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United States Government Accountability Office: 
GAO: 

Report to the Congress: 

February 2011: 

Debt Limit: 

Delays Create Debt Management Challenges and Increase Uncertainty in 
the Treasury Market: 

GAO-11-203: 

GAO Highlights: 

Highlights of GAO-11-203, a report to the Congress. 

Why GAO Did This Study: 

GAO has prepared this report to assist Congress in identifying and 
addressing debt management challenges. Since 1995, the statutory debt 
limit has been increased 12 times to its current level of $14.294 
trillion. The Department of the Treasury (Treasury) recently notified 
Congress that the current debt limit could be reached as early as 
April 5, 2011, and the Congressional Budget Office (CBO) projects that 
under current law debt subject to the limit will exceed $25 trillion 
in 2021. 

This report (1) describes the actions that Treasury traditionally 
takes to manage debt near the limit, (2) analyzes the effects that 
approaching the debt limit has had on the market for Treasury 
securities, and (3) describes alternative mechanisms that would permit 
consideration of the link between policy decisions and the effect on 
debt when or before decisions are made. GAO analyzed Treasury and 
market data; interviewed Treasury officials, budget and legislative 
experts, and market participants; and reviewed practices in selected 
countries. 

What GAO Found: 

The debt limit does not control or limit the ability of the federal 
government to run deficits or incur obligations. Rather, it is a limit 
on the ability to pay obligations already incurred. 

While debates surrounding the debt limit may raise awareness about the 
federal government’s current debt trajectory and may also provide 
Congress with an opportunity to debate the fiscal policy decisions 
driving that trajectory, the ability to have an immediate effect on 
debt levels is limited. This is because the debt reflects previously 
enacted tax and spending policies. 

Delays in raising the debt limit create debt and cash management 
challenges for the Treasury, and these challenges have been 
exacerbated in recent years by a large growth in debt. In the past, 
Treasury has often used extraordinary actions, such as suspending 
investments or temporarily disinvesting securities held in federal 
employee retirement funds, to remain under the statutory limit. 
However, the extraordinary actions available to the Treasury have not 
kept pace with the growth in borrowing needs. For example, unlike the 
past, the amount potentially provided by the extraordinary actions for 
1 month in fiscal year 2010 was less than the monthly increase in debt 
subject to the limit for most months of the year. As a result, once 
debt reaches the limit, Congress will likely have less time than in 
prior years to debate raising the debt limit before there are 
disruptions to government programs and services. This trend is likely 
to continue given the long-term fiscal outlook. 

Failure to raise the debt limit in a timely manner could have serious 
negative consequences for the Treasury market and increase borrowing 
costs. Also, some of the actions that Treasury has taken to manage the 
amount of debt near the limit add uncertainty to the Treasury market. 
In the past, Treasury has postponed auctions and dramatically reduced 
the amount of bills outstanding, which compromised the regularity of 
auctions and the certainty of supply on which Treasury relies to 
achieve the lowest borrowing cost over time. GAO’s analysis suggests 
that borrowing costs modestly increased during debt limit debates in 
2002, 2003, and most recently in 2010. 

In addition, managing debt near the debt limit diverts Treasury’s 
limited resources away from other cash and debt management issues at a 
time when Treasury already faces challenges in lengthening the average 
maturity of its debt portfolio. 

Observers and participants suggested improving the link between the 
spending and revenue decisions that drive debt and changes in the debt 
limit. Better alignment could be possible if decisions about the debt 
level occur in conjunction with spending and revenue decisions as 
opposed to the after-the-fact approach now used. This practice, which 
is similar to practices used in some other countries, might facilitate 
efforts to change the fiscal path by highlighting the implications of 
tax and spending decisions on changes in debt. 

What GAO Recommends: 

To avoid potential disruptions to Treasury markets and help inform 
fiscal policy decisions in a timely way, Congress should consider ways 
to better link decisions about the debt limit with decisions about 
spending and revenue. 

Treasury provided technical comments on a draft of this report, which 
GAO incorporated as appropriate. 

View [hyperlink, http://www.gao.gov/products/GAO-11-203] or key 
components. For more information, contact Susan J. Irving at (202) 512-
6806 or irvings@gao.gov or Gary T. Engel at (202) 512-3406 or 
engelg@gao.gov. 
[End of section] 

Contents: 

Letter: 

Background: 

Increased Borrowing and Limited Borrowing Capacity Provided by 
Extraordinary Actions Create Debt Management Challenges: 

Approaching the Debt Limit Can Add Uncertainty in the Treasury Market: 

Experts and Practices of Other Countries Offer Insights for Better 
Linking Policy Decisions with Their Effect on Debt: 

Conclusions: 

Matter for Congressional Consideration: 

Agency Comments: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Detailed Methodology and Findings of Statistical Analysis 
of Treasury Borrowing Costs near the Debt Limit: 

Appendix III: GAO Contacts and Staff Acknowledgments: 

Tables: 

Table 1: Extraordinary Actions Taken by Treasury to Manage Debt near 
the Debt Limit: 

Table 2: Estimated Borrowing Capacity Provided by Extraordinary 
Actions: 

Table 3: Average Operating Cash Balance Less Supplementary Financing 
Program Account Balance, Fiscal Years 2003-2010: 

Table 4: Postponed Auctions and Delayed Auction Announcements, 1995- 
2010: 

Table 5: Variables Used in Multivariate Regression: 

Table 6: Regression Results for Debt Limit Event Periods from Fiscal 
Year 2002 to 2010: 

Figures: 

Figure 1: Extraordinary Actions Taken by Treasury Prior to Debt Limit 
Increases, 1995-2010: 

Figure 2: Estimated Borrowing Capacity Provided by Extraordinary 
Actions Based on a 1-Month DISP Relative to Actual Monthly Changes in 
Debt Subject to the Limit for Select Years: 

Figure 3: Daily Change in Net Cash Flows during Recent Debt Limit 
Event Period, August 7, 2009, to February 12, 2010: 

