, and in Advance Refundings

Issue
date

Description

Amount
issued
Term
(yrs .-mos.) ($ mil.)

Type of
financing

Offering
yield

Spread above
outstanding
issue yields

Rights
Cash Rfdg.
Rights
Rights
Rights
Rights
New Cash
Rights
New cash
Rights
Rights
Cash Rfdg.
Rights
Rights
New cash
Rights
Rights
Rights
Rights
Rights
Cash Rfdg.

4.625%
3.875
3.75
3.75
3.98
3.81
4.04
4.00
3.75
3.68
3.94
4.00
4.00
3.75
4.00
4.25
4.22
4.17
5.00
5.25
5.375

.165%
.085
.01
.15
.10
.10
.11
.07
.14
.14
.07
.09
.08
.09
.11
.02
.07
.09
.10
.11
.105

4.15

.10

Cash financings and regular refundings:
5/15/60
8/15/60
11/15/60
8/ 1/61

4-5/8%
3-7/8%
3-3/4%
3-3/4%
3-7/8%
11/15/61 3-3/4%
1/24/62 4%
2/15/62 4%
4/18/62 3-3/4%
5/15/62 3-5/8%
5/15/62 3-7/8%
8/15/62 4%
11/15/62 4%
2/15/63 3-3/4%
6/20/63 4%
5/15/64 4-1/4%
5/17/65 4-1/4%
8/13/65 4%
2/15/66 5%
8/15/66 5-1/4%
11/15/66 5-3/8%

Nt. 5/15/65
Bd. 5/15/68
Bd. 5/15/66
Nt. 8/15/64
Bd. 5/15/68
Bd. 5/15/66
Bd. 10/1/69
Nt. 8/15/66
Bd. 8/15/68
Nt. 2/15/66
Bd. 11/15/71
Bd. 2/15/69
Bd. 2/15/72
Bd. 8/15/68
Bd 8/15/70
Bd. 5/15/74
Bd. 5/15/74
Bd. 2/15/69
Nt. 11/15/70
Nt. 5/15/71
Nt. 11/15/71

Total or average
May 1960-Nov. 1966 -




5-0
7-9
5-6
3-1/2
6-9-1/2
4-6
7-8-1/2
4-6
6-4
3-9
9-6
6-6
9-3
5-6
7-2
10-0
9-0
3-6
4-9
4-9
5-0

5-7

2,113
1,070
1,213
5,019
749
2,384
1,114
4,454
1,258
3,114
1,204
1,844
2,344
2,490
1,906
1,532
2,062
1,884
2,839
2,578
1,734

44,905

A-2 3

Table 18--Issues Maturing in 3 through 10 Years in Cash Financings
and Regular Refundings, and in Advance Refundings

Issue
date

Description

Amount
Term
Type of
Issued
(yrs.-mos.) ($ mil.) financing

Offering
yield

Spread above
outstanding
issue yields

Advance Refundings:
6/23/60

3-3/47o Nt.

5/15/64

3-7/87o Bd.

5/15/68

3-5/87o Bd.

11/15/67

3-11

3,893

7-11

320

6-8

3,604

Junior
Junior

4.247c

.207c

4.14

.10

3.75

.14

3.63

.07

4.104

.10

5-8

2,438

Junior
Junior

8/15/71

9-5-1/2

2,805

Junior

3-3/47» Nt.

8/15/67

4-11

5,282

47c

3/30/61

Bd.

8/15/72

9-11

2,579

3 - 5 / 8 7 c Nt.

2/15/67

3-3/87, Bd.
3/

9/62

9/20/62

3/15/63

47c

Bd.

11/15/66

3-11

4,287

3 - 7 / 8 7 c Bd. 1 1 / 1 5 / 7 1

8-8

1,515

3.809

.17

4.06

.12

Prerefund.
Prerefund.

3.645

.15

3.965

.09

Prerefund.
Prerefund.

