Federal Debt: Debt Management in a Period of Budget Surplus (Letter
Report, 09/29/1999, GAO/AIMD-99-270).
Pursuant to a congressional request, GAO provided information on the
actions taken by the Department of the Treasury to manage the marketable
debt held by the public during the recent period of unified budget
surpluses.
GAO noted that: (1) the transition from annual unified budget deficits
to surpluses has had consequences for both the profile of outstanding
federal debt held by the public as well as the Treasury's strategies for
achieving its debt management objectives; (2) the effect of
better-than-expected fiscal outcomes in 1997 and 1998 initially resulted
in reductions in short-term debt; (3) the "April surprise" that occurred
in fiscal years 1997 and 1998 created a situation in which the Treasury
suddenly and quickly absorbed unexpectedly high tax revenue; (4) since
some bills mature each week, the unexpected cash inflows were used to
redeem bills; (5) according to a Treasury official, bills were redeemed
at such high levels that the liquidity of the bill market was adversely
affected and the average life of marketable debt increased modestly; (6)
the Treasury took steps subsequent to April 1998 to position itself
better to reduce debt while promoting market liquidity for its
securities, keeping its costs low, and achieving cash management goals;
(7) rather than across-the-board reductions in all issues, the Treasury
decided to concentrate its borrowing in fewer but larger debt offerings,
eliminating the 3-year note and reducing the frequency of the 5-year
note from monthly to quarterly in May 1998; (8) to better prepare for
the possibility of another larger-than-expected influx of April tax
receipts in fiscal year (FY) 1999, the Treasury operated with a lower
cash balance and issued cash management bills to ensure adequate cash
balances; (9) this cash management strategy increased the Treasury's
flexibility and permitted the Treasury to more quickly apply the surplus
to debt reduction in FY 1999 than in FY 1998; (10) in the first 10
months of FY 1999, the Treasury rebalanced its debt portfolio by
shifting its debt reduction efforts from Treasury bills to Treasury
notes; (11) the Treasury chose to reduce the volume of notes outstanding
even during months when spending exceeded receipts, issuing more bills
during this period; (12) these actions shortened the average maturity of
outstanding debt while improving liquidity in the bill market; (13) the
Treasury may use other tools like selling more of the most recent issue
rather than opening a new issue, repurchasing outstanding debt before it
matures, and redeeming callable securities as they become callable; and
(14) if implemented, these initiatives could enhance the Treasury's
ability to maintain a broad, deep market for Treasury securities and
lowest cost financing, while at the same time ensuring adequate cash
balances.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: AIMD-99-270
TITLE: Federal Debt: Debt Management in a Period of Budget
Surplus
DATE: 09/29/1999
SUBJECT: Budget surplus
Economic analysis
Public debt
Debt held by public
Deficit reduction
Unified budgets
US Treasury securities
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Report to Congressional Requesters
September 1999
FEDERAL DEBT
Debt Management in a Period of Budget Surplus
*****************
*****************
GAO/AIMD-99-270
The Treasury continues to replace some nominal debt with inflation-indexed
debt. Inflation-indexed notes and bonds, which were introduced in January
1997, grew to
1.8 percent of privately held marketable securities by the end of fiscal
year 1998 and to
Accounting and Information
Management Division
B-283077
September 29, 1999
The Honorable Pete V. Domenici
Chairman
Committee on the Budget
United States Senate
The Honorable Bill Archer
Chairman
Committee on Ways and Means
House of Representatives
You asked us to provide additional information on debt management issues
to supplement our recent publication, Federal Debt: Answers to Frequently
Asked Questions--An Update (GAO/OCG-99-27, May 28, 1999). In this report,
we discuss actions taken by the Department of the Treasury to manage the
marketable debt held by the public during the recent period of unified
budget surpluses.