Figure 4: Supply of Treasury Bills Decreased Sharply during Debt Limit 
Event: 

Figure 5: Spreads between Yields of 3-Month Commercial Paper and 3- 
Month Treasury Bills Were Lower during the 2009-2010 Debt Limit Event 
Period: 

Figure 6: Trends in Treasury's CDS Spreads Were Consistent with Trends 
in the Yield Spread for the 2009-2010 Debt Limit Event: 

Abbreviations: 

BPD: Bureau of the Public Debt: 

CBO: Congressional Budget Office: 

CDS: credit default swap: 

CPFF: Commercial Paper Funding Facility: 

CM bill: cash management bill: 

CSRDF: Civil Service Retirement and Disability Fund: 

DISP: debt issuance suspension period: 

ESF: Exchange Stabilization Fund: 

FFB: Federal Financing Bank: 

G-Fund: Government Securities Investment Fund of the Federal 
Employees' Retirement System: 

GDP: gross domestic product: 

IMF: International Monetary Fund: 

LIBOR: London interbank offer rate: 

Moody's: Moody's Investors Service: 

ODM: Office of Debt Management: 

OECD: Organisation for Economic Co-operation and Development: 

OFP: Office of Fiscal Projections: 

Recovery Act: American Recovery and Reinvestment Act of 2009: 

Secretary: Secretary of the Treasury: 

SFP: Supplementary Financing Program: 

SLGS: State and Local Government Series: 

TARP: Troubled Asset Relief Program: 

TIPS: Treasury Inflation-Protected Securities: 

Treasury: Department of the Treasury: 

VIX: Chicago Board Options Exchange's Volatility Index: 

[End of section] 

United States Government Accountability Office: 
Washington, DC 20548: 

February 22, 2011: 

Report to the Congress: 

Congress and the President have enacted laws to establish a limit on 
the amount of federal debt that can be outstanding at one time. The 
debt limit does not restrict Congress' ability to enact spending and 
revenue legislation that affect the level of debt or otherwise 
constrain fiscal policy; it restricts the Department of the Treasury's 
(Treasury) authority to borrow to finance the decisions enacted by the 
Congress and the President. As a result, as the government nears the 
debt limit, Treasury often must deviate from its normal cash and debt 
management operations and take a number of extraordinary actions such 
as temporarily disinvesting securities held as part of federal 
employees' retirement plans to meet the government's obligations as 
they come due without exceeding the debt limit. Once the extraordinary 
actions are exhausted, Treasury is not authorized to issue new debt 
and could be forced to delay payments for government services or 
operations until funding is available and could eventually be forced 
to default on legal debt obligations. 

Since 1995, the statutory debt limit has been increased 12 times to 
its current level of $14.294 trillion. Treasury recently notified 
Congress that the current debt limit could be reached as early as 
April 5, 2011, and the Congressional Budget Office (CBO) projects 
that, if current laws remain in place, debt subject to the limit will 
exceed $25 trillion in 2021. Meanwhile, GAO's long-term simulations 
show that absent policy changes, federal debt will increase 
continually over the next several decades. The medium-and long-term 
outlook for the federal budget makes an understanding of the 
operations and implications of the debt limit important. 

GAO has prepared this report under the Comptroller General's authority 
to conduct evaluations on his own initiative as part of a continuing 
effort to assist Congress in identifying and addressing debt 
management challenges. This report examines the challenges associated 
with managing cash and debt near the limit. Specifically, the 
objectives of this report are to (1) describe the actions that 
Treasury has taken to manage debt near the limit and challenges that 
arise, (2) analyze the effects that approaching the debt limit has on 
the market for Treasury securities, including Treasury's borrowing 
costs, and (3) in light of the disconnect between the debt limit and 
the policy decisions that have an effect on the size of federal debt, 
describe alternative triggers or mechanisms that would permit 
consideration of the link between policy decisions and their effect on 
debt when or before decisions are made. 

To answer our first objective, we analyzed publicly available data on 
Treasury cash and debt transactions from the last 16 years (1995-2010) 
to identify factors that could create challenges for Treasury in 
managing debt near or at the limit. We reviewed documents provided by 
Treasury, interviewed Treasury officials, and obtained estimates of 
the time and staff involved in planning for when the debt limit will 
be reached and related operations. We conducted a check for 
reasonableness of these estimates. 

To determine what effect approaching the debt limit had on the 
Treasury market, we analyzed changes in the size and timing of 
Treasury auctions when debt was near or at the limit. Our review 
generally covered the last 16 years--or as many of those years for 
which data were readily available--in order to include both a 
particularly disruptive debt limit debate in 1995-1996 that required 
Treasury to take a number of extraordinary actions and the most recent 
debt limit increase. We interviewed several market participants and 
observers, including primary dealers, money market fund managers, and 
credit rating agencies, to obtain their views on how the debt limit 
and the actions Treasury takes to manage the amount of debt when it is 
near the debt limit affect the Treasury market. We analyzed changes in 
the yields for Treasury securities before, during, and after five of 
the debt limit debates in the past 10 years, including the most recent 
in 2009-2010, to determine how proximity to the debt limit affected 
Treasury's borrowing costs. See appendix II for more details on how we 
estimated increased borrowing costs including limitations to our 
analysis. 

To identify alternative triggers or other mechanisms, we interviewed 
budget and legislative experts including former congressional staff; 
former CBO, Office of Management and Budget, and Treasury officials; 
and other congressional observers from a range of policy research 
organizations. We also reviewed information from select member 
countries of the Organisation for Economic Co-operation and 
Development (OECD) and received input from budget or debt office 
representatives from Canada, Denmark, New Zealand, Sweden, 
Switzerland, and the United Kingdom about mechanisms used in their 
countries to manage aggregate levels of debt. We selected these 
countries based on a review of relevant reports and other information 
published by the OECD and International Monetary Fund (IMF). While 
selected countries offer illustrative examples, their experiences are 
not always applicable to the United States given differences in 
political systems and economies. 

