FROM THE OFFICE OF PUBLIC AFFAIRSLS-365
Good morning. I am pleased to be with you today to discuss the governments refunding needs for the current quarter. This month marks the longest running economic expansion in our nations history. The President announced on Monday that, by the end of the year, we will have paid down approximately $300 billion in debt over three years. As our nations debt takes up a smaller portion of our economy and our financial markets, our continued fiscal discipline contributes significantly to the health of the economy.
Debt Management Challenges
To date, Treasury has managed the declining debt by refunding our regularly maturing debt with smaller amounts of new debt. We have accomplished this by two means. First, we have reduced the number of longer-term debt issuances by one-third, from 39 to 26 auctions per year, while keeping auction sizes relatively constant. Second, we have cut the size of our short term bill auctions by almost a quarter, from an average of almost $20 billion in 1996 to just over $15 billion in 1999, but have maintained the number of issues.
Fortunately, as budget surpluses continue to diminish our borrowing needs, we now face additional challenges going forward.
First, debt held by the public is forecast to shrink even further and faster than it has in the last two years. As we announced on Monday, we estimate that we will paydown $17 billion in net market borrowing for the January-March quarter. This will be followed next quarter with the largest reduction in publicly held debt in our nations history, as we pay down approximately $152 billion. More significantly, there is now a consensus among private sector and government forecasters that these paydowns will grow in the future.
Second, the effect of seven years of fiscal discipline is already showing up in our maturing debt. There will be a great deal less maturing debt to be redeemed in the very near future. This fiscal year, $476 billion of coupon debt will mature, down from a peak of $510 billion in 1998. Over the next 15 months, the last of the old 7-year and 3-year notes will mature. Thus, by 2002, debt maturing will decline significantly. Debt maturing in 2002 is likely to be less than $400 billion.
Third, we face the challenge of how to continue to issue sufficient longer-term debt without an unacceptable lengthening of our maturity structure. For instance, if we maintain the current level of longer-term financing (10-year and 30-year debt), the average maturity of Treasury debt is forecast to lengthen from about 5 3/4 years currently to approximately 8 years by the end of 2004. Over the long term, this would impose an unnecessary additional cost on the taxpayers to finance our debt.
We have several announcements to make today concerning adjustments we are making across our debt management program to further address these challenges.
Reducing Size of Long-Maturity Issues
Our first announcement concerns reductions in the issuance sizes of longer-maturity debt. This reduces our funding, takes into consideration the longer-term fiscal forecasts, and helps us manage the average maturity of our debt. In this regard, we plan to reduce the issuance of 5-year, 10-year and 30-year debt, both fixed rate and inflation-indexed securities.
At the last quarterly refunding, we announced new rules to facilitate reopening of our benchmark securities within one year of issuance. We now will be adopting a regular reopening schedule for our longer term securities. Our current offering plans are as follows:
- New 5-year notes will be offered in May and November, with smaller reopenings in February and August. The February five-year note therefore will be a smaller reopening of the November 5-year note.
- New 10-year notes will be offered in February and August, with smaller reopenings in May and November. The May offering of our 10-year notes therefore will be a reopening of the 10-year notes we issue this quarter.
- New 30-year bonds will be offered only in February, with significantly smaller reopenings in August.
In line with the reductions we are making in our 5- and 10-year notes and 30-year bonds, we also intend to reduce the issuance size of our inflation-indexed notes and bonds. We started this process last month, when we reduced the auction size on the 10-year securities from $7 billion to $6 billion. We are now announcing that we plan to auction only one 30-year inflation-indexed bond, which will be issued in October. There will be no April issue. In addition, we most likely will make further modest reductions in the size of the 10-year inflation-indexed note.
Taken together, our aggregate issuance of 30-year debt for this fiscal year will be less than half what it was in FY1999. We expect that these changes to our auction schedule will preserve the liquidity of our 5-, 10- and 30-year securities while reducing the overall size of our longer term issuances. We will continue to assess the size, frequency, and issuance of these securities in the future.
Last month, Treasury announced the adoption of a final rule that permits us to conduct buybacks of outstanding Treasury securities prior to maturity. We will begin using this new debt management tool promptly.
We plan to conduct up to $30 billion of debt buybacks this year, with the first operations conducted in the next two months. Our initial buyback operations will be approximately $1 billion each in size and will focus on the longer-maturity sector. These initial operations will provide an opportunity for both the market and the Treasury to gain experience with the reverse auction process prior to more significant operations. After evaluating our first buyback operations, we will refine our approach to using buybacks going forward. The use of debt buybacks will help us best maintain the liquidity of our remaining issues, while also managing the average maturity of Treasury debt.
Reducing Number of Short Maturity Issues
Lastly, we plan to reduce the issuance of our shorter-maturity securities. Based on the Borrowing Advisory Committees recommendations, we are reducing the auction frequency of our one-year bills. These bills currently are auctioned every four weeks. We will now auction one-year bills only four times each year. The last monthly auction of the one-year bill will take place on March 2 and the next auction will then be June 1. This change to our auction schedule will eliminate five one-year bill issues this fiscal year.
Consistent with the Committees recommendations, we will maintain the regular monthly auctions of our two-year notes at the present time. We plan, however, to cut modestly the size of individual auctions of two-year notes.
These changes will enable us to increase the size of our three- and six-month bill auctions, as well as respond to our reduced borrowing needs. We will increase the size of weekly bills beginning with the regular auction announcement tomorrow. It is likely that, as further reductions in issuance becomes necessary, elimination of the one-year will be considered.
Terms of the February Refunding
I will now turn to the terms of the quarterly refunding. We are offering $32 billion of notes and bonds to refund $27.6 billion of privately held notes maturing on February 15, raising approximately $4.4 billion.
The securities are:
- A reopening of the 5 7/8 % note of November 1999, maturing on November 15, 2004, in the amount of $12 billion;
- A 10-year note in the amount of $10 billion, maturing on February 15, 2010; and
- A 30 1/4-year bond in the amount of $10 billion, maturing on May 15, 2030.
These securities are scheduled to be auctioned on a yield basis at 1:00 p.m. Eastern time on Tuesday, February 8, Wednesday, February 9, and Thursday, February 10, respectively.
As announced on Monday, January 31, 2000, we estimate that we will have a $40 billion cash balance on March 31, as well as on June 30. We expect to issue cash management bills this quarter to bridge seasonal low points in our cash position.
The next quarterly refunding press conference will be held on May 3, 2000.