Frank Cavanaugh, the head of the Treasury's debt management team, must be wondering what he has to do to keep a difficult job from becoming more difficult.
He is responsible for selling the Treasury's debt to cover the federal deficits as well as refinancing the already outstanding debt. Two issues that were scheduled to be sold early last week--the two- and five-year notes--had to be postponed until Congress passed the bill raising the debt ceiling to $1.39 trillion. The Treasury was in a bind, as it needed new cash to pay the government's bills as well as to roll over maturing debt. In anticipation of the president's signing the new legislation on Thursday, the Treasury quickly announced the rescheduling of the two postponed issues.
The two-year note was sold Thursday, a 15-day cash management bill to raise much needed cash was set for Friday, and the five-year note was to be auctioned this Wednesday. The regular weekly bill auction was already set for Tuesday due to the holiday. This meant that $32 billion worth of Treasuries were to be sold over a period of four working days.
So quick was the sale of the two-year note, that the public as well as many professional investors missed the auction. The point is that the government is in such need for funds to pay its bills that the Treasury was forced to expedite the auction.
But Cavanaugh's problems don't end with the sale of the five-year note on Wednesday. The Treasury will offer during June four weekly bill auctions, a year bill auction, probably a cash management bill, as well as five coupon issues, all totaling $102 billion. This continuous heavy supply, coupled with rising money supply numbers, an improving economy, an upward blip in the CPI inflation number as well as the large budget deficits, will all contribute to form a nervous bond market and will make it most difficult for interest rates to decline over the month of June.
The U. S. domestic scene, with rising M1, argues for slight tightening of monetary policy. International considerations, on the other hand, dictate a lowering of interest rates eliciting a reduction in the strength of the dollar. The Fed may have snugged a bit, but one course of action may cancel out the other. Certainly these problems will be discussed at Williamsburg.
Prudential Bache recently issued municipal bonds under a new form, called "citizen bonds." These new tax-exempts are issued in $1,000 denominations instead of the usual $5,000 pieces.
The concept here is to broaden investor interest in tax-exempts by having smaller denominations and also by having no physical delivery of the bonds. Instead, the owner's name is listed on a computerized book entry system and in compliance with the new 1982 federal tax law, a registered certificate for each separate maturity is to be held in a central depository. This may alleviate problems for everyone involved.
The price expected on the Treasury's five year note this Wednesday is 10.5 percent.