3 - 7/87» Bd. 1 1 / 1 5 / 6 8

5-2

1,591

.08

Bd.

9/15/73

9-11

3,894

Prerefund.
Pre and Jr.

4.02

47c

4.147

.13

1/29/64

47c

Bd.

8/15/70

6-6-3/4

2,223

Pre and Jr.

4.155

.105

7/24/64

47c

Bd.

1/69

5-2-1/4

3,726

.085

Bd. 1 1 / 1 5 / 7 3

9-3-3/4

4,357

Pre and Jr.
Pre and Jr.

4.07

4-1/87c

4.229

.09

47c

Bd.

2/15/70

5-1-

4,381

.085

2/15/74

9-1

3,130

Pre and Jr.
Pre and Jr.

4.175

4 - l / 8 7 o Bd.

4.238

.06

Nt. 1 1 / 1 5 / 7 0

4-9

4,836

Prerefund.

4.976

.075

4-9

1,687

Prerefund

5.236

.12

4.106

.11

9/18/63

1/19/65

2/15/66

57c

8/15/66

5 - 1 /47c Nt.

10/

5/15/71

Total or average
June 1960 - Aug. 1966




6-5

56,548

Table 19-Estimated Cost or Saving in Advance Refundings-Eligible

Issues Maturing before Dec. 31, 1966

A s s u m p t i o n "A"-Interest

savings from eligible issue maturity to maturity of offered issue based on market yield
issue when remainder of eligible issue was refunded at maturity!'
"B"-same as "A" except when market rate on offered issues longer than 5 years was over 4-1/4%—'

Year

Eligible

issue

Number
of advance
refundings
involved

Total
exchanged

(Dollar figures are in millions)
:
Estimated [ budget cost or savings
Added cost
Savings
Savings
Net Savunder
to eligible
under
ings (+)
assumpassumpor cost ( - )
issue
tion "B"
under "A"
tion "A"
maturity

1961:

2-1/2% Bd

11/15/61

1

$43,214

$74.0

-$ 6.4

1962:

2-1/4% Bd
2-1/4% Bd

6/15/59-•62
12/15/59-•62

1
1

15,296
1 :,177

22. 3
24. 8

15. 1
9. 6

2-5/8%
3-1/4%
3-1/2%
3-1/4%
3-1/4%
4%
2-1/2%
3-1/2%
3-1/8%

Nt.
Nt.
C.I.
C.I.
Nt.
Nt.
Bd
C.I.
C.I.

2/15/63
2/15/63
2/15/63
5/15/63
5/15/63
5/15/63
8/15/63
8/15/63
11/15/63

1
1

2.
,483
1 :,383
1 ;,142
,402
2.
,021
560
5.
,294
,670
1.
302

28.,4
3.
J
2.
,0
6.,1
8.
,9
,2
66.,0
2.
,5
,3

3%
3-1/4%
3-3/4%
4-3/4%
3-3/4%
5%
3-3/4%
4-7/8%

Bd
C.I.
Nt.
Nt.
Nt.
Nt.
Nt.
Nt.

2/15/64
5/15/64
5/15/64
5/15/64
8/15/64
8/15/64
11.15/64
11/15/64

1
1
1
2
2
2
2

2.
,219
,495
,876
534
2, ,110
,116
;
955
927

29.,6
,3
8.
4..6
,0
2.
2.
,3
,5
2.
,2
2.
,8

1963:

1964:

1/
2/
—
3/
—'

1
1
1
1
1

1
.

1.

1
,
1
.

Based on difference between market yield plus

Cost and savings discounted




2
8.0
7. 8
,2
,8
2. 3
70., 6
15.,5
4. 2

-

- 1.

1

If over 4-1/4%, the length of the offered

_

1.
1.

