WASHINGTON -- Treasury officials confirmed yesterday that they are considering rule changes to ensure fairness for all bidders in government security auctions but said they want to make sure any new procedures will not disrupt the bond market.
Officials also said they will wait for input from a federal advisory panel of the Public Securities Association before deciding whether to carry out any changes in response to the May squeeze in two-year notes that brought losses to some dealers on Wall Street.
The association panel, known as the Treasury Borrowing Advisory Committee, is scheduled to meet July 29-31 as a prelude to the quarterly auction of government notes and bonds expected to occur in early August. The committee meets regularly to advise the government on how Treasury securities can be sold in ways that keep the bond market functioning smoothly.
"You have to remember that we are a large seller," said a senior Treasury official. "There are operational concerns. The last thing we want to do is make it more difficult for people to participate."
The Treasury disclosed on Tuesday that it was considering tougher auction rules in response to the May sale of two-year notes. After a large portion of the $12.25 billion issue was purchased by a few bidders, dealers found tight supplies that drove up prices.
The senior official said the Treasury has the authority to change the auction rules without a public rule making, but he declined to say what kinds of changes are being studied or how soon any might be implemented. Some could be put in place right away while others might be phased in to soften the impact on the market, he added.
A Treasury spokesman confirmed that rule changes are under review but said officials have not made up their mind on what to do. The spokesman said any changes are not likely to come before early August after the meeting of the PSA advisory panel.
The panel is made up of some 20 dealers, investors, and other fixed-income participants and is chaired by John Corzine, a partner with Goldman Sachs & Co. Mr. Corzine was traveling yesterday and could not be reached for comment, but Morgan Stark,, the panel's vice chairman, said he had not yet been contacted by the Treasury.
However, Mr. Stark said there is still plenty of time for the committee to put the Treasury's concerns on the agenda and deal with them in time for the quarterly refunding announcement that is due to be made July 31. An auction of three-year notes, 10-year notes, and 30-year bonds is expected to take place Aug. 6-8.
The Treasury originally estimated third-quarter net marketable borrowing in the range of $110 billion to $115 billion. A more realistic figure would be closer to $80 billion, given the slow pace of outlays by the Resolution Trust Corp., according to a recent market letter by analysts at Griggs & Santow Inc.
Under current auction rules, a bidder may acquire up to 35% of any issue, but primary dealers may purchase a larger share when they buy on their own account and on behalf of customers. Market speculation has centered on the idea that the Treasury will scale back the amount of each issue that bidders may acquire.
Mary C. Sophos, the Treasury's assistant secretary for legislative affairs, said in a letter dated July 1 the May note squeeze "resulted in losses for some dealers." The House Energy and Commerce telecommunications and finance sub-committee released the letter on Tuesday.
Ms. Sophos said the Treasury is concerned that if dealers shy away from the auctions because of supply fears, interest rates could be driven higher. "If doubts concerning the fairness of Treasury auctions persis over the longer term, the number of active participants in the government securities market could be reduced. The resulting decline in participation in Treasury auctions and in the liquidity of the secondary market could raise Treasury borrowing costs."
The letter from Ms. Sophos said that "there have been several recent auctions resulting from a concentration of ownership at original issue." It was not more specific, but there have been reports of large buying for an investment fund controlled by Michael Steinhardt and George Soros.