The Treasury's stated goals for debt management--to have sufficient
operating cash to meet the government's obligations, to achieve lowest
financing cost, and to promote broad and deep capital markets--have
remained the same to date regardless of whether the unified budget is in
surplus or deficit. However, surpluses raise different debt management
challenges in meeting these goals. The smaller amount of outstanding debt
reduces the Treasury's flexibility to sustain efficient markets across the
wide variety of instruments in demand by potential investors. Balancing
debt management goals in a time of surplus has prompted the Treasury to
consider new approaches affecting
o the profile (type and maturity) of debt held by the public,
o the management of cash balances, and
o the development of strategies to actively change the characteristics
and volume of outstanding debt.
To answer your request, we reviewed publications/Footnote1/ and
interviewed officials of the Treasury Department from May 1999 through
August 1999 in Washington, D.C.
Background
In fiscal year 1998, the federal unified budget turned from having an
annual deficit to having a surplus--the first unified budget surplus since
1969. The fiscal year 1998 unified budget surplus resulted in about a $51
billion reduction in debt held by the public. Because a unified budget
surplus reduces the amount of outstanding debt held by the public, this
change has implications for the Treasury's management of the federal debt.
The Congressional Budget Office's (CBO) recent projections show that
continuing unified budget surpluses could reduce outstanding debt held by
the public from about $3.6 trillion in fiscal year 1999 to $0.9 trillion
over the next 10 years./Footnote2/ As figure 1 shows, the debt held by the
public reached a peak of $3.83 trillion in March 1998 and dropped to $3.65
trillion on July 31, 1999./Footnote3/
Figure****Helvetica:x11****1: Federal Debt Held by the Public,
September 1996 through July
1999
*****************
*****************
Source: Monthly Treasury Statement, Department of the Treasury.
Just as deficits lead to increased borrowing, surpluses generally result
in the Treasury retiring debt. These two actions are not symmetrical,
however. When the debt is increasing, the Treasury is issuing more
securities than are maturing and is adding to the amount of debt
outstanding. By selecting the instruments with which to borrow, the
Treasury can have a greater effect on the maturity profile of the
outstanding debt. In contrast, during periods of surplus, the Treasury is
retiring more debt than it is issuing. Because the Treasury is not adding
to the amount of debt outstanding, the maturity profile is more determined
by the maturities of the remaining outstanding debt. As a result, the
profile of outstanding marketable debt--both the type of security and when
the debt matures--is a significant determinant of how and when the
Treasury can reduce debt.
The profile of the Treasury's marketable securities consists of bills that
mature in a year or less, notes with original maturities of at least 1
year to not over 10 years, and bonds with original maturities of more than
10 years out to 30 years. As figure 2 illustrates, as of July 1999, 57
percent of the outstanding marketable public debt is nominal (not adjusted
for inflation) notes, 20 percent is bills, 20 percent is nominal bonds,
and the remaining 3 percent is inflation-indexed notes and bonds.
Figure****Helvetica:x11****2: Treasury Bills, Notes, and Bonds as
Percentages of Marketable Public Debt
Outstanding, July 31,
1999
*****************
*****************
Source: Monthly Statement of the Public Debt of the United States,
Department of the Treasury.
The mix of Treasury securities outstanding--the profile of maturing debt--
changes as new debt is issued or existing debt is retired. The profile of
securities is important because it can have a significant influence on
interest payments and liquidity./Footnote4/ For example, over an extended
period of time, a long-term bond typically carries a higher interest rate--
or cost to the government--than a shorter-term security because investors
demand higher interest to compensate for what they see as greater risks,
such as higher inflation in the future. However, long-term bonds offer the
government the certainty of knowing what the Treasury's payments will be
over a longer period and spread out refinancing requirements over a longer
period. At the other end, short-term debt generally carries a lower
interest rate because the risks are carried over a shorter period of time.
However, issuing too much short-term debt exposes the Treasury to
increased interest rate risk as it must go to the market more often. The
debt profile is also important because it can influence the Treasury's
choices about how to reduce debt held by the public and its ability to
respond to market changes.
