U.S. Department of the Treasury

(Archived Content)

Debt Management: Regular and Predictable in a Changing World

The Treasury's commitment to regular and predictable debt management practices should be understood as a means to an end and not an end in itself. The preeminent objective of the Treasury's debt management is to achieve the lowest borrowing cost, over time, to meet the government's financing needs. A schedule of regular and predictable auction dates for particular maturities is one way we seek to achieve the lowest borrowing costs over time. But in order to serve this ultimate objective in a constantly changing world, the Treasury's debt management practices must also change and adapt.

Secretary O'Neill likes to remind us that the real goal is to make excellence a habit and to do this we must strive for continuous improvement. Applied to our debt management, this principle drives us to examine all aspects of the issuance of Treasury securities, from savings bonds to the long bond.

Our decision last fall to suspend auctions of the 30-year bond is only the most recent big change made to debt management, as I explained in our quarterly refunding announcement in October. The previous administration also made significant changes with the introduction of buyback operations and the launch of inflation-indexed securities. They took the step of introducing these new debt management tools to improve the efficiency with which Treasury finances the needs of the Federal government.

Since the mid-1970s, the Treasury has self-consciously adhered to the principle of a regular and predictable schedule of auction dates for specific maturities. We do not attempt to time the market - as some countries did and some still do - by holding snap auctions for a given maturity when its yield appears particularly low. Instead, we provide predictable auction dates for each maturity.

This provides certainty for investors as to the availability of our securities and, over time, helps to smooth out the distribution of our overall borrowing costs. This is why, for instance, we continue issuing bills in late April and May even when we are flush with cash from tax revenues. While the Treasury may not need the cash, by holding auctions every week we keep an even, steady presence in the capital markets.

We have used our regular quarterly refunding announcements to provide the details of any changes to our debt management, providing a substantial lead time for any specific changes to the instruments we are issuing and also as a means for us to inform the markets of any issues we are considering over the medium term. In addition, we provide the market with advance announcements of our anticipated borrowing needs and the timing of our bill and note auctions.

But the Treasury's commitment to a regular and predictable schedule of auctions has never meant that debt management is static. Our auction sizes are constantly shifting, with seasonal changes in our cash flow, structural changes in tax policy and shifts in the level of government spending, and cyclical changes in the economy. In practice, we absorb a great deal of the variability in our revenues with our cash balance in order to smooth out the variance in our month to month borrowing. The Treasury's cash balance can shift by $30 billion in a day. It has routinely been the case that the very best forecasts of our annual borrowing needs - both public and private - are routinely off by roughly $70 billion. As a result, we must build into our debt management strategy the flexibility to deal with outcomes that do not match our expectations.

More importantly, the capital markets in which we operate and the technology which we use are constantly changing. Just as financial intermediaries are constantly adapting to meet customer needs and serve shareholder interests, we - at the Treasury - are engaged in a process of continuous improvement and adaptation in order to achieve the lowest borrowing costs for the American taxpayer.

Over the last three decades this process of adaptation has resulted in the introduction, and the withdrawal, of numerous securities including: the fifty-two week bill, the three-year note, the four-year note, the five-year inflation-indexed note, the seven-year note, the twenty-year bond, the thirty-year bond, the thirty-year callable bond, the thirty-year inflation-indexed bond, and foreign targeted securities.

More recently, the Treasury has made a number of changes that remain in place today, including: the move to single price auctions, the introduction of the ten-year inflation-indexed note, debt buybacks, regular re-openings, and our new four-week bills. Most significant among all these changes, to my mind, are buybacks and inflation-indexed securities.

When the Treasury department introduced the debt buyback program, then-Secretary Summers outlined three main purposes for the program: enhancing the liquidity of benchmark securities; preventing an increase in the average maturity of the debt outstanding; and to make more effective use of cash balances at certain times of the year. Treasury settled into a regular pattern of two-buyback operations per month that persisted through last December.

In the quarterly refunding announcement made in October of last year, we announced that we would modify the buyback program beginning in this quarter to reflect the altered budget outlook for this fiscal year. Specifically, the schedule was changed so that announcements of buyback operations coincide with the quarterly refunding process. Our decisions to conduct buyback operations will be based on three factors: first, our projections of the federal government's annual, unified surplus or deficit position; second, our projections of that three-month period's cash position; and third, our analysis of how best to minimize borrowing costs over time. Consistent with this approach, we announced at the end of January that we will conduct three buyback operations in April in order to lower high seasonal cash balance at that time.

The boldest initiative of Treasury's debt management in recent years was the introduction of inflation-indexed securities in 1997. These instruments were designed at a time when a rising volume of debt was presumed to be the norm, and it was in Treasury's interest to provide a new product that could expand our investor base by providing inflation protection.

Even in their brief history, they have undergone a number of changes. Today we are issuing only a ten-year inflation-indexed security, and we are looking at ways to develop the market for this security. It may be that we at the Treasury and you in the investment community have to work at little harder to make these instruments live up to their potential. As a completely different asset class, inflation-indexed securities present an opportunity for us to diversify our portfolio of debt instruments, and an opportunity for investors to take advantage of both inflation and deflation protection. The challenge for both of us is to see how we can enhance the development of this market.

Both dealers and the Treasury's Borrowing Advisory Committee have suggested that there may be ways to enhance the Inflation Indexed program's appeal, including more aggressive marketing to pension consultants and retail investors, more frequent auctions, a shorter when-issued trading period, and different issuance sizes and/or calendars.

At our most recent quarterly refunding, Assistant Secretary Brian Roseboro invited public suggestions on how we can help develop the inflation-indexed market. We look forward to hearing as many ideas as possible.

We also invited suggestions and ideas from the public on our current reopening policy and on changes to net long position reporting rule. This latter request was made in service to our goal of faster auction processing, which is the key to widening the appeal of direct auction participation - something I hope very much will also help us lower borrowing costs over time.

It is in pursuit of this goal - the lowest cost of funding over time for the American taxpayer - that we are constantly pushing forward and searching for new and better ways to finance the government's operations. We believe that a regular and predictable schedule is an important tool that has demonstrated its value over the years, and it will remain our standard as we continue to strive to continuously improve our debt management practices in a constantly changing world.