37.,2
38.,5
38.,0
9.,0
21.,5
12..4
9.,7
3.
,9

-$80.4

_
-

28.,6

- 11.J
- 9.,8
- 4.9
- 7.,1
- 2.,5
+ 4.,6
+ 13.,0
+ 2.,9
+
+
+
+
+

7.
,6
30.,2
33.,4
11.,0
19.,2
+ 13..9
+ 7.,5
+ 6.,7

_

T$77.5

13.0

8.6
- 15.5

21.6
23.7

_

_

28.,6

-

- 11.,7
- 9..8
- 4.,9

25.7
3.7
2.0

,2
8.
,0
,8
7.
1.
.2
1.
,8
2.
.3
.6
70.
15.
,5
,2
4.
37.
.1
13.
.5
14.
.0
.9
8.
.6
.1
2,
.5
,3

1,

1
.

- 1
.

6.0

-

7.
.1
2.
.5
+ 4..6
+ 13..0
+ 2..9

+

+
+
+
+

+
+
4-

63.3
2.5
1.3

7,
.5
5,.2
9,.4
3,
.9
6,
.3
2,
.6
.3
.5

28.5
8.1
4.5
1.9
2.2
1.5
2.2
2.8

1,

issue.

to 5 years, but could be longer if not over 4-1/4%.

at 3.5%, the average yield on marketable

-$ 5.9

,2
7.
15.,2

15.,1
9.,6

issues on June 30, 1957 through

or saving3/
Net
savings (+)
or cost (-)
under "B"

$71.6

-$80.4

.12% and the coupon rate (effective) on the offered

issue was limited

Discounted values of cost
Added cost
Savings
to eligible
under
issue
assumpmaturity
tion "B"

-

7. 2
15. 2

-

-$ 6.4

Net Savings (+)
or cost ( - )
under "B"

on

1966.

8.2
.3
7.0
6.8
1.0
1.5
2.0
62.2
13.7
3.7

-

31.2
12.1
12.5
1.7
7.9
1.6

-

26.0

- 10.7
5.0
7.3
2.0
1.1
11.2
2.4
2.7
4.0
8.0
3.6
5.7
3.1
2.2
3.6

Table 19-Estimated Cost or Saving in Advance Refundings-Eligible
Assumption

Year

Eligible

1965 :

2-5/8%
4-5/8%
3-7/8%
3-1/2%
4%

Bd
Nt.
Nt.
Nt.
Nt.

3-5/8%
3-7/8%
3-3/4%
4%
3%
4%
3-3/8%
4%
4-3/4%

Nt.
2/15/66
Nt.
2/15/66
Bd
5/15/66
Nt.
5/15/66
Bd
8/15/66
Nt.
8/15/66
Bd
11/15/66
Nt.
11/15/66
C.I. 11/15/66

1966:

issue

2/15/65
5/15/65
5/15/65
11/15/65
11/15/65

Issues Maturing before Dec. 31, 1966

M

A"-Interest savings from eligible issue maturity to maturity of offered issue based on market yield on
issue when remainder of eligible issue was refunded at maturityl/
^f
"B"-Same as "A" except when market rate on offered issues longer than 5 years was over 4-l/4%~

Number
of advance
refundings
involved
3

1
1
2

1
3

1
4

1
2
3
2

1
1

Total
exchanged

(Dollar figures are in millions)
Estimated budget cost or savings
Net SavSavings
Savings
Added cost
ings (+)
under
under
to eligible
or cost ( - )
assumpassumpissue
under "A"
tion "A"
tion "B"
maturity

Net Savings (+)
or cost ( - )
under "B"