Results in Brief
The transition from annual unified budget deficits to surpluses has had
consequences for both the profile of outstanding federal debt held by the
public as well as the Treasury's strategies for achieving its debt
management objectives. The effect of better-than-expected fiscal outcomes
in 1997 and 1998 initially resulted in reductions in short-term debt. The
"April surprise" that occurred in fiscal years 1997 and 1998 created a
situation in which the Treasury suddenly and quickly absorbed unexpectedly
high tax revenue. Since some bills mature each week, the unexpected cash
inflows were used to redeem bills. However, according to a Treasury
official, bills were redeemed at such high levels that the liquidity of
the bill market was adversely affected and the average life of marketable
debt increased modestly.
The Treasury took steps subsequent to April 1998 to position itself better
to reduce debt while promoting market liquidity for its securities,
keeping its costs low, and achieving cash management goals. Rather than
across-the-board reductions in all issues, the Treasury decided to
concentrate its borrowing in fewer but larger debt offerings, eliminating
the 3-year note and reducing the frequency of the 5-year note from monthly
to quarterly in May 1998. To better prepare for the possibility of another
larger-than-expected influx of April tax receipts in fiscal year 1999, the
Treasury operated with a lower cash balance and issued cash management
bills to ensure adequate cash balances. This cash management strategy
increased the Treasury's flexibility and permitted the Treasury to more
quickly apply the surplus to debt reduction in fiscal year 1999 than in
fiscal year 1998.
In the first 10 months of fiscal year 1999, the Treasury rebalanced its
debt portfolio by shifting its debt reduction efforts from Treasury bills
to Treasury notes. The Treasury chose to reduce the volume of notes
outstanding even during months when spending exceeded receipts, issuing
more bills during this period. Collectively, these actions shortened the
average maturity of outstanding debt while improving liquidity in the bill
market.
While total debt held by the public continues to decrease because of the
unified budget surplus, the Treasury may use other tools to concentrate
new debt into larger issues and to redeem higher cost or less liquid
outstanding debt before it matures. These actions include reopening the
most recent securities issues (selling more of the most recent issue
rather than opening a new issue), repurchasing outstanding debt before it
matures, and redeeming callable securities as they become callable. If
implemented, these initiatives could enhance the Treasury's ability to
support two of its goals--a broad, deep market for Treasury securities and
lowest cost financing--while at the same time ensuring adequate cash
balances.
The Treasury's Evolving Debt Management Strategy
The transition from unified budget deficits to unified budget surpluses
was accelerated by greater-than-projected net revenues. In fiscal years
1997 and 1998, both the Office of Management and Budget and the
Congressional Budget Office underestimated revenues. As a result, cash
flows from tax receipts in April of each of these years provided
substantially more cash than expected. Because fiscal year 1998 was the
first year with an annual unified budget surplus, the Treasury initially
retained the cash, increasing operating cash balances, and did not
significantly reduce total debt held by the public. However, over the full
fiscal year, the Treasury did change the profile of outstanding debt by
significantly reducing bills, reducing some notes, and continuing to issue
bonds and inflation-indexed securities.
(See figure 3.) Bills are the most readily available instrument with which
to make changes in the securities mix because new bills are issued and
maturing bills are redeemed weekly. Although in fiscal year 1998 total
marketable debt declined 3.2 percent, the amount of outstanding bills fell
9.2 percent. The result of concentrating fiscal year 1998 debt reduction
on bills is that about $64 billion fewer bills will mature in 1999 than
matured in 1998.
In addition, this disproportionate redemption of short-term debt also
caused the average maturity of the debt to lengthen modestly (from 5 years
and 3 months at the beginning of fiscal year 1997 to 5 years and 8 months
in May 1998). If left unaddressed, the shortage of bills and the
lengthening of the average maturity of outstanding debt could have
increased the Treasury's cost of borrowing. According to Treasury and
Federal Reserve officials, the amount of bills reduced was sufficiently
large to cause the market for bills to become less liquid.
Immediately following the April 1998 surge in tax receipts, the Treasury
began to take actions to better position itself to reduce debt while
continuing to support its three debt management goals. The Treasury
decided to concentrate its borrowing on fewer, larger issues instead of
making across-the-board cuts among all debt issues. As part of this
initiative, in May 1998, the Treasury eliminated the 3-year note and
reduced the frequency of issuance of the 5-year note from monthly to
quarterly.
