FROM THE OFFICE OF PUBLIC AFFAIRSLS-43
Good morning. I am pleased to be with you today to discuss the governments refunding needs for the current quarter. We are about to record the nations first back-to-back budget surpluses since 1956 and 1957. That was before many of us in this room were born. We expect this quarter to pay down $11 billion in privately held marketable debt, bringing the total reduction to an estimated $95 billion by the end of FY 1999. Including changes in non-marketable borrowings, this will result in an overall reduction of $87 billion this fiscal year in our publicly held debt. This is a record decline in publicly held debt.
Treasury debt is taking up an ever smaller share of the capital markets. Prior to President Clinton taking office, privately held marketable Treasury securities represented 31 percent or just under a third of the U.S. debt market. Now, they represent only 23 percent, or just under one quarter of the U. S. debt market. Even more dramatically, Treasurys share of the volume of gross new issuance of long term debt has been cut by more than half. While we still have to issue debt to refund maturing securities, last year that debt represented only 18 percent of new long-term debt issuance in the United States, down from 40 percent in 1990.
The Clinton Administrations policy of fiscal discipline has been critical to achieving this success. As a result of reduced Federal borrowing, the net national savings rate has more than doubled from a low of 3.5 percent in 1993 to 7.2 percent this year. This has made more funds available for the private sector, fueling a surge in private business investment. More investment leads to higher productivity, which over the long term should produce a rising standard of living.
The significant reduction in debt over the last two years has left us with a set of challenges that we are delighted to have. We have needed to seek new debt management methods that will preserve the depth and liquidity of the Treasury markets in this era of budget surpluses. To this end, we have a number of announcements today concerning the manner in which we manage our nations debt.
First, we are announcing that we are reducing the frequency of our issuance of 30-year bonds. We will no longer issue a 30-year bond in November, but will continue to issue 30-year bonds in February and August. This allows us to continue to concentrate on fewer, but larger benchmark issues. In addition, this will enable us to counter the current lengthening in the average maturity of Treasurys debt.
Second, we will continue to examine the possibility of reducing the frequency of our issuance of 1-year bills and 2-year notes. A further decrease in the number of offerings would allow us to increase the liquidity of Treasurys remaining benchmark issues.
Proposed rules on debt buy-backs
Finally, as Secretary Summers announced, we are publishing a proposed rule that would establish a mechanism for Treasury to conduct debt buy-backs. While Treasury has not yet determined whether it will, in fact, conduct debt buy-backs, publication of the proposed rule is the first step to making buy-backs an actual debt management tool for Treasury. The Treasurys Borrowing Advisory Committee has strongly endorsed publication of this rule to provide Treasury with a full range of policy options.
We are now in our second year of budget surpluses. Thus far, we have managed the paydown of our debt by refunding our regularly maturing debt with smaller amounts of new debt. What we are proposing today would enable Treasury to repurchase debt that is not currently maturing.
This new tool would provide us with an important new means of managing the governments debt and responding to our improved fiscal condition. First, the use of debt buy-backs could allow Treasury to maintain larger issuance sizes, enhancing the liquidity of Treasurys benchmark securities. Over the long term, this enhanced liquidity should reduce the governments interest expense and promote more efficient capital markets. Secondly, debt buy-backs could enhance our ability to exert control over the maturity structure of Treasury debt. A buy-back program would provide us with the option of managing the maturity structure by selectively targeting the maturities of debt to be repurchased. Lastly, buy-backs could be used as a cash management tool, absorbing excess cash in periods such as late April when tax revenues greatly exceed immediate spending needs.
The proposed rule will be published tomorrow in the Federal Register and will be available today on the Bureau of the Public Debts website (www.publicdebt.treas.gov). Attached is a one page summary of the main features of the proposed rule. We look forward to receiving comments over the next sixty days.
Terms of the August Refunding
I will now turn to the terms of the quarterly refunding. We are offering $37.0 billion of notes and bonds to refund $28.9 billion of privately held notes maturing on August 15, 1999, raising approximately $8.1 billion.
The securities are:
1) A 5-year note in the amount of $15 billion, maturing on August 15, 2004.
2) A 10-year note in the amount of $12 billion, maturing on August 15, 2009.
3) A 30-year bond in the amount of $10 billion, maturing on August 15, 2029.
These notes and bonds are scheduled to be auctioned on a yield basis at 1:00 p.m. Eastern time on Tuesday, August 10, Wednesday, August 11, and Thursday, August 12, respectively.
As announced on Monday, August 2, we estimate that net market borrowing for the July -September quarter will be a paydown of $11 billion. This estimate assumes a $45 billion cash balance on September 30. The Treasury also announced that net market borrowing for the October - December quarter will be approximately $65 billion with a cash balance of $80 billion on December 31.
We anticipate a larger than usual year end cash balance as part of our planning related to the Year 2000. Congress recently enacted legislation to ensure that there would be liquidity of up to approximately $20 billion available to credit unions at this year end. As a result, the Federal Financing Bank has entered into a note purchase agreement with the National Credit Union Administration (NCUA) to provide that liquidity should it be needed. The NCUA has indicated that they do not believe that there will be a need to access funds under the facility, but we plan to be prepared to fulfill our obligation should the need arise.
In addition, there is more uncertainty than historically related to Treasurys forecasts of daily receipts and outlays for the period around year end. Thus we plan additional funding to provide for the possibility that the timing of receipts or outlays do not follow historical patterns. As with the credit union facility, we do not anticipate any problems, but we believe it is appropriate to be prepared. All major Treasury financial systems, including those used to collect taxes, disburse payments, and auction marketable securities are Y2K ready. The Federal Reserve has also indicated that its systems supporting Treasury programs are Y2K ready.
The additional funding in the fourth quarter will be done by modestly increasing weekly bill offerings and through cash management bills.
We also expect to issue two cash management bills this quarter to bridge seasonal low points in our cash position, one in mid-August and another in late August or early September. Both will mature after the September 15 tax date.
The next quarterly refunding will be announced on November 3, 1999. Summary of the Proposed Buy-Back Regulations