U.S. Department of the Treasury

(Archived Content)

FROM THE OFFICE OF PUBLIC AFFAIRS

In 1824, Presidential candidate Andrew Jackson called our national debt a national curse. When he entered the White House in 1829 with a national debt of just over $58 million, he embarked upon a crusade to eliminate it. In 1835, he succeeded, extinguishing our national debt for the first and only time in our nation's history.

Today, over 160 years after our nation was last debt-free, President Clinton has presented a plan that would lead to the elimination of the publicly held debt of $3.6 trillion by 2013. Clearly, numerous factors can influence the timing and execution of such a plan. Already, though, in the past seven years, the U.S. has made truly remarkable progress with its fiscal policy. We have moved from incurring the largest budget deficit in our history to enjoying our largest surplus. By the end of this fiscal year, we will have reduced the debt held by the public by more than $350 billion - or almost 10 percent - in just 3 years.

President Jackson spoke of the sublime spectacle of a Republic... free from debt and with all ... [her] immense resources unfettered. Debt reduction holds the same sense of promise today. It has many benefits:

• Leaving our immense resources unfettered puts our country in the best possible position to meet our obligations to our seniors and ensure the future integrity of Social Security and Medicare, especially as the pressures of the retirement of the baby boom generation puts increasing demands on the system.
• Today, interest payments on the national debt total approximately $220 billion per year - the third largest individual item in our national budget. Freeing these significant resources for other purposes will permit the U.S. government to operate more effectively and efficiently at a lower cost to taxpayers, and, as President Clinton has commented, lift the burden of interest payments off our children and grandchildren.
• Debt reduction means increased national savings will flow into financing capital investment for businesses and homes for families - helping to create a more productive workforce, and raising our overall standard of living.
• Reduced pressure on credit markets will lower borrowing costs for American businesses and consumers.
• And, the results won't be felt only in the U.S. As the $3.6 trillion currently invested U.S. government debt is freed for more productive uses, foreign businesses and nations also will share in the benefits.

Paying down the debt and securing these advantages for the economy creates a new set of challenges for Treasury's debt managers. Today, I would like to speak to you about the ways in which we are meeting these challenges and some of the implications of the reduction of publicly held U.S. debt for financial markets more broadly.

While the challenges facing Treasury's debt managers are thankfully quite different from those of a decade ago, our goals and principles remain the same. As we have stated in the past, Treasury debt management has three main goals: (1) to provide sound cash management in order to ensure that adequate cash balances are available to meet our obligations at all times; (2) to achieve the lowest cost financing for the taxpayers; and (3) to promote efficient capital markets. In achieving these goals, we are guided by five interrelated principles:

• First, the maintenance of the risk-free status of Treasury securities to assure ready market access and lowest cost financing.
• Second, the maintenance of consistency and predictability in our financing program which reduces uncertainty in the market and helps to minimize our overall cost of borrowing.
• Third, the promotion of Treasury market liquidity, within the constraints of our borrowing needs, both to promote efficient capital markets and to lower Treasury borrowing costs.
• Fourth, financing across the yield curve to enable us to appeal to a broad range of investors and to mitigate refunding risks.
• Finally, unitary financing through which we aggregate the financing needs from all programs of the Federal Government and borrow as one nation, ensuring that all programs benefit from Treasury's low borrowing rate.

In furtherance of these principles in an era of increasing surpluses, we have taken a number of steps. For the past three years, we have paid down the debt primarily by redeeming outstanding securities as they matured and reducing the size and frequency of our auctions of new securities. To promote our objectives, we have sought to concentrate new issuance in fewer, larger benchmark issues. Thus, we have eliminated the 3- and 7-year notes, and reduced the size and frequency of other issuances.

As we have made such necessary changes, we have aimed to maintain the regularity and predictability of our debt auctions by providing the markets with clear indications of our future intentions. For example, in February, we announced our intention to begin reducing issuance of 30-year bonds six months later - at our August refunding. This provides the market with ample notice to adjust to such changes.

Our ability to effectively meet our debt management goals has been enhanced over the past year by the addition of two important debt management tools- debt buybacks and regular reopenings. In November 1999 we announced a rule change that provided for more favorable tax treatment associated with reopening issues with below market coupons. This new rule, combined with the continuing fiscal improvements, enabled us to announce at our February refunding a regular reopening policy which allows us to further concentrate our issuance and thereby preserve liquidity in these benchmark issues.

Our other newly available debt management tool is the reintroduction of debt buybacks. On March 9, we conducted our first buyback in over seventy years. Since that time, we have conducted an additional five buyback operations, repurchasing a total of $11 billion of par value in outstanding publicly held debt with a weighted average maturity of 19.4 years. We have announced our plans to buy back a total of up to $30 billion this year.

From a debt management perspective, debt buybacks have a number of important advantages. With debt buybacks, we are better able to: maintain larger auction sizes in our benchmark issues, enhancing liquidity; prevent a potentially costly and unjustified increase in the average maturity of our debt; and manage our cash flows by using cash to buy back debt in periods in which revenues exceed our immediate spending needs.

