As the so-called debt ceiling again approaches, a primary tool to be employed by the Treasury Department to manage its borrowings is for the Bureau of Public Debt to close the application window for State and Local Government Series securities (SLGS).
Historically, issuers have chosen between purchasing portfolios of US Treasury securities through the secondary market, via competitive bids (“Open Markets”), and directly-issued SLGS. Under certain conditions, there is a distinct cost advantage between one method and the other. The SLGS program process is more straightforward, simple and the preferred route recommended by bond counsel firms. In fact, unless a demonstrable advantage exists for Open Markets, many bond counsel firms will insist on using SLGS. As we move into extraordinarily uncertain periods such as the fiscal cliff budget battle, there is substantial reason to include Open Markets in the discussion as an important and prudent risk management decision.
For refunding transactions scheduled to be sold during this period of uncertainty, it is imperative that Open Market securities be seriously considered as a risk reducing strategy even if it provides little, or even no, demonstrable economic benefit. Furthermore, as a matter of prudence, it is advisable to dual track both Open Markets and SLGS up until the day of pricing.