In fiscal year 1999, the Treasury continued to address the liquidity in
the bill market by rebalancing its portfolio of debt. To prevent further
erosion of bill liquidity, the Treasury targeted its debt reduction on
notes rather than on bills-a decision that also helped to shorten the
average maturity of outstanding debt./Footnote5/ Targeting debt reduction
to notes was complicated by the fact that slightly more than half of the
notes coming due in 1999 matured in the first half of the fiscal year-a
time when outlays generally are greater than receipts and the Treasury
needs to be a net issuer of debt. As figure 3 shows, cash flows follow
cyclical patterns driven by the seasonal nature of receipts and outlays,
and the Treasury has to borrow during months of negative cash flow even
when the unified budget is expected to be in surplus for the full year.
Despite these hurdles, the Treasury has reduced the volume of notes
outstanding in 9 of the first 10 months in fiscal year 1999, even in
months when outlays exceeded receipts. The Treasury has used two
strategies to facilitate rebalancing the portfolio of outstanding debt.
First, by issuing more bills during months of negative cash flows, the
Treasury generally could redeem notes. (See figure 3.) This strategy also
addressed the liquidity problem in the bill market and shortened the
average maturity of outstanding debt.
Figure****Helvetica:x11****3: Month-to-Month Change in Treasury
Securities and Budget Deficit or Surplus,
October through July, Fiscal Year 1999
and 1998
*****************
*****************
Source: Monthly Treasury Statement and Monthly Statement of the Public
Debt of the United States; Department of the Treasury.
Portfolio rebalancing also was facilitated by the Treasury's willingness
to hold lower cash operating balances. As figure 4 shows, cash balances
generally have been lower from February to June in fiscal year 1999 than
in comparable months during fiscal year 1998. The Treasury was able to use
more of the cash from the surplus to reduce outstanding debt because they
operated with lower cash balances.
Figure****Helvetica:x11****4: Treasury's Daily Cash Balance, January
through June, Fiscal Years 1998 and 1999
(Dollars in
billions)
*****************
*****************
Source: Daily Treasury Statement; Department of the Treasury.
This cash management strategy included a more active use of cash
management bills in 1999. The Treasury uses cash management bills to
bridge the low points in cash flow, thereby facilitating lower cash
operating balances. Issuing cash management bills in months when cash
flows were negative also helped the Treasury to reduce debt in these
months when it otherwise would not have been able to do so. (See figure 5,
which compares the Treasury's use of cash management bills in the first 9
months of fiscal years 1997 through 1999).
Figure****Helvetica:x11****5: Treasury's Cash Management Bills Issued
in the First 9 Months of Fiscal Years
1997 through
1999
*****************
*****************
Source: Daily Treasury Statement, Department of the Treasury.
Cash management bills are the Treasury's most flexible debt management
instrument. These bills are issued at irregular intervals with maturities
generally ranging from a few days to about 6 months. Although the initial
yield is generally higher than regular bills with fixed maturities, these
bills allow the Treasury to make lower interest payments overall because
of their generally shorter maturity. The expanded use of cash management
bills and the Treasury's willingness to hold lower cash balances together
contributed to the Treasury's ability to reduce notes in months when cash
flows were negative.
When viewed over the entire 9-month period, these strategies helped the
Treasury use a larger share of unified budget surpluses for debt reduction
in 1999 than in 1998. As figure 6 shows, a budget surplus does not
translate dollar-for-dollar into debt reduction because the cash obtained
from surpluses can be used to increase cash balances, to finance Federal
direct loan and loan guarantee programs,/Footnote6/ and for other
transactions (largely changes to accrued interest and checks
outstanding)./Footnote7/ Figure 6 compares the allocation of the surpluses
for the first 9 months of fiscal years 1999 and 1998. Seventy-two percent,
($68 billion), of the fiscal year 1999 unified budget surplus through June
1999 has been used to reduce debt. In contrast, in a comparable period in
fiscal year 1998 only 33 percent,
($22 billion), of the surplus was used to reduce debt.
