WASHINGTON -- A Public Securities <
Association advisory panel has thrown its support behind the Treasury Department's plans to move towards a single-price auction technique for government debt.
The PSA's Treasury Borrowing <
Advisory Committee agreed that it "does not oppose experimenting with another way to auction Treasury securities," according to minutes of an April 28 meeting released yesterday.
Treasury officials are considering <
using an open, single-price bidding system at government auctions to replace the current sealed-bid, multiple-price technique. They are also going ahead with efforts to automate the auctions. Last week, the Treasury announced that registered dealers and brokers can use their computers and software available from their Federal Reserve district banks to participate in auctions.
However, the PSA panel urged <
the Treasury to proceed cautiously and hold off on any experimentation with new auction procedures until at least early July, following a conference of industry executives and government representatives slated for June 3.
The panel also recommended <
that the testing run for at least six months to a year before any attempt is made to change the current bidding system, dominated by the primary dealers and large financial institutions. In the meantime, members said it would be a good idea to retain the $5 million cap on noncompetitive awards to a single firm.
By a vote of 9 to 7, the committee <
recommended experimenting with both the two-year and five-year note auctions that take place each month. Those objecting favored experimenting only with the monthly five-year notes. Members urged the Treasury not to do anything different in the bill auctions.
The panel also reviewed the <
Treasury's policy of standing ready to reopen an issue to combat a squeeze in the government bond market, which the department has defined as an "acute, protracted shortage." In a squeeze, prices are driven higher and dealers who are short -- or, who have sold bonds they do not own in anticipation of prices dropping -- must finance their positions in the repurchase market by lending money at low rates.
The panel recommended that <
auction awards in a reopening be made on a sealed-bid, muliple-price basis "so that Treasury captures the full premium that short sellers are willing to pay in order to cover their exposures."
In a regular auction, the Treasury <
is seeking to raise a given amount of debt at the lowest market-clearing yield, but in a reopening the main object is to ease a shortage and restore balance in the market, the panel said. Therefore, a conventional bidding system should prove more effective.