To assess the reliability of the data used in this report, including 
financial markets data downloaded from Thomson Reuters' proprietary 
statistical database, Datastream, and IHS Global Insight and publicly 
available data from Treasury and the Federal Reserve, we examined the 
data to look for outliers and anomalies and, when possible, compared 
data from multiple sources for consistency. In general, we chose 
databases that were commonly used by Treasury and researchers to 
monitor changes in federal debt and related transactions. On the basis 
of our assessment we believe the data are sufficiently reliable for 
the purpose of this review. 

We conducted our work from December 2009 to January 2011 in accordance 
with generally accepted government auditing standards. Those standards 
require that we plan and perform the audit to obtain sufficient, 
appropriate evidence to provide a reasonable basis for our findings 
and conclusions based on our audit objectives. We believe that the 
evidence obtained provides a reasonable basis for our findings and 
conclusions based on our audit objectives. 

Background: 

Congress and the President first enacted a statutory limit on federal 
debt during World War I to eliminate the need for Congress to approve 
each new debt issuance and provide Treasury with greater discretion 
over how it finances the government's day-to-day borrowing needs. 
Federal debt subject to the limit includes both debt held by the 
public and debt held by government accounts (intragovernmental debt 
holdings). The majority of debt held by the public consists of 
marketable Treasury securities, such as bills, notes, bonds, and 
Treasury Inflation-Protected Securities (TIPS), that are sold through 
auctions and can be resold by whoever owns them. Treasury also issues 
a smaller amount of nonmarketable securities, such as savings 
securities and special securities for state and local governments. 
Debt held by the public primarily represents the amount the federal 
government has borrowed to finance cumulative cash deficits. 
Intragovernmental debt holdings represent balances of Treasury 
securities held in government accounts such as the Social Security 
trust funds. It increases when these accounts run a surplus or accrue 
interest on existing securities.[Footnote 1] Debt subject to the limit 
increased from roughly $43 billion in 1940 to more than $13,000 
billion (or $13 trillion) in 2010. 

In the past, Congress has sought to link decisions about the level of 
debt to those about the level of federal spending and revenue by 
integrating changes to the debt limit into the larger budget process. 
For example, the Congressional Budget Act of 1974 requires that 
Congress include the levels of debt implied by the spending and 
revenue levels in the budget resolution for the next 5 years and 
allows for specific estimates of the increase in debt subject to the 
limit.[Footnote 2] Until recently, the House of Representatives had a 
rule that automatically generated a joint resolution considered to 
have been passed in the House changing the debt limit by the amount 
recommended in the budget resolution for the next fiscal year. 
[Footnote 3] The Congressional Budget Act as amended also established 
an alternative procedure for changing the debt limit through 
reconciliation legislation that is subject to expedited procedures. 
Despite these rules and procedures, Congress usually votes on the debt 
limit after fiscal policy decisions affecting federal borrowing have 
begun to take effect. 

Debt limit increases frequently involve protracted debate, regardless 
of prior votes on the budget resolution or other legislation that 
increases the need to borrow. This debate often occurs when federal 
debt is near or at the debt limit. Three pieces of legislation enacted 
to respond to the financial market crisis and economic downturn are 
recent exceptions--in each of these the debt limit was increased by 
roughly the amount the legislation was expected to increase debt. For 
example, in addition to spending and revenue provisions, the American 
Recovery and Reinvestment Act of 2009 (Recovery Act) increased the 
debt limit by $789 billion from $11,315 billion to $12,104 billion 
[Footnote 4]. Federal debt at the time of enactment was more than $600 
billion below the limit. 

Treasury's normal cash management operations involve ensuring that 
there is enough cash on hand to pay government obligations as they 
come due. Treasury has two primary sources of funds to finance these 
obligations: (1) revenue collections, such as federal tax revenues and 
other fees the federal government imposes and (2) cash borrowed from 
the public through auctions of marketable securities. One of 
Treasury's goals is to finance the government's borrowing needs at the 
lowest cost over time by, among other things, issuing a wide range of 
securities in a regular and predictable pattern.[Footnote 5] Treasury 
currently issues bills that mature in a year or less, notes with 
maturities of 2 to 10 years, and bonds with maturities of greater than 
10 years. Treasury also issues 5-year, 10-year, and 30-year TIPS, 
which offer inflation protection to investors who are willing to pay a 
premium for this protection in the form of lower interest rates. 
[Footnote 6] Treasury does not "time the market"--or seek to take 
advantage of low interest rates--when it issues securities. Instead, 
Treasury strives to lower its borrowing costs over time by relying on 
a regular preannounced schedule of auctions. 

Treasury holds cash in its operating cash balance in an account at the 
Federal Reserve and in accounts at depository institutions across the 
country. Treasury can draw down its operating cash balance as debt 
approaches the limit, which allows Treasury to temporarily make 
payments without increasing the amount of debt subject to the limit. 
However, cash balances in its account at the Federal Reserve must be 
kept at a sufficient level to avoid overdrawing this account since the 
Federal Reserve System cannot legally lend directly to the Treasury. 

The issuance of cash management bills (CM bills) provides another way 
for Treasury to manage more closely the amount of additional debt 
subject to the limit. CM bills are flexible securities that Treasury 
issues outside of its regular preannounced auction schedule. Treasury 
sets the amount and time to maturity to meet its immediate borrowing 
needs at the time.[Footnote 7] Issuing CM bills allows Treasury to 
borrow cash for shorter periods than regular bills to help manage the 
uncertainty around the timing of increases to the debt limit. However, 
our past work showed that Treasury paid a premium, in the form of 
higher yields, for CM bills relative to regular bills.[Footnote 8] 

There are also a number of extraordinary actions currently available 
to Treasury to avoid exceeding the debt limit. These actions reduce 
uncertainty over future increases in debt subject to the limit or 
reduce the amount of debt subject to the limit. Table 1 provides an 
overview of each one. Two of these actions relate to the Civil Service 
Retirement and Disability Fund (CSRDF), which is the trust fund for 
two federal retirement plans that hold nonmarketable securities. To 
take these actions, Treasury must declare in advance a debt issuance 
suspension period (DISP)--a period in which Treasury determines that 
it cannot issue debt without exceeding the debt limit. Another four 
actions can be taken without first declaring a DISP. 

