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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 IBil. Semiannually, Beginning July I960 20k ^ Advance Refunded 20 17 4 15 14'/% 13*4 Actually MaturingV^ 13 ll'/fe 10 10 14 10 6/fc 5'4 16 4 12 elfc 960 B2" 64 163 Colendor Years 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 IBil. 5 to 20 Year Maturities I to 5 Year Maturities Issued in Regular Financing Issued in Advance 70,8 /^fundings \ 60 40 36.4 31.9 :2.4I IJO 64.0 606 17.6 59.5 17.9 20 195 22.0 19.4 .53% 386 28.5 23.1 .39% 40 61.6 33.2 49.3 27.7 n.o 1959 > BO 64 0 e c — 165 8.2 7.0 12.9 11.6 I0J0 17.5 171 16.9 10.8 =1.4= 5.3 12.3 123 72% 20 Years and Over 20 13.4 7.6 23.8 20 12.9 23.7 " M 12.6 "66 1 8.1 7.2 1959 60 .5 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 Closing Date* 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 xtfhy the dealers remained much more aloof from the earlier junior as 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 Total 1/ Note: Dealer allotment as % of total public Dealer allotment ($ bil.) 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 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. •Bil. 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 Calendar Years '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 (V • " " 1 •11 " • •1111111 11 " " •111' " " 1" 1 "1 " o 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. it n it n.a. ii ii ii n.a. ii ii ii n.a. it 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 it it it ii ii ii ii ii n ii it n ii it it it 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 ii ii ii it ii ii ii ii ii ii ii it 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 it 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" 3-1/8% CI 8/1/61 0-11-1/2 3-7/8% Bd. 5/15/683/ 7-9 $11,848 5,158 $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 4% Bd. 2/15/69 6-•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. ii. a. 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 It - Advance Refundings Since June i960 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 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..... $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 25.9 30.2 26.3 35.8 11,177 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 17.6 4,688 10.6 M.O 9-6 f3-1/2* 11/15/80 <3-1/2* 2/15/90 [3-1/2* 11/15/98 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 3-1/2* 3-1/2* 3-1/2* 3-1/2* 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 11/15/67 11/15/67 11/15/67 11/15/66 6-8 6*8 6-8 5<r8 36J 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/ 4.24* 4.14 4.51* 4.22 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 + 2.25 - 1.00 - 2.00 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 - 6.3 +$0.30 1.6 September 1961: 2-1/2* 2-1/2* 3/15/65-70..... 3/15/66-71 Total March 1962: 3* 2/15/64 2,927 2,180 7,615 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 18.6 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 19,074 6,851 3,017 Total (Continued) 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 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. - 0 0-8 0-8 0-8 2-8 2-11 4,287 ^,122 3-5 5,282 4,926 14,519 17,620 32,139 8,025 15,005 23,030 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 4,454 3-5/8* 2/15/67 3-3/4* 8/15/67 Subtotals: Pre-refunding "Junior" refunding. Description Mos.) 2,703 8/15/66 4* 3-11 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* ,„ { ^ 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 S/15/T3 5/15/89-94 3/15/73 5/15/89-94 Term to maturity (Yrs. Mos.) 4-6 9-3 5-2 9-11 "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 5* 4-5/8* 2/15/65 5/15/65 Total. 2,113 1,685 15,263 Amount exchanged Extension (Yrs. Mos.) 5-2 9-11 Publicly held (m. of d.) Total $ 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 6-0 26-9 6-0 20-9 6-0 20-9 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 9-5 620 500 375 777 782 317 194 214 126 $ 198 588 114 272 105 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 91 674 2.1 132 2,838 3,867 2,681 6,742 6,548 3,905 $ 618 500 *375 756 782 317 194 126 621 114 340 105 7-3 28-0 7-0 27-9 6-6 27-3 11-8 9-10 10-10^ January 1964 3-3/4* (Continued) 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 - 1.65 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 10.1 17.1 2.2 2.7 26.9 16.1 21.0 17.9 28.4 - 0.60 - 0.70 - 0.90 U8.2 21.2* 7.3 5.2 3.4 12.3 7.0 10.8 221 27 122 1.1 76 23 10.5 3.6 2,971 2,657 12.0 17.4 630 - o.4o 13.7 5.5 15.4 .7 7.2 1.4 655 53 - I.60 18.1 2.5 13.8* 4.7 7.1 4.6 4.3 2.5 5.0 2.8 14.0 4.21 02 U.l6* -$0.95 - .05 - 1.65 - .75 - .95 4.25 k.16 - .05 U.25 - 1.85 - .95 4.15 • .25 4.25 4.15 4.25 4.15 H 1.15 - 1.80 4.25 - .90 