$4,730
297
1,356
1,669
461

$64.2
1.4
3.5
10.8
.8

$81. 6
8
15. 0
55.
13. 5

+$17.4
+
2.2
+ 11.5
+ 44.3
+ 12.7

$46..6
,1
6.
,4
28.,6
6.
,1

-$17.6
+
1.5
+
2.9
+ 17.8
+
5.0

4,192
1,444
2,568
1,230
785
3,734
1,172
584
517

32.4
4.2
14.1

229. 0
102. 8
127. 3
2. 8
59.
125. 9
67. 8
5. 3
4. 7

+196.6
+ 98.6
+113.2
2.8
+ 45.1
+119.3
+ 55.3
5.5
+
+
4.6

171. 5
55..1
73. 2
2. 8
34. 3
79. 9
46. 2
5. 3
4. 7

Discounted values of cost
Savings
Added cost
under
to eligible
assumpissue
tion "B"
maturity

+139.1
+ 50.9
+ 59.1
2.8
+ 20.3
+ 73.3
+ 33.7
+
5.5
+
4.6

- -

14.0
6.6
12.5
.2
.1

1

1

1/ Based on difference between market yield plus . 127o and the coupon rate (effective) on the offered

issue.

2/ If over 4-1/4%, the length of the offered issue was limited to 5 years, but could be longer if not over 4-1/4%.
3/

Cost and savings discounted at 3.5%, the average yield on marketable issues on June 30, 1957 through 1966.




$58.,8

- 1 .3
.

$ 38.4
- -

3.
,4
10.
,4
,8

4.4
24.9
5.3

31.,1
,0
4.
13.,5

148.3
48.5
62.4
2.5
28.0

13. 0
6.
11. 6
3

1

-

1

68.6
37.6
5.0
4.2

or saving 3/
Net
savings (+)
or cost ( - )
under M B M
-$ 20.4
3
0
+
14. 5
+
4. 5

+
+

1.
1.

+ 117. 2
+
44.
•5
+
48. 9
2.
,5
+
15. 0
+
+
+
+

62. 5
26. 0
5.
,3
4.
,1

>

I

00

TABLE 20--Types of Exchange and Adjustment (Boot) Payments in Advance Refundings, 1960-66
Types of exchange: Nontaxable, recognition of gains or losses postponed; Taxable, immediate recognition
(In millions of dollars)
Total exchanges
Advance
Exchanges by the Public
Refunding
Nontaxable
Taxable^/
Nontaxable
|
Taxable.!/
Exchanges No
Boot paid
No
Boot paid Boot paid
Boot paid
Boot paid
Boot paid
Boot paid
Boot paid
with
Boot to investor by investor to investor by investor ICotal Boot to investor by investor to investor by investor Total
AMOUNTS EXCHANGED:
- - 1960:June 4,214
4,214 4,077
4,077
- - - - - - Oct. 3,979
- 3,979 3,395
3,395
- - - - - 1961:Mar. 4,864
1,177
6,041 4,623
5,442
819
- - - - - Sept
1,909
1,849
3,757
1,519
1,307
2,826
- - - - 1962:Mar. 1,334
5,201 1,269
3,867
2,908
4,176
- - - Sept
7,860
7,860
7,519
7,519
- 1963:Mar.
7,544
210
8,005
7,331
251
251
98
7,680
- - 6,742
- 6,742
Sept
6,548
6,548
- - - 2,262
1964:Jan.
708
2,971
1,999
657
2,657
- 782
July
176
196
9,284
5,359
2,947
5,338
111
2,947
9,258
- 1965:Jan.
2,931
4,596
5,028
1,167
641
9,765
2,661
1,166
641
9,063
- - - 1966:Feb.
4,836
4,836
4,737
4,737
- - - - - Aug.
1,687
1,674
1,687
1,674
Total 14,642
36,706
4,114
7,360
74,343 13,615
34,848
11,524
7,248
39,053
9,227
4,113
(Net
(Net
to into investor) m
vestor)
BOOT PAID
1960:June
Oct.
-2.5
3.5
2.5
1961:Mar.
-3.5
- -1.7
21.6
19.9
-9.1
24. 0
33.1
Sept
-39.4
- 39.4
-50.9
50.9
1962:Mar.
+34.8
- 34.8
+37.0
37.0
Sept
- +38.1
.5
38.6
1.1
41.2
+40.1
1963:Mar.
- +73.3
73.3
- +75.8
75.8
Sept
- +17.0
- - 18.9
+20.4
1.9
2.2
22.6
1964:Jan.
.2
17.2
440.9
2.4
.2
26.3
17.2
+40.9
2.5
26.4
July
7.2
+15.8
1.6
19.0
8.8
7.2
+16.6
1.6
9.7
20.7
1965:Jan.
-19.4
19.4
- 19.8
-19.8
1966:Feb.
-5.7
5.7
- - 5.8
-5.8
Aug.
151.2
24.4
26.9
230.8
24.4
27.4
77.1
141.7
103. 0
247. 7
Total
1/ Boot paid in all taxable exchanges.
Note: Figures may not add to totals due to rounding.
- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