Table 1: Extraordinary Actions Taken by Treasury to Manage Debt near 
the Debt Limit: 

Extraordinary actions that do not require the declaration of a DISP: 

Suspension of new issuances of State and Local Government Series 
(SLGS) Securities; Extraordinary actions that do not require the 
declaration of a DISP: SLGS are special securities offered to state 
and local governments and other issuers of tax-exempt bonds. 
Suspending new SLGS issuances reduces uncertainty over future 
increases in debt subject to the limit. Suspending SLGS issuances 
eliminates a flexible, low-cost option that state and local government 
issuers have frequently used when refinancing their existing debt 
before maturity. Suspending new SLGS issuances is generally the first 
extraordinary action Treasury takes to manage debt near the debt limit. 

Exchanging Federal Financing Bank (FFB) debt for debt subject to the 
limit; Extraordinary actions that do not require the declaration of a 
DISP: FFB is a government corporation under the general supervision 
and direction of the Secretary of the Treasury, which borrows from the 
Treasury to finance purchases of agency debt and agency guaranteed 
debt. It can also issue up to $15 billion of its own debt--FFB 9(a) 
obligations--that is not subject to the debt limit. This debt can be 
exchanged with other federal debt (e.g., securities held by the CSRDF) 
to reduce the amount of debt subject to the limit. 

Suspension of investments to the Government Securities Investment Fund 
of the Federal Employees' Retirement System (G-Fund)[A]; Extraordinary 
actions that do not require the declaration of a DISP: The G-Fund 
contains contributions made by federal employees toward their 
retirement as part of the Thrift Savings Plan program, which are 
invested in special one-day nonmarketable Treasury securities that are 
subject to the limit. As debt nears the limit and the Secretary 
determines that the G-Fund may not be fully invested without exceeding 
the debt limit, Treasury can suspend investment for the entire amount 
or a portion of the G-Fund on a daily basis to reduce debt subject to 
the limit. Treasury is required to restore lost interest on the G- 
Fund's uninvested funds after the debt limit has been increased.[B] 

Suspension of Exchange Stabilization Fund (ESF) Investments; 
Extraordinary actions that do not require the declaration of a DISP: 
The ESF is used to help provide a stable system of monetary exchange 
rates. Dollar-denominated assets of the ESF not used for program 
purposes are generally invested in one-day nonmarketable Treasury 
securities that are subject to the debt limit. When debt approaches 
the limit, Treasury can suspend investment for the entire amount or a 
portion of the ESF's maturing nonmarketable Treasury securities. 
Treasury is not authorized to restore lost interest to the ESF when 
the debt limit is increased. 

Extraordinary actions that require the declaration of a DISP: 

Suspension of new CSRDF investments[C]; Extraordinary actions that do 
not require the declaration of a DISP: Once debt reaches the debt 
limit, Treasury is able to suspend investment of new receipts to the 
CSRDF. To do so, Treasury must send a letter notifying Congress that 
CSRDF receipts cannot be invested without exceeding the debt limit 
(i.e., declaring a DISP). Treasury is required to make the CSRDF whole 
after the DISP has ended. 

Disinvestment of securities held by CSRDF[C]; Extraordinary actions 
that do not require the declaration of a DISP: Once debt reaches the 
debt limit, Treasury is able to disinvest Treasury securities held by 
the CSRDF. To do so, Treasury must send a letter notifying Congress 
that it will not be able to issue debt securities without exceeding 
the debt limit and provide the expected length of the DISP, which 
Treasury uses to determine the amount of CSRDF investments that can be 
disinvested. Treasury is required to restore lost interest after the 
DISP has ended. 

Source: GAO. 

[A] Under 5 U.S.C. § 8438(g), to repay lost interest on suspended G- 
Fund investments, Treasury must declare a separate DISP unrelated to 
the actions taken involving the CSRDF. The Secretary is required to 
notify Congress when a G-Fund DISP begins but is not required to 
determine the length of a G-Fund DISP in advance. For the purposes of 
this report, we use the term DISP to refer to the authorities that 
Treasury has related to the CSRDF under 5 U.S.C. § 8348(j) unless 
otherwise specified. 

[B] 5 U.S.C. § 8438(g). 

[C] 5 U.S.C. § 8348(j). 

[End of table] 

Since 1995, the debt limit has been increased 12 times. Prior to 6 of 
these, Treasury had to take one or more extraordinary actions to avoid 
exceeding the debt limit. Figure 1 shows when the debt limit was 
increased and the extraordinary actions that were used. 

* Prior to five of the six debt limit increases between 1996 and 2006, 
Treasury took extraordinary actions, including declaring a DISP. 

* During the period immediately preceding the debt limit increase in 
August 1997, Treasury did not take any extraordinary actions. 

* The federal government ran budget surpluses in fiscal years 1998 
through 2001. Debt subject to the limit increased by $293 billion 
during this period, but no increases to the debt limit were required. 

* During the period immediately preceding the debt limit increase in 
September 2007, Treasury suspended the issuance of SLGS but did not 
take any other extraordinary actions or declare a DISP. 

* In 2008 and 2009, three laws that were expected to increase the 
amount of debt held by the public included corresponding increases in 
the debt limit at the time of enactment. 

* In December 2009 and February 2010, Treasury avoided taking 
extraordinary actions as debt approached the limit in part by allowing 
the Treasury securities it issued for the Supplementary Financing 
Program (SFP)--a temporary program begun in 2008 at the request of the 
Federal Reserve to drain reserves from the banking system and assist 
with its emergency liquidity and lending initiatives--to mature 
without rolling them over. 