Figure****Helvetica:x11****6: Allocation of Unified Budget Surpluses,
October to June, Fiscal Years 1998 and
1999
*****************
*****************
*****************
*****************
Source: Monthly Treasury Statement; Department of the Treasury.
The average maturity of outstanding debt has lengthened from 5 years and 3
months in 1996 to 5 years and 9 months in February 1999. The Treasury's
actions in fiscal year 1999--reducing relatively more notes than bills--
have been aimed at partially offsetting this trend and in March 1999 the
average maturity of outstanding debt stood at 5 years and 6 months.
Nevertheless, if the Treasury continued to sell new securities on the May
1999 schedule, the average maturity of the outstanding debt would continue
to grow. This would happen because the Treasury would redeem short-term
securities as they mature and longer-term securities would remain
outstanding. Figure 7 shows the trend in average maturity of outstanding
debt from 1990 to 1998. The Treasury recently announced further changes to
its auction schedule intended to enable it to counter the lengthening in
the average maturity of debt.
Figure****Helvetica:x11****7: Average Length of Marketable Public Debt,
1990-1998
*****************
*****************
Source: Treasury Bulletin, Department of the Treasury.
The Treasury announced in August 1999 that it will reduce the frequency of
issuance of 30-year bonds from 3 times a year to twice a year. This will
allow the Treasury to continue to concentrate on fewer but larger
benchmark issues and to partially counter the current lengthening of the
average maturity of outstanding debt. Treasury officials also announced
that they are considering reducing the frequency of issuance of 1-year
bills and 2-year notes. This move would allow the Treasury to increase the
liquidity of the remaining benchmark issues.
Other Tools to Increase the Treasury's Flexibility in Managing the Debt
-----------------------------------------------------------------------
While the surplus is leading to a decrease in total debt held by the
public, the continued ability to issue new debt securities is important to
a number of the Treasury's goals. Continuing to issue new debt across the
maturity spectrum and especially in certain "benchmark"
securities/Footnote8/ would support the Treasury's current goals of
obtaining the lowest financing cost and maintaining a broad, deep market
for U.S. securities.
Three actions that allow the Treasury more flexibility in debt management
are (1) to reopen an issue, that is, to increase the size of an existing
issue to make it more liquid rather than open a new issue, (2) to
repurchase outstanding Treasury securities before their maturity dates,
and (3) to redeem callable securities before their original maturity dates.
Reopen Current Issues
The Treasury can increase the liquidity of outstanding issues by
continuing to sell debt from the most recent issue (reopening) rather than
opening new issues. This strategy is useful when the Treasury wants to
issue a small amount of a given type of security and it determines that
the overall cost of reopening is lower than it would be for new issues.
The Treasury uses reopenings regularly for bills and has used this tool in
the past for notes and bonds. Reopening allows the Treasury to concentrate
its new debt into larger, more liquid issues.
Two other tools--advance repurchase of securities and redeeming callable
bonds--would target one segment of outstanding debt by either inviting or
requiring investors respectively to redeem securities they currently hold.
Reducing the amount of outstanding debt through advance repurchase of non-
callable and callable securities allows the Treasury to reduce specific,
less liquid debt issues and to issue new, more liquid (and generally lower
cost) benchmark securities across the maturity spectrum and in greater
volume than would otherwise be possible.
Advance Repurchase of Debt
In a period of unified budget surpluses, when the Treasury is reducing the
amount of debt held by the public, repurchasing debt in advance of its
maturity is one tool to allow the Treasury to use the cash obtained from
budget surpluses to retire outstanding debt. This tool would allow the
Treasury to maintain a higher volume of new, more liquid benchmark
securities. Although not a primary reason for the advance repurchases, the
Treasury said that it might also occasionally reduce the government's
interest outlays by replacing repurchased debt with new lower-yield debt.