—




- -

- -

>
i
oj
-O

TABLE 21 -- Market Yields on Federal Agency and Treasury Issues at Constant Maturities
and Reoffering Rates or New Corporate Bonds—Selected Dates, 1963-66
(In per cent)

Agency

1-Year
Treasury

3.22
3.26
3.76
3.88

3.02
3.09
3.48
3.68

1964--Mar. 10
Apr. 6
May 28
July 29
Sept. 23
Oct. 13
Nov. 6

4.08
4.15
4.04
3.98
4.02
4.10
4.08

1965--Mar. 26
June 4
Sept. 24
Nov. 23
1966--Jan.
Feb.
Mar.
Apr.
June
June
July
Aug.
Oct.
Nov.
Dec.

Date
1963--Feb.
Apr.
July
Oct.

n.a.

28
8
29
31

26
23
11
22
6
24
8
30
11
28
29

Agency

5-Years
Treasury

.20
.17
.28
.20

3.88
3.89
4.08
4.13

3.68
3.72
3.87
4.01

3.90
3.95
3.84
3.71
3.82
3.86
3.86

.18
.20
.20
.27
.20
.24
.22

4.28
4.58
4.27
4.25
4.24
4.30
4.28

4.27
4.35
4.47
4.58

4.04
4.03
4.31
4.38

.23
.32
.16
.20

5.05
5.29
5.34
5.38
5.70
5.61
5.74
6.36
6.00
6.10
5.47

4.88
4.98
5.05
4.89
5.03
4.85
5.15
5.97
5.58
5.48
5.00

.17
.31
.29
.49
.67
.76
.59
.39
.42
.62
.47

Not available.