Figure 1: Extraordinary Actions Taken by Treasury Prior to Debt Limit 
Increases, 1995-2010: 

[Refer to PDF for image: illustrated table] 

Extraordinary actions that do not require the declaration of a DISP: 

Suspension of new issuances of SLGS: 
March 29, 1996: [Check]; 
August 5, 1997: [Empty]; 
June 28, 2002: [Check]; 
May 27, 2003: [Check]; 
November 19, 2004: [Check]; 
March 20, 2006: [Check]; 
September 29, 2007: [Check]; 
July 30, 2008: [Empty]; 
October 3, 2008: [Empty]; 
February 17, 2009: [Empty]; 
December 28, 2009: [Empty]; 
February 12, 2010: [Empty]; 
Total number of times used since 1996: 6. 

Exchanging FFB debt for debt subject to the limit[A]: 
March 29, 1996: [Check]; 
August 5, 1997: [Empty]; 
June 28, 2002: [Empty]; 
May 27, 2003: [Check]; 
November 19, 2004: [Check]; 
March 20, 2006: [Empty]; 
September 29, 2007: [Empty]; 
July 30, 2008: [Empty]; 
October 3, 2008: [Empty]; 
February 17, 2009: [Empty]; 
December 28, 2009: [Empty]; 
February 12, 2010: [Empty]; 
Total number of times used since 1996: 3. 

Suspension of G-Fund investments: 
March 29, 1996: [Check]; 
August 5, 1997: [Empty]; 
June 28, 2002: [Check]; 
May 27, 2003: [Check]; 
November 19, 2004: [Check]; 
March 20, 2006: [Check]; 
September 29, 2007: [Empty]; 
July 30, 2008: [Empty]; 
October 3, 2008: [Empty]; 
February 17, 2009: [Empty]; 
December 28, 2009: [Empty]; 
February 12, 2010: [Empty]; 
Total number of times used since 1996: 5. 

Suspension of ESF investments: 
March 29, 1996: [Check]; 
August 5, 1997: [Empty]; 
June 28, 2002: [Empty]; 
May 27, 2003: [Check]; 
November 19, 2004: [Check]; 
March 20, 2006: [Check]; 
September 29, 2007: [Empty]; 
July 30, 2008: [Empty]; 
October 3, 2008: [Empty]; 
February 17, 2009: [Empty]; 
December 28, 2009: [Empty]; 
February 12, 2010: [Empty]; 
Total number of times used since 1996: 4. 

Extraordinary actions that require the declaration of a DISP: 

Suspension of new CSRDF investments: 
March 29, 1996: [Check]; 
August 5, 1997: [Empty]; 
June 28, 2002: [Check]; 
May 27, 2003: [Check]; 
November 19, 2004: [Check]; 
March 20, 2006: [Check]; 
September 29, 2007: [Empty]; 
July 30, 2008: [Empty]; 
October 3, 2008: [Empty]; 
February 17, 2009: [Empty]; 
December 28, 2009: [Empty]; 
February 12, 2010: [Empty]; 
Total number of times used since 1996: 5. 

Disinvestment of securities held by CSRDF: 
March 29, 1996: [Check]; 
August 5, 1997: [Empty]; 
June 28, 2002: [Check]; 
May 27, 2003: [Check]; 
November 19, 2004: [Check]; 
March 20, 2006: [Check]; 
September 29, 2007: [Empty]; 
July 30, 2008: [Empty]; 
October 3, 2008: [Empty]; 
February 17, 2009: [Empty]; 
December 28, 2009: [Empty]; 
February 12, 2010: [Empty]; 
Total number of times used since 1996: 5. 

Source: GAO. 

[A] The 1996 transaction did not involve FFB issuing FFB 9(a) 
obligations. Instead, FFB exchanged other financial assets--namely 
loans to federally chartered entities--that were also exempt from the 
debt limit for securities held by the CSRDF that were subject to the 
debt limit. 

[End of figure] 

If debt is at the limit and the extraordinary actions are exhausted, 
Treasury may not issue debt without further action from Congress and 
could be forced to delay payments until sufficient funds become 
available. In the past, Congress and the Secretary of the Treasury 
have taken additional actions beyond those described above when 
necessary to ensure that the government paid its obligations as they 
came due without breaching the debt limit. For example, in 1996, 
Congress passed and the President signed legislation allowing Treasury 
to issue securities temporarily excluded from the debt limit in an 
amount equal to the March 1996 Social Security payments to ensure that 
benefit payments were made on time.[Footnote 9] 

Treasury has never been unable to pay interest or principal on debt 
held by the public because of the debt limit. Treasury, credit rating 
agencies, and others agree that failure to pay principal or interest 
on Treasury securities because of the debt limit could have costly 
consequences for the U.S. government and financial markets including 
higher future borrowing costs for Treasury and the public; stress on 
the value of the dollar in currency markets; and major disruptions in 
capital markets due to the repricing of products, services, and 
transactions dependent on an efficiently functioning Treasury market. 

Increased Borrowing and Limited Borrowing Capacity Provided by 
Extraordinary Actions Create Debt Management Challenges: 

Extraordinary Actions Provide Less Borrowing Capacity Relative to 
Borrowing Needs Than They Did in the Past: 

The borrowing capacity provided by the extraordinary actions has grown 
in size but has not kept pace with the growth in Treasury's borrowing 
needs. The amount potentially provided by the extraordinary actions 
for a 1-month DISP in fiscal year 2010 was less than the monthly 
increase in debt subject to the limit for most months of the year. As 
of August 31, 2010, the extraordinary actions available to Treasury 
could provide about $147.5 billion in additional borrowing capacity 
without a DISP and an additional $7.7 billion per month based on the 
length of the DISP declared. As table 2 shows, the amounts available 
from suspending G-Fund investments, suspending ESF investments and the 
disinvestment of CSRDF funds have all grown--with the bulk of the 
growth in the G-Fund. G-Fund growth results from an increase in 
federal employee retirement funds being invested in Treasury 
securities. However, the estimated total borrowing capacity provided 
by extraordinary actions available without a DISP is still $15 billion 
below Treasury's average monthly borrowing needs in fiscal year 2010, 
which was over $162 billion, and only 44 percent of the largest single 
monthly increase in debt subject to the limit, which was over $330 
billion. Treasury officials stated that there are no additional 
extraordinary actions within their legal authorities that could be 
prudently used in the future to create additional borrowing capacity. 