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 Maturiti e s 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 1965-*67 Maturitie:s 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 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 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 2.4 287 362 197 637 344 196 250 232 118 162 213 145 232 For nontaxa]ble holders 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 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/.. r $ 3,976 Nov. 1965-Nov. 1967 Mat urlties 3-1/2* 11/15/65 2,95* 4* 3-5/8* 3-7/8* Term to maturity (Yrs. Mos.) • 3,**2 0-1 0-10 ' *-l/8* *-l/** 8,560 2,253 0-10 2/15/66 3,260 2,6*9 1-1 If,0*0 ** *-l/8* I *-l/** ** 2,869 11/15/65 2/15/66 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 2/15/65 11/65-11/67 Mat 2-5/8* •total 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* 01 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 19.6* 1*.3 18.6 62* *l6 21.7 14.1 9.5 2.1 1.6 1.7 21.7 1*.5 8.7 7.8 6.2 6.* 18.2 8.0 5.* 17.3 *-3 8-3 26-9 4l6 282 176 1*0 1*5 588 *8l 18.0 8-0 26-6 *-0 8-0 33* 144 379 *00 26-6 665 300 211 144 369 39* 26-9 *-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 $ -.60 6.0 $ 3,**2 IB,682 1*-1 9-3 $1,808 7,957 $1,807 7,257 *5-5* 27.3 52.5* 38.8 •33,077 $22,12* 10-2 $9,765 $9,063 29.5* *1.0* 4.16* 4.23 4.24 -.*5 -.50 4.1*0 -.90 -.95 -.05 -.40 -•*5 +.*5 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 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 -.75 +.15 -.50 -.55 +.35 31.2 13.3 5.9 $ 3,976 29,101 *.23 4.2* -.70 18.5 *.l6* -.65 + .25 -.05 -.10 +.80 +.30 +.25 +1.15 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 % 5 / 1 5 / 6 6 4% 5 / 1 5 / 6 6 Term to maturity (Yrs. Mos.) Description $1,688 9 , 5 1 9 37o 8 / 1 5 / 6 6 1 , 0 2 4 4% 8 / 1 5 / 6 6 11,060 . . . 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 $ 2 3 , 2 9 1 August 1966: Pre-refunding 4 - 3 / 4 % 1 1 / 1 5 / 6 6 $ 4% 3 - 3 / 8 % 1 , 6 5 2 $ 1 , 6 3 7 1 1 / 1 5 / 6 6 2 , 2 5 4 1 , 6 6 9 1 1 / 1 5 / 6 6 1 , 8 5 1 1 , 5 9 5 $ Total Amount exchanged Publicly Total held (m. of d.) Extension (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 570 11/15/70 Total Term to maturity (Yrs. Mos.) Effect on average length of marketable debt (mos.) 5 , 7 5 7 $4,901 0 - 0 - 3] 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 4-6 3 0 - 3' 3 8 . 9 % 5 - 1 / 4 % 5/l5[7l 4 - 9 4 - 6 4-6 4 $ 1.2 517 ; $ 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 47» Bd. 10/ 1/691/ 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/ 5/60 11/15/61 8/15/62 1/17/63 4/18/63 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 - - - 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 3/30/61 3-3/47o Nt. 3-7/87o Bd. 5/15/68 3-5/87o Bd. 11/15/67 9/62 9/20/62 3/15/63 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 Bd. 8/15/72 9-11 2,579 3 - 5 / 8 7 c Nt. 2/15/67 3-3/87, Bd. 3/ 5/15/64 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 1.,670 302 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 8.,3 4..6 2.,0 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 -$80.4 _ - 7. 2 15. 2 - 28.,6 - 11.J - 9.,8 - 4.9 - 7.,1 - 2.,5 + 4.,6 + 13.,0 + 2.,9 + + + + + 7.,6 30.,2 33.,4 11.,0 19.,2 + 13..9 + 7.,5 + 6.,7 -$ 6.4 Net Savings (+) or cost ( - ) under "B" -$80.4 _ T$77.5 13.0 8.6 - 15.5 _ _ 28.,6 - - 11.,7 - 9..8 - 4.,9 25.7 3.7 2.0 37..1 13..5 14..0 .9 8..6 .1 2,.5 ,3 1, 1. - 1. 6.0 - 7..1 2..5 + 4..6 + 13..0 + 2..9 + + + + + + + 4- 63.3 2.5 1.3 7,.5 5,.2 9,.4 3,.9 6,.3 2,.6 .3 .5 28.5 8.1 4.5 1.9 2.2 1.5 2.2 2.8 1, issue. to 5 years, but could be longer if not over 4-1/4%. at 3.5%, the average yield on marketable -$ 5.9 21.6 23.7 ,2 8.,0 7.,8 1..2 1.,8 2..3 70..6 15.,5 4.,2 issues on June 30, 1957 through 1966. or saving3/ Net savings (+) or cost (-) under "B" $71.6 7.,2 15.,2 .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" - 15.,1 9.,6 on 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 $4,730 297 1,356 1,669 461 4,192 1,444 2,568 1,230 785 3,734 1,172 584 517 (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" $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 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 +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 Discounted values of cost Savings Added cost under to eligible assumpissue tion "B" maturity 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. $58.,8 3.,4 10.,4 ,8 4.4 24.9 5.3 -$ 20.4 3 0 + 14. 5 + 4. 5 31.,1 4.,0 13.,5 148.3 48.5 62.4 2.5 28.0 + 117. 2 + 44.•5 + 48. 9 2.,5 + 15. 0 - 1..3 13. 0 6. 11. 6 3 1 - or saving 3/ Net savings (+) or cost ( - ) under M B M 1 $ 38.4 - - 68.6 37.6 5.0 4.2 + + + + + + 1. 1. 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 ijj 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.