At our May quarterly refunding, we announced a regular schedule for our debt buyback program for the current quarter. We expect to continue enhancing the regularity and predictability of our buyback program in this manner by indicating our intentions at our Quarterly Refunding announcements.

While tools such as these enable us to better manage our rapid debt reduction, ultimately a significantly declining supply of Treasury securities will lead to an adjustment by markets and market participants.

Treasury securities currently play a number of roles in the global capital markets. Among these functions are serving as a pricing benchmark, a hedging vehicle, and a low risk investment for both domestic U.S. and international investors - including foreign central banks.

As the supply of Treasury securities continues to decline, other instruments will increasingly serve the functions for capital markets that Treasuries currently serve. Such substitutions will not take place overnight, but rather will result from a gradual transition. Indeed, we have already entered the transition period. Ultimately, only the markets can determine which instruments or combinations of instruments will most effectively substitute for Treasury securities with respect to these capital market functions. We are confident that our strong and dynamic markets will adjust successfully.

In the meantime, the market for U.S. Treasury securities remains the deepest, most liquid securities market in the world. For example, in 1999 the daily average volume of transactions in the Treasury market was well over twice the daily average volumes for each of corporate debt, agency debt, mortgage-related securities, and the New York Stock Exchange. Only the volume of interest rate swaps transactions even approached that of Treasury securities.

Already, however, we are beginning to see a change. This is perhaps best evidenced by the growth trends in the issuance of longer-term securities. For example, 1998 was the first year in memory during which gross new issuance of Treasury coupon securities was exceeded by not one, but three other domestic securities markets -- corporate, agency, and mortgage-backed issuances each exceeded that of Treasury securities. These changing patterns of issuance suggest that markets have already begun to adjust to a decrease in the relative supply of Treasury securities. As the amount of our debt issuance continues to decline, it is likely that such changes will continue.

I would like to take a moment to reflect upon a number of adjustments already taking place, and some we may see in the future, with respect to certain capital market functions of Treasury securities.

First, let me discuss the adjustment process that is already underway with regard to the role of Treasury securities as a pricing benchmark.

In the corporate bond market, high-grade corporations have been consolidating their issuance into fewer, larger issues. While they are priced relative to Treasury securities, weight is also given, as it has been for years, to the value of other high-grade corporate bonds and, more recently, to interest rate swaps. These high-grade corporate issues, in turn, are becoming benchmarks in their own right.

The corporate high yield bond market is traditionally less reliant on the Treasury market, and thus, should be less affected. When high yield bonds are priced, they are already priced relative to each other much more than they are to Treasury securities.

At the shorter end of the yield curve, the commercial paper market also relies on other instruments in addition to Treasury bills for pricing value. As the Treasury bill supply has decreased prime commercial paper, bankers' acceptances, and derivatives (particularly Eurodollar futures) have also begun to take on benchmark roles. In fact, market participants today already use Eurodollar futures quite actively to determine relative value in the short maturity area.

Finally, market participants have suggested that it is likely that other benchmarks, including swaps, agency debt, and/or corporate indices may become more relevant pricing benchmarks as the transition continues.

Many of the same reasons that markets may find other instruments attractive as alternative pricing benchmarks also may make them suitable hedging vehicles. Already, interest rate swaps are widely used as a hedging vehicle because of their wide availability and liquidity. Debt securities of other highly rated issuers are also used for hedging purposes, although to a somewhat lesser extent at this time due to liquidity constraints. And, as I indicated earlier, Eurodollar futures are already used as a primary hedging instrument in the short end of the yield curve.

While these instruments have different risk characteristics than Treasury securities, market participants have suggested that some of these characteristics, such as a higher correlation to the securities being hedged, can serve to make them attractive as potential supplemental or alternative hedging vehicles.

Finally, regarding the role of Treasury securities as a low risk investment, a further decline in rates on Treasury securities relative to the rate on private instruments will increase the incentive for other issuers and market participants to take advantage of the lower rates. Thus, if the incentive becomes great enough, issuers will likely take steps to decrease the credit risk associated with their debt. Similarly, capital markets professionals may seek to create new instruments to fulfill this role. Already, for example, asset backed securities professionals are issuing super senior tranches designed to provide an enhanced degree of safety in order to take advantage of the premium the market is willing to pay for low risk assets.

It is likely that a variety of instruments will replace Treasury securities with respect to their various private sector functions. Market participants will determine which instruments or combinations of instruments best meet their needs. Today the market for Treasury securities remains the deepest, most liquid securities market in the world. As we continue on our path of debt reduction, the market alone will determine what instruments will be most widely used in the future.

As Secretary Summers and Chairman Greenspan have said, our markets are among the most innovative, competitive, and dynamic in the world. It is clear that they have the capacity to adjust to a world with a reduced supply of Treasury debt, particularly when such a world will bring with it the myriad benefits of debt reduction.

Thank you very much.