Table 2: Estimated Borrowing Capacity Provided by Extraordinary 
Actions: 

Extraordinary actions that do not require the declaration of a DISP: 

Exchanging FFB debt for debt that is subject to the limit[A]; 
Fiscal year: 2002: $0.0 billion; 
Fiscal year: 2005: $1.0 billion; 
Fiscal year: 2006: $1.0 billion; 
Fiscal year: 2010: $4.8 billion. 

Suspension of G-Fund investments; 
Fiscal year: 2002: $44.0 billion; 
Fiscal year: 2005: $62.6 billion; 
Fiscal year: 2006: $72.2 billion; 
Fiscal year: 2010: $122.3 billion. 

Suspension of ESF investments; 
Fiscal year: 2002: $9.8 billion; 
Fiscal year: 2005: $15.2 billion; 
Fiscal year: 2006: $15.6 billion; 
Fiscal year: 2010: $20.4 billion. 

Subtotal--extraordinary actions available without declaring a DISP; 
Fiscal year: 2002: $53.8 billion; 
Fiscal year: 2005: $78.8 billion; 
Fiscal year: 2006: $88.8 billion; 
Fiscal year: 2010: $147.5 billion. 

Extraordinary actions that require the declaration of a DISP (amount 
per month based on the length of the DISP declared): 

Suspension of new CSRDF investments[B]; 
Fiscal year: 2002: $1.7 billion; 
Fiscal year: 2005: $2.0 billion; 
Fiscal year: 2006: $2.1 billion; 
Fiscal year: 2010: $2.0 billion. 

Disinvestment of securities held by the CSRDF; 
Fiscal year: 2002: $4.0 billion; 
Fiscal year: 2005: $4.6 billion; 
Fiscal year: 2006: $4.8 billion; 
Fiscal year: 2010: $5.7 billion. 

Extraordinary actions: Total; 
Fiscal year: 2002: $59.6 billion; 
Fiscal year: 2005: $85.3 billion; 
Fiscal year: 2006: $95.8 billion; 
Fiscal year: 2010: $155.2 billion. 

Source: GAO and Department of the Treasury. 

Notes: These estimates represent an approximation of the additional 
borrowing capacity provided by the extraordinary actions as of August 
31st of each year--the last month in the fiscal year for which data 
are typical of most months of the year. They do not reflect the actual 
amount of borrowing capacity Treasury obtained by taking extraordinary 
actions in any given year. 

[A] Some or all of the $15 billion in FFB 9(a) securities that FFB can 
issue were already exchanged for debt subject to the limit. 

[B] Treasury can also suspend large investments to the CSRDF that are 
made three times a year. In June and December, Treasury makes 
semiannual interest payments to the CSRDF and in September, Treasury 
makes a onetime investment in the CSRDF for financing the unfunded 
liability of new and increased annuity benefits. These amounts would 
be added to the monthly averages calculated above. 

[End of table] 

Some of the options used in the past are either more limited or no 
longer available. FFB has the authority to issue up to $15 billion in 
securities that are not subject to the debt limit that it can exchange 
for other Treasury securities to reduce the amount of debt subject to 
the limit. However, some or all of these FFB securities may be 
outstanding from previous transactions, including those made to manage 
the amount of debt subject to the limit in the past, and therefore 
unavailable. For example, as of August 31, 2010, the exchange of FFB 
securities for other Treasury securities could provide less than $5 
billion in additional borrowing capacity under the debt limit. In the 
past, FFB reversed these transactions by redeeming FFB 9(a) 
obligations prior to maturity once the debt limit was raised. However, 
Treasury officials said they no longer reverse these transactions 
because of the potential costs FFB and its counterparties could incur 
as a result.[Footnote 10] Also, until March 2004, Treasury kept 
"compensating balances" in non-interest-bearing accounts at banks to 
compensate them for collecting federal receipts for the Treasury. This 
allowed Treasury to call back tens of billions of dollars when needed 
to pay obligations and avoid breaching the debt limit.[Footnote 11] 
Since these compensating balances were replaced in March 2004 by 
direct payment to banks for services, this option is no longer 
available. 

Assuming current borrowing trends, our estimates show that the 
borrowing capacity provided by the extraordinary actions would be 
sufficient to meet the government's borrowing needs for as little as a 
few days to a few weeks during certain times of the year. This means 
that once debt approaches the debt limit, Treasury may not be able to 
manage the amount of debt subject to the limit for as long a period of 
time as it had in the past before the debt limit must be increased or 
payments must be delayed. Figure 2 below shows the estimated borrowing 
capacity provided by these actions for a 1-month DISP relative to the 
monthly change in debt subject to the limit for fiscal year 2010 and 3 
previous fiscal years in which Treasury took extraordinary actions. 
The amount potentially provided by the extraordinary actions for a 1-
month DISP in fiscal year 2010 was less than the monthly increase in 
debt subject to the limit in 8 of the 12 months. In contrast, in 
earlier years, the potential borrowing capacity provided by the 
extraordinary actions was greater than the monthly increase in debt 
subject to the limit in almost all months. 

Figure 2: Estimated Borrowing Capacity Provided by Extraordinary 
Actions Based on a 1-Month DISP Relative to Actual Monthly Changes in 
Debt Subject to the Limit for Select Years: 

[Refer to PDF for image: illustrated table] 

Change in total federal debt subject to the limit: 

Fiscal year 2003: 
October: $11.7 billion; 
November: $72.3 billion; 
December: $54.6 billion; 
January: ($5.5 billion); 
February: $67.3 billion; 
March: $2.0 billion; 
April: ($20.3 billion); Estimated borrowing capacity provided by 
extraordinary actions as of August 31: $59.6 billion; 
May: $35.2 billion; 
June: $108.3 billion; 
July: $33.7 billion; 
August: $50.8 billion; 
September: $18.6 billion. 