Section 3111 of title 31, United States Code, authorizes the Treasury to
purchase back its outstanding securities, at or before maturity. As
indicated by the Treasury in its response to congressional inquiry, this
statute provides that money received from the sale of obligations, as well
as other money in the general fund of the Treasury, may be used to buy,
redeem, or refund outstanding securities (bonds, notes, certificates of
indebtedness, or savings certificates) at or before maturity, including
securities trading at a premium. In 1978, the Attorney General decided
that this provision constitutes a permanent indefinite appropriation,
which the Treasury could use for purchase, redemption, or refund of
securities. Likewise, the Comptroller General has recognized that section
3111 provides the Treasury with discretion to use any money in the general
fund to purchase, redeem, or refund public debt obligations.
Earlier this year, Treasury officials said that they were studying the
"mechanics and the advisability" of inviting investors to offer to sell
notes and bonds they hold to the Treasury. On August 4, 1999, the Treasury
published proposed rules that would establish a reverse auction--where
primary dealers submit offers to sell (rather than buy) a security.
Comments on these proposed rules are due on or before October 4, 1999.
Repurchasing debt could necessitate the payment of a premium since most of
Treasury's older securities were issued with interest rates higher than
those of securities issued today. Any premium paid to buy back debt might
be treated as an interest outlay in the budget year when the securities
are repurchased.
In 1998, Canada introduced a pilot program--a reverse auction to
repurchase existing, less liquid bonds from primary dealers and the
issuance of replacement current benchmark bonds. This is one part of
Canada's strategy to maintain a well-functioning market in benchmark
securities. The goal of the buy back program was to improve the liquidity
of the 2-, 5-, 10-, and 30-year notes. According to an official of
Canada's Ministry of Finance, an assessment of the pilot program's results
will be available later this year.
Callable Bonds
In some years, the Treasury has another way to redeem certain securities
before their maturity dates. Before December 1984, the Treasury issued
bonds that can be redeemed at the Treasury's option 5 years in advance of
the maturity dates (or on any interest payment date thereafter, after
providing four months notice) without paying a premium. Although the
Treasury has not issued these "callable" bonds since November 1984, a
number of outstanding callable bonds with relatively high interest rates
could be redeemed beginning in 2000. There are $87.6 billion in high-
interest bonds that can be called between May 2000 and November 2009. The
Treasury could redeem these bonds as one strategy to reduce the amount of
debt held by the public and reduce interest costs. (See figure 8.)
Figure****Helvetica:x11****8: Callable High-Interest Rate Treasury
Bonds (End of Fiscal Year
1998)
*****************
*****************
Source: Monthly Statement of the Public Debt of the United States;
Department of the Treasury.
Future Debt Challenges
Budget surpluses offer the prospects of significant benefits for both the
budget and the economy in the near and longer term. However, surpluses
pose challenges to the Treasury's debt management. Declining levels of
debt prompt the need to make choices over how to allocate debt reduction
across the full maturity range of securities used.
The stakes associated with debt reduction strategies are considerable. As
debt declines, the Treasury faces more difficult trade-offs in achieving
broad and deep markets for its securities and the lowest cost financing
for the government. Moreover, a wide variety of government and private
sector participants both here and abroad have come to rely on Treasury
securities to meet their investment needs. Both declining amounts of
Treasury securities as well as shifts in their composition affect the
interests of these participants. These changes, for instance, may very
well affect the use of Treasury securities as benchmarks to price other
financial transactions. Although markets tend to adjust to these shifts
over time, changes may not be seamless or without cost.
Projections of continuing and increased unified budget surpluses suggest
that the challenges to debt management experienced in 1998 and 1999 are a
harbinger of more difficult decisions yet to come. The CBO July 1999
baseline projected that debt held by the public would decrease from
$3,618 billion in fiscal year 1999 to $865 billion in fiscal year 2009,
assuming compliance with discretionary spending caps through 2002, growth
at the rate of inflation thereafter, and that all projected surpluses are
used to reduce debt. To gain an appreciation of the size of the projected
reduction, consider that the level of debt held by the public projected by
CBO for
2009 is less than the dollar amount of federal securities owned by the
Federal Reserve and state and local governments combined at the end of
fiscal year 1998. The particular allocation of securities will be
determined by a number of factors but the comparison above gives a sense
of the size of the continuing and more extensive adjustments by both the
Treasury and market participants.