Spread

Agency

10-Years
Treasury

.20
.17
.21
.12

4.08
4.08
4.18
4.24

3.94
3.97
3.99
4.15

.14
.11
.19
.09

4.26
4.31
4.35
4.38

4.11
4.19
4.03
4.05
4.06
4.08
4.04

.17
.39
.24
.20
.18
.22
.24

4.32
n.a.
4.33
4.31
4.32
4.33
4.37

4.20
4.22
4.19
4.20
4.19
4.19
4.15

.12
n.a.
.14
.11
.13
.14
.22

4.46

4.33
4.42
4.54
4.71

4.14
4.15
4.29
4.45

.19
.27
.27
.26

4.34
4.44
4.56
4.68

4.20
4.23
4.31
4.45

.14
.21
.25
.23

4.49
4.58
4.71
4.80

5.08
5.28
5.34
5.16
5.30
5.33
5.52
6.14
5.58
5.62
5.22

4.91
5.00
4.99
4.83
4.96
4.94
5.09
5.85
5.29
5.35
4.80

.17
.28
.35
.33
.34
.39
.43
.29
.29
.27
.42

4.94
5.08
5.22
5.04
5.25
5.25
5.48
5.92
5.52
5.37
5.13

4.61
4.92
4.96
4.77
4.79
4.80
4.99
5.48
5.05
5.19
4.60

.33
.16
.26
.27
.46
.45
.49
.44
.47
.18
.53

4.95
5.18
5.30
5.30
5.64

Spread

Spread

New Aa
Corporate rates!/

4.47
4.43
4.51
4.48
4.48

5.82
6.35
6.04
6.15
5.86

s
>

A-2 3

APPENDIX TO PARAGRAPH NO. 9
NONRECOGNITION OF GAIN OR LOSS FOR FEDERAL INCOME TAX PURPOSES
Where a bond is offered by the Treasury with a payment (other than the accrued interest
adjustment) to the investor.
Examples:
1. Assume that:
(a) The fair market value of the security offered by the Treasury on the date
the subscription is submitted is $99.00 (per $100 face value).
(b) The payment to the subscriber (discount) on account of $100 issue price
is $.50.
(c) The cost basis of the security surrendered by the subscriber is $99.75
(per $100 face value).
The sum of the fair market value of the security offered by the Treasury and
the payment to the subscriber is $99.00 • $«50 or $99.50. This is less than
the cost basis of the issue surrendered, therefore, no gain is recognized.
The new issue will be entered on the books of the subscriber at a cost basis
of $99.25, the cost basis of the issue surrendered less $.50. The gain or loss
between this cost basis and the proceeds of a subsequent sale or redemption of
the new issue will be a capital gain or loss to all investors, except those to
whom the bonds are stock in trade. Under present law, if the combined time
that the security surrendered and the new security received in exchange were
held exceeds 6 months, the capital gain or loss is long-term, otherwise it is
short-term.
2. The assumptions are the same except that the cost basis on the-books of the
subscriber, of the security surrendered is now $99.25 (per $100 face value)
instead of $99.75 in example 1.
The sum of the fair market value of the new security received in exchange by
the subscriber plus the $.50 payment (discount) is again $99.50. This exceeds
the cost basis of the security surrendered by $.25. This excess is a recognized
gain reportable for the year in which the exchange takes place. The gain is a
capital gain except to those to whom the bonds are stock in trade. Under present law, if the time the security surrendered was held exceeds 6 months, the
capital gain is long-term, otherwise it is short-term.
The subscriber will carry the new issue received in exchange at a cost basis
equal to the basis of the issue surrendered ($99.25), less the payment ($.50),
plus the amount of the recognized gain ($.»25), or ($99.25 - $.50 • $.25) $99.00.
3. The assumptions are the same as in example 1, except that the cost basis on the
books of the subscriber, of the security surrendered is $98.75 (per $100 face
value) instead of $99.75i in example 1.
The sum of the fair market value of the new issue received in exchange by the
subscriber plus the $.50 payment (discount) is still $99.50. This exceeds the
$98.75 cost basis by more than $.50. However, the amount of the gain reportable for the year of the exchange is $.50, since the amount of gain recognized
cannot exceed the amount of the payment. The nature of the recognized gain and
its treatment is the same as in example 2.
In this case, the subscriber will enter the new security received in exchange
on his books at the same cost basis as the security surrendered.



A-37

Excerpt from advance refunding offer of Feb. 20, 1963.

Computation of reinvestment rate for the extension of maturity:
A holder of the outstanding eligible securities had the option of accepting the
Treasury's exchange offer or of holding them to maturity. Consequently, he can
compare the interest plus (or minus) any payment, other than the adjustment of
accrued interest, he will receive resulting from exchanging now with the total
of the interest on the eligible issues and what he might obtain by reinvesting
the proceeds of the eligible securities at maturity.
The income before tax for making the extension now through exchange will be the
coupon rates plus (or minus) any payment on the new issues. If a holder of the
eligible securities does not make the exchange he would receive the coupon rates
on the eligible issues to their maturity and would have to reinvest at that time
at a rate equal to that indicated in paragraph 13 below for the remaining terms
of the issues now offered, in order to equal the return (including any payment)
he would receive by accepting the exchange offer. For example, if the 3% bonds
of 2/15/64 are exchanged for 3-7/870 bonds of 11/15/71 the investor receives
3-7/8% interest for the entire eight years and eight months plus $.70 (per
$100 face value) immediately. If the exchange is not made, a 3%, rate will be
received until February 15, 1964, requiring reinvestment of the proceeds of the
3 f s of 1964 at that time at a rate of at least 4.11%, for the remaining seven
years and nine months, all at compound interest, to average out to a 3-7/8%
rate for eight years and eight months plus the $.70 immediate payment. This
minimum reinvestment rate of the extension period is shown in the table under
paragraph 13. The minimum reinvestment rates for the other issues included
in the exchange are also shown in the table under paragraph 13.