Fiscal year 2005: 
October: $50.6 billion; 
November: $80.8 billion; 
December: $70.9 billion; 
January: $32.1 billion; 
February: $85.0 billion; 
March: $62.8 Estimated borrowing capacity provided by extraordinary 
actions as of August 31: $85.3 billion; 
April: ($11.5 billion); 
May: $13.5 billion; 
June: $60.6 billion; 
July: $50.9 billion; 
August: $39.4 billion; 
September: $2.6 billion. 

Fiscal year 2006: 
October: $93.7 billion; 
November: $64.1 billion; 
December: $78.1 billion; 
January: $25.3 billion; 
February: $51.7 billion; Estimated borrowing capacity provided by 
extraordinary actions as of August 31: $95.8 billion; 
March: $97.5 billion; 
April: ($18.7 billion); 
May: $1.1 billion; 
June: $66.8 billion; 
July: $22.0 billion; 
August: $70.7 billion; 
September: ($3.0 billion). 

Fiscal year 2010: 
October: ($16.8 billion); 
November: $220.7 billion; 
December: $197.2 billion; 
January: ($32.0 billion); Estimated borrowing capacity provided by 
extraordinary actions as of August 31: $155.2 billion; 
February: $161.2 billion; 
March: $332.8 billion; 
April: $220.7 billion; 
May: $256.8 billion; 
June: $248.0 billion; 
July: $35.6 billion; 
August: $231.6 billion; 
September: $112.0 billion. 

Source: GAO analysis of Treasury data. 

[End of figure] 

The actions available without declaration of a DISP could potentially 
provide $147.5 billion (as of Aug. 31, 2010), but the amount of time 
that these actions provide before debt reaches the limit depends on a 
number of factors. For instance, debt subject to the limit increases 
sharply certain days of the year. Treasury makes semiannual interest 
payments on a large amount of debt held in government accounts on the 
last day of June and December.[Footnote 12] During the recent debt 
limit debate in early fiscal year 2010, debt increased by more than 
$165 billion in a single day--December 31--because of $81 billion in 
net nonmarketable securities issuances, including interest payments to 
government accounts,[Footnote 13] as well as $84 billion in net 
marketable securities issuances. 

Another factor that determines the amount of time that Treasury is 
able to manage debt near the debt limit is the size of Treasury's 
operating cash balance. Treasury can draw down its operating cash 
balance to pay obligations rather than increase borrowing. While the 
size of Treasury's operating cash balance routinely fluctuates 
throughout the year depending on the timing of withdrawals and 
deposits, table 3 shows that Treasury's average operating cash balance 
was roughly twice as high in fiscal year 2009 and fiscal year 2010 as 
it was in the previous 6 fiscal years. From December 15, 2009, to 
February 11, 2010, when debt was approaching the debt limit, 
Treasury's operating cash balance (excluding the SFP account balance) 
rarely fell below $90 billion.[Footnote 14] Higher cash balances 
helped ensure that Treasury had enough cash available to make large 
disbursements on short notice. Treasury officials explained that 
higher cash balances were not related to the debt limit but rather to 
regular and predictable financing patterns coupled with large receipts 
and expenditures related to the Troubled Asset Relief Program (TARP), 
Recovery Act, and other legislation to address the financial crisis 
and the economic downturn. 

Table 3: Average Operating Cash Balance Less Supplementary Financing 
Program Account Balance, Fiscal Years 2003-2010: 

Average operating cash balance: 
Fiscal year: 2003: $17.9 billion; 
Fiscal year: 2004: $20.5 billion; 
Fiscal year: 2005: $25.9 billion; 
Fiscal year: 2006: $26.4 billion; 
Fiscal year: 2007: $30.6 billion; 
Fiscal year: 2008: $24.9 billion; 
Fiscal year: 2009: $58.9 billion; 
Fiscal year: 2010: $57.7 billion. 

Source: GAO analysis of Treasury data. 

[End of table] 

The amount of additional borrowing capacity provided by disinvesting 
CSRDF securities depends on the length of the DISP declared by the 
Secretary.[Footnote 15] For past DISPs, the Secretary determined the 
amount of disinvestments based on the length of the DISP and the 
estimated monthly CSRDF benefit payments that would occur during this 
time. For example, Treasury declared a DISP from May 16 to June 28, 
2002, and disinvested about $4 billion in Treasury securities held by 
the CSRDF. This amount was roughly equal to the amount that would have 
been needed to make 1 month's worth of Civil Service benefit payments. 
Similarly, Treasury declared a 12-month DISP in November 1995 and 
disinvested $39.8 billion in Treasury securities held by the CSRDF, 
roughly the equivalent of 12 months' worth of benefit payments. The 
statute does not require that disinvestments be made only for the 
purpose of making CSRDF benefit payments. However, Treasury cannot 
disinvest additional securities later to make those benefit payments. 
As a result, the amount provided by the CSRDF declines over the period 
of the DISP. In the past 16 years, the Secretary of the Treasury 
declared DISPs ranging from 14 days to 14 months. The period of time 
between the declaration of a DISP and the debt limit increase ranged 
from 1 day to 4-½ months. 

Treasury Diverts Resources from Other Priorities to Manage Debt near 
the Limit: 

Debt and cash management require more time and Treasury resources as 
debt nears the debt limit. The size and timing of auctions must be 
adjusted when nearing the debt limit; cash and borrowing needs must be 
forecasted and monitored with increasing frequency and in increasing 
detail; and contingency plans and alternative scenarios for the 
possible implementation of extraordinary actions must be developed, 
reviewed, and tested. These activities divert time and Treasury 
resources from other cash and debt management issues. We reviewed 
estimates provided by the Office of Debt Management (ODM), the Office 
of Fiscal Projections (OFP), and the Bureau of the Public Debt (BPD) 
that overall indicated they devoted as much as several hundred hours 
per week to managing debt near the debt limit. 