As debt held by the public continues to shrink, there will be greater
pressure on the Treasury to further concentrate debt in fewer issues to
maintain deep and liquid markets. Moreover, the Treasury will need to
reassess its issuance of nonmarketable securities such as state and local
government securities series and savings bonds. In a similar situation,
Canada has begun a pilot program to consolidate its portfolio by buying
back outstanding smaller, less liquid issues, allowing a simultaneous
auction of new, larger replacement benchmark issues. The U.S. Treasury has
taken a number of actions to concentrate its portfolio already and is
considering other strategies to enable them to issue new and more liquid
issues as overall debt declines, such as buying back outstanding less
liquid debt.
Given the wide range of interests at stake, initiatives to concentrate
debt on fewer issues are bound to raise concerns among various groups of
market participants. The Treasury has a tradition of working closely with
these groups. Obtaining information from the Treasury's ongoing contacts
with market participants is especially valuable as debt held by the public
decreases. The Treasury formally solicits recommendations on debt
structure and the mix of securities from primary security dealers and from
the Bond Market Association's Treasury Borrowing Advisory Committee.
Treasury officials meet quarterly with the Treasury Borrowing Advisory
Committee/Footnote9/ to discuss economic forecasts and the government's
borrowing needs. Treasury officials present the Committee with questions
on specific issues and ask for its views on how to improve the
government's debt programs. The Treasury also meets with dealers selected
by the Federal Reserve Bank of New York before each quarterly auction
announcement. This information from market participants assists the
Treasury in balancing its goals of maintaining sufficient cash on hand,
achieving lowest financing cost, and promoting efficient markets.
The Treasury and Congressional Budget Office generally agreed with this
report and provided technical comments. We have incorporated these
comments as appropriate.
We are sending copies of this report to Senator Frank R. Lautenberg,
Ranking Minority Member, Senate Committee on the Budget; Representative
Charles B. Rangel, Ranking Minority Member, House Committee on Ways and
Means; the Honorable Lawerence H. Summers, Secretary of the Treasury; and
other interested parties. We will also make copies available to others
upon request.
If you or your staff have any questions concerning this letter, please
contact me at (202) 512-9573. Key contributors to this assignment were
Thomas James, Jose Oyola, and Carolyn Litsinger.
*****************
*****************
Paul L. Posner
Director, Budget Issues
(935311)
--------------------------------------
/Footnote1/-^For this report, we used the Daily Treasury Statement and
Monthly Treasury Statement, published by the Treasury's Financial
Management Service, and the Monthly Statement of the Public Debt of the
United States, published by the Treasury's Bureau of the Public Debt, as
the sources of data.
/Footnote2/-^These budget projections assume compliance with discretionary
spending caps on such spending through 2002, that discretionary spending
will grow at the rate of inflation thereafter, and that all surpluses
are used to reduce debt.
/Footnote3/-^This total is net of unamortized premiums and discounts on
public debt securities.
/Footnote4/-^A liquid market is one in which trading can be completed at
will and the offer and purchase prices differ only slightly.
/Footnote5/-^3 percent as of June 1999.
/Footnote6/-^The Federal loan and loan guarantee financing accounts are
not included in the budget surplus, but they do affect the Treasury's
financing needs. The amount of the surplus used to fund direct and loan
guarantees made by the government results from the size of program
activity not decisions by Treasury officials.
/Footnote7/-^Several items in the federal budget, such as interest and
federal loan programs, are recorded on an accrual or present value
basis. The Treasury's cash balances must be adjusted for these and other
accrued outlays and receipts so that the Treasury can ensure that it
maintains a positive cash balance. This adjusted cash balance is the
basis for the Treasury's borrowing.
/Footnote8/-^The most recently issued Treasury securities, known as
"benchmark" issues, are used by other financial services to price their
products.
/Footnote9/-^The Treasury Borrowing Advisory Committee was chartered under
the Federal Advisory Committee Act, as amended, and is comprised of
between 20 to 25 members who represent securities firms, banks, and
investor groups. The Committee is self-selecting in that new members are
nominated by the Committee and approved by the Treasury.
*** End of document. ***