U.S. Department of the Treasury

(Archived Content)

FROM THE OFFICE OF PUBLIC AFFAIRS

This morning I have the pleasure of introducing an important new tool for Treasury's management of the public debt in an era of budget surpluses - debt buybacks. Today we are releasing the final regulations that make this important tool available to us, and announcing our plan to use debt buybacks to benefit American taxpayers as we continue to pay down our nation's debt.

As you all know, FY 1999 produced a budget surplus of $123 billion, the largest ever. Following FY 1998's surplus of $69 billion, we have generated the first back-to-back budget surpluses in over forty years. As a result, we have paid down $140 billion in debt held by the public over the past two years, saving taxpayers the billions of dollars in interest payments that would have been due on that amount. And, while future projections are always uncertain, if the President's fiscal framework is adopted and the current fiscal discipline is maintained, we anticipate paying down the debt held by the public to zero within the next fifteen years.

As I have previously noted, reducing the supply of Treasury debt held by the public brings enormous benefits to our economy.

• It means that less of the savings of Americans will flow into government bonds and more will flow into financing capital investment for American businesses and homes for American families.
• It means that we will be less reliant on borrowings from abroad to finance American investment.
• It means that there will be less pressure on interest rates than there would otherwise have been, and therefore lower borrowing costs for businesses and lower interest payments for American families.

At the same time, this success brings a new and welcome debt management challenge for the Federal government. Debt buybacks, which will allow us to repurchase outstanding securities before they mature, are a new tool created to respond to these challenges.

Debt buybacks have several concrete advantages for our Federal debt management:

• First, they allow us to enhance the liquidity of Treasury benchmark securities, which promotes overall market liquidity and should reduce the government's interest costs over time. The issue of liquidity is important, as can be seen in the noticeable difference in yield between recently issued highly liquid benchmark securities and older less liquid debt. This differential is commonly in the range of 20 basis points.
• Second, by paying off debt that has substantial remaining maturity, buybacks enable us to prevent what would otherwise be a potentially costly and unjustified increase in the average maturity of our debt, which has grown from 5 1/4 years in 1997 to 5 3/4 years in 1999 and, absent countervailing action, would be projected to rise to almost 8 years by 2004. Over the long term, this would impose additional cost on the taxpayers to finance our debt.
• Third, by paying off debt, we can make more effective use of excess cash at times of the year when tax revenues exceed immediate spending needs. For instance, last April our cash balances rose from $5 billion to $75 billion due to the receipt of income tax payments.

Each of these benefits contributes to our ability to meet our overall debt management goals, which include achieving the lowest cost financing for American taxpayers, effective cash management, and promotion of efficient capital markets. We plan to use debt buybacks to help us fulfill each of these goals. The rule that is being released today establishes the procedures by which we will conduct debt buybacks. These include:

• An announcement of the range of eligible maturates.
• A multiple-price, reverse auction format.
• Operations will be conducted through the Federal Reserve Bank of New York.
• Only competitive offers will be accepted.
• Settlement will occur two days after the buyback operation.

While the amount of debt that we intend to purchase will be influenced by a number of factors, we expect to buy back as much as $30 billion this year. We will begin conducting buyback operations in the next few months and expect to conduct several in the first half of the year. We plan to gauge the market reaction to our early experiences and adjust our processes and procedures, including the notice period, size, timing and regularity of the operations. We will prepare the market for our first debt buyback operation by prior public announcement.

Following consultations between OMB and CBO, it has been determined that the most appropriate budget treatment for any purchase premium (or discount) is as a means of financing. This is the section of the budget that includes funds used for debt reduction (or borrowed to finance deficits), seigniorage on coins, changes in Treasury cash balances, and other items that, like debt buybacks, do not represent a true cost to the Federal government.

The Treasury is committed to protecting the interests of the American taxpayer. An era of budget surpluses requires us to adapt by making changes to the way we manage the national debt in a manner consistent with our long-held objectives: achieving the lowest cost of financing for the American taxpayer; maintaining sound cash management practices; and promoting efficient capital markets. Today, we have put in place an important new tool to allow us to manage our nation's debt more efficiently. We look forward to using it to benefit all Americans. Thank you.