13.

Investment rates on the new notes and bonds offered in exchange to holders of the eligible securities:

Eligible securities

3-1/2%
C/Is
8/15/63

2-1/2%
Bonds
8/15/63

3-1/8%
C/ls
11/15/63

3%
Bonds
2/15/64

FOR THE NEW 3-5/8% NOTES OF FEBRUARY 15, 1967
Payments on account of $100 issue price to subscriber

$0.50

$0.10

$0.30

$0.10

Approximate investment yield from exchange date (3/15/63) to maturity of notes
offered in exchange based on price of securities eligible for exchange 1/

3.657,

3.65%,

3.647,

3.637,

Approximate minimum reinvestment rate for the extension period 2/

3.80

3.80

3.84

3.87

$1.10

$0.70

$0.90

$0.70

FOR THE NEW 3-7/8 BONDS OF NOVEMBER 15, 1971
Payments on account of $100 issue price to subscriber
Approximate investment yield from exchange date (3/15/63) to maturity of bonds
offered in exchange based on price of securities eligible for exchange 1/

3.97%

3.97%

3.96%

3.96%

Approximate minimum reinvestment rate for the extension period 2/

4.05

4.06

4.08

4.11

3-5/8%
Notes
2/15/66

3%
Bonds
8/15/66

3-3/8%
Bonds
11/15/66

$1.70

$ -

3-1/2%
Notes
11/15/65
FOR THE NEW 3-7/8% BONDS OF NOVEMBER 15, 1974
Payments on account of $100 issue price to subscriber:

$1.50

$0.90

Approximate investment yield from exchange date (3/15/63) to maturity of bonds
offered in exchange based on price of securities eligible for exchange 1/

3.987,

3.98%,

3.977,

3.97%

Approximate minimum reinvestment rate for the extension period 2/

4.24

4.24

4.33

4.32

Footnotes appear at end of table on next page.




>
i
u
>
00

Eligible securities

3-1/2 %
C/Is
8/15/63

2-1/2 %
Bonds
8/15/63

3-1/87,
3%
C/Is
Bonds
11/15/63 2/15/64

3-1/2%
Notes
11/15/65

3-5/8%
Notes
2/15/66

3%
Bonds
8/15/66

3-3/8%
Bonds
11/15/66

$0.50
-

$0.40

FOR THE NEW 4% BONDS OF FEBRUARY 15, 1980
Payments on account of $100
issue price:
By subscriber
To subscriber

$ "
0.90

$ "
0.50

$ 0.70

$ "
0.50

$ 1.00

$ 1.20

Approximate investment yield
from exchange date (3/15/63)
to maturity of bonds offered
in exchange based on price
of securities eligible for
exchange 1/

4.04%

4.04%

4.04%

4.03%

4.04%

4.04%

4.03%

Approximate minimum reinvestment rate for the extension
period 2/

4.03% »
r
ij
j
v>
£
I

4.09

4.10

4.11

4.12

4.23

4.24

4.30

4.29

1/ Yield to nontaxable holder or before tax. Based on mean of bid and asked prices (adjusted for payments on
account of issue price) at noon on February 19, 1963.
2/ Rate for nontaxable holder or before tax.




For explanation see paragraph 12 above.