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I would like to thank The Bond Market Association for this opportunity to talk with you today. I am going to discuss the framework in which the Treasury addresses debt management and outline some of the key challenges likely to confront us in the near term.

Goals Treasury debt management has three principal goals.

First is sound cash management, assuring that Treasury cash balances are sufficient at all times. Second is achieving the lowest cost financing for the taxpayers, and

third is the promotion of efficient capital markets.

Guiding Principles

In achieving these goals, a number of interrelated principles guide us.

First is maintaining the risk free status of Treasury securities. This is accomplished through prudent fiscal discipline, and lest we forget the budget crisis of three years ago, timely increases in the statutory debt limit. Ready market access at the lowest cost to the Government is an essential component of debt management

Second is maintaining the consistency and predictability in our financing program. Treasury issues securities on a regular schedule with set auction procedures. This reduces uncertainty and helps minimize our overall cost of borrowing. Related to this principle, Treasury does not seek to time markets. Our sheer size does not practically permit an opportunistic approach. Over the long run, moreover, it is unlikely that we could consistently and successfully time markets.

In addition, any attempt to time markets inevitably would be perceived as signaling Administration views on interest rates and the economy.

Third, Treasury is committed to ensuring market liquidity. The U.S. capital markets are the largest and most efficient in the world. Treasury securities are the principal hedging instruments across the markets. Liquidity promotes both efficient capital markets and lower Treasury borrowing costs.

Fourth, Treasury finances across the yield curve, appealing to the broadest range of investors. A balanced maturity structure also mitigates refunding risks. In addition, providing a pricing mechanism for interest rates across the yield curve further promotes efficient capital markets.

Borrowing Needs and Sources

Let me turn to a brief discussion of our borrowing needs and sources.

At the start of the Clinton Administration the deficit was estimated to be $320 billion for 1998. OMB now projects it to be around $10 billion and the CBO released estimates this week which suggest a modest surplus. As a result of the deficit reductions we have seen in this decade, more than one trillion dollars in capital -- which would otherwise have been borrowed by the U.S. Government -- has been made available to help build America's future.

The decrease in the Government's net borrowing needs has been dramatic. Last year, net Treasury borrowing from the public represented only a 6% share of total borrowing in the credit markets. This compares with a nearly 60 % share in 1992. At this time, the financing accounts, which largely support direct student loans, are the greatest contributor to net borrowing needs. They are estimated to require approximately $16 billion in each of this year and next year.

Of course, our gross borrowing needs remain significant. This year, about $510 billion of privately held coupon securities mature. Next year, $505 billion will mature. In addition, there are currently $494 billion of privately held Treasury bills outstanding.

The bulk of our borrowing needs continues to be met through marketable debt issued to private investors. The issuance of non-marketable securities, however, has been filling an increasing share of our borrowing needs. Municipalities have been significant net purchasers of Treasury's state and local government series (SLGS) securities. Due to recently declining yields, they have been refunding increasing amounts of their debt. We raised $16 billion of net new cash from SLGS last year and estimate that we will raise at least twice that amount this year.

The Federal Reserve System's portfolio also has been absorbing an increasing share of our declining financing needs. The System expands its Treasury portfolio in line with the growth in demand for bank reserves and currency. The Federal Reserve System's outright holdings of Treasury securities increased by $28 billion last year. This year, the System has been purchasing nearly one third of our bill auctions, up from approximately one quarter just two years ago.

Financing Tools

I would like to turn now to a discussion of the financing tools that we have at our disposal to manage the Federal debt in the new fiscal environment. Let me review some brief thoughts on issue sizes, issuance cycles, instruments offered, auction rules, and debt repurchases.

Issue sizes have been the principal tool used over the years to address changes in financing needs. The Treasury has varied the sizes of weekly bill offerings to respond to seasonal changes in cash balances, and generally has made gradual changes in the sizes of coupon issues to assure consistency and predictability. The issue sizes of notes and bonds, however, are now back to the levels which existed in 1992. Over that same period, the debt market has grown significantly. We recognize that this has presented challenges for market participants. The important relationship between issue size and liquidity is constantly considered. This week, we balanced these concerns when we cut the size of the 3 month bill auction while maintaining the size of the 6 month bill. In addition, issue sizes could be adjusted by changing the treatment of foreign official awards in coupon auctions. Instead of treating such awards as add-ons, we could include them in the amount offered to the public, as we currently do in bill auctions.

Issuance cycles are determined largely by cash management needs. In addition, we also take into consideration the desire for a regular schedule of large liquid issues across the yield curve. Therefore, while issuance cycles are adjusted less often than issue sizes, it will continue to be appropriate to adjust them from time to time.

The specific instruments offered by Treasury have changed over time in response to market demands. The 4 year notes were discontinued in 1991 and 7 year notes were discontinued in 1993. Many in the audience remember the 20-year bond, which was discontinued in 1986. On the other hand, we initiated stripping of coupon securities in 1985.

We also are committed to the further development of inflation indexed securities. We believe that they provide an important diversification vehicle for both Treasury borrowing needs and investors. They also help promote capital markets in providing a pricing mechanism for real interest rates.

We customarily use Cash Management bills to bridge low points in cash balances. The Government's receipts and outlays have significant seasonal swings. The largest swings attend tax receipt dates, particularly in April. Monthly fluctuations in fiscal results have varied as much as $140 billion.

Treasury auction rules strive to ensure that Treasury rates are determined by the market and are the lowest cost to the taxpayers. The availability of auction awards on a noncompetitive basis and rules restricting award amounts help to promote broad distribution of Treasury securities. We also reopen bills on a regular basis and coupon securities, from time to time, to promote market liquidity. In addition, we are encouraged by the results of single-price auctions of 2 and 5 year notes.

The Borrowing Advisory Committee and several market participants have suggested that the Treasury consider open market buy-backs. This will be considered versus alternative financing tools, in light of the likelihood and potential amount of cost savings, the effect on the market for off-the-run securities, the duration and mechanics of any such plan, and it's possible budget scoring.


To help focus the discussion around these various financing tools, let me summarize a few points. The present issuance schedule and most recent issue sizes for coupon securities would approximately fund our maturing notes this year and next year. While recent issue sizes of bills have been at a seasonal low for an extended period, they are expected to increase modestly later this year. As our financing schedule is currently structured, however, we do not expect any net funding from bills this year or next. As mentioned earlier, SLGS will provide significant net funding this year. Assuming OMB budget projections, even if SLGS provide no net new funding next year, we will be roughly in balance for the next two years.

As you can see, we face interesting new challenges at Treasury. I look forward to your questions. Thank you.