May 28, 1996
TO: INSTITUTIONAL FUNDS COMMITTEE No. 8-96
MONEY MARKET FUNDS AD HOC COMMITTEE No. 7-96
RE: TREASURY PROPOSAL ON INFLATION-PROTECTION SECURITIES
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The Department of the Treasury recently published a notice of proposed rulemaking to
solicit comments on the design details, terms and conditions and other features of a new type of
Treasury security: "inflation-protection" securities. The Treasury Department has also
published "Questions and Answers" and a notice of public meetings on the proposed securities.
Copies of these documents are attached.
The Treasury Department intends to issue inflation-protection securities in order to save
on interest costs and broaden the types of debt instruments available to U.S. investors. The
design of the inflation-protection securities currently being considered by Treasury is modeled,
with some modifications, on the Real Return Bonds currently issued by the Government of
Canada.
Under the Canadian structure, the principal amount of an inflation-protection security
is adjusted for inflation. Interest is paid semiannually, and interest payments are a fixed
percentage of the value of the inflation-adjusted principal, in current dollars, for the date on
which it is paid. Comment is requested on two alternative structures. The first alternative is a
zero-coupon inflation-protection security. The Treasury only would make one payment on this
type of security, which would be at maturity. In the second alternative, the Treasury would
make periodic payments of principal and interest, similar to payments on a mortgage. Each
payment would have the same value when adjusted for inflation, though the proportions of
each payment representing principal and interest would change.
Treasury is currently contemplating issuing either 10-year inflation-protection notes or
30-year inflation-protection bonds. The securities would be auctioned on a regular quarterly
schedule, both with competitive and noncompetitive bidding. With respect to the inflation
index on which to base the new securities, the Treasury is contemplating using the Consumer
Price Index, and seeks comment on whether other indexes, such as the Employment Cost Index
or the GDP deflator, would be more appropriate. Comment is also specifically requested on the
appropriate size of the offerings.
The Treasury also invites comments, by June 19, 1996, on any other issues relevant to
the proposed securities. If there are any comments that you would like the Institute to
address in a possible comment letter, please contact the undersigned at 202/326-5923 by
Friday, June 7, 1996.
Alexander C. Gavis
Assistant Counsel
Attachments