Treasury's operational focus on the debt limit begins as early as 6 to 
9 months before the debt limit is expected to be reached and increases 
as debt nears the limit. Since this work involves contingency 
planning, it is undertaken whether or not the debt limit is raised 
prior to the use of extraordinary actions or the declaration of a 
DISP. For example, Treasury staff develop projections under multiple 
scenarios of when debt might reach the debt limit. As debt nears the 
debt limit, these projections and scenarios are developed weekly, then 
daily, and finally as often as multiple times a day. According to 
Treasury, these projections and scenarios may take 3 of OFP's 11 staff 
members between 2 to 4 hours per day to produce. 

While Treasury needs accurate cash-flow forecasts to project changes 
in the amount of debt subject to the limit, the precision and 
frequency increases when debt is near or at the limit. While large 
regular and predictable payments and receipts--such as Medicare and 
Social Security payments and receipts from corporate taxes--cause 
predictable swings in daily deposits and withdrawals, an official from 
OFP said that it was uncertainty about other revenue and irregular 
payments that made planning and forecasting more difficult as debt 
approached the debt limit in fiscal year 2010. For example, as figure 
3 shows, Treasury received an influx of repayments of more than $90 
billion from financial institutions under TARP in December 2009. 
However, since Treasury did not know for certain when these payments 
would be received, Treasury officials ran multiple projections of when 
the debt limit would be reached. 

Figure 3: Daily Change in Net Cash Flows during Recent Debt Limit 
Event Period, August 7, 2009, to February 12, 2010: 

[Refer to PDF for image: vertical bar graph] 

Date: 8/7/09: -$4 billion; 
-$1 billion; 
-$8 billion; 
-$7 billion; 
-$12 billion; 
-$2 billion; 
-$18 billion; 
-$7 billion; 
-$7 billion; 
-$6 billion; 
-$6 billion; 
-$2 billion; 
-$6 billion; 
-$8 billion; 
-$9 billion; 
-$2 billion; 
-$5 billion; 

Date: 9/1/09: -$30 billion; ($15 billion Medicare payment); 
-$1 billion; 
-$29 billion; 
-$6 billion; 
-$3 billion; 
-$12 billion; 
-$6 billion; 
-$4 billion; 
$3 billion; 
$27 billion; ($29 billion corporate tax deposit); 
$2 billion; 
-$4 billion; 
-$1 billion; 
$5 billion; 
$3 billion; 
-$9 billion; 
-$10 billion; 
-$6 billion; 
0; 
-$3 billion; 
-$6 billion; 

Date: 10/1/09: -$31 billion; ($15 billion Medicare payment); 
-$24 billion; 
-$2 billion; 
-$9 billion; 
0; 
-$8 billion; 
-$3 billion; 
-$3 billion; 
-$14 billion; 
-$3 billion; 
-$3 billion; 
-$3 billion; 
-$6 billion; 
-$4 billion; 
-$7 billion; 
-$1 billion; 
$1 billion; 
-$7 billion; 
-$10 billion; 
-$7 billion; 
-$31 billion; ($15 billion Medicare payment); 

Date: 11/2/09: -$4 billion; 
-$27 billion; 
$2 billion; 
-$7 billion; 
-$4 billion; 
0; 
-$16 billion; 
-$4 billion; 
-$12 billion; 
-$11 billion; 
-$8 billion; 
-$9 billion; 
-$8 billion; 
-$4 billion; 
$1 billion; 
-$8 billion; 
-$8 billion; 
-$6 billion; 
-$8 billion; 

Date: 12/1/09: -$32 billion; 
-$2 billion; 
-$30 billion; 
-$3 billion; 
-$5 billion; 
-$7 billion; 
$37 billion; ($46 billion TARP deposit); 
-$7 billion; 
-$4 billion; 
-$1 billion; 
$31 billion; ($37 billion corporate tax deposit); 
-$1 billion; 
-$6 billion; 
$1 billion; 
$4 billion; 
-$6 billion; 
$29 billion; ($46 billion TARP deposit); 
-$5 billion; 
$3 billion; 
$1 billion; 
$31 billion; ($44 billion FDIC insurance deposit); 
-$46 billion; ($22 billion Social Security payment and $15 billion GSE 
investment payment); 

Date: 1/4/10: -$7 billion; 
-$9 billion; 
$3 billion; 
-$5 billion; 
$2 billion; 
0; 
-$6 billion; 
-$9 billion; 
-$6 billion; 
-$3 billion; 
$13 billion; 
$11 billion; 
$1 billion; 
-$5 billion; 
$3 billion; 
-$5 billion; 
-$7 billion; 
-$8 billion; 
-$10 billion; 

Date: 2/1/10: -$24 billion; 
-$4 billion; 
-v23 billion; 
-$8 billion; 
-$26 billion; 
$1 billion; 
-$8 billion; 
-$3 billion; 
-$7 billion; 

Date: 2/12/10: -$32 billion ($29 billion IRS tax refund payment). 

Source: GAO analysis of Treasury data. 

Note: Net cash flow is equal to deposits less withdrawals. This 
excludes federal debt transactions including noncash transactions 
involving debt held in government accounts such as large regularly 
occurring interest payments in late December. 

[End of figure] 

Treasury uses the projections of debt subject to the limit not only 
for operational scenarios but also in meetings to inform senior 
Treasury officials--including the Secretary. These meetings also 
increase in frequency from monthly to as often as daily as debt 
approaches the limit. The meetings, which have included 10 or more 
executives and senior career staff, are used to discuss strategies for 
managing debt near the debt limit including the potential use of 
extraordinary actions. According to Treasury, these meetings can 
require several hours of preparation. While Treasury officials and 
staff can draw on previous experiences managing debt near the debt 
limit, they told us that each debt limit event presents new and 
different issues to be considered and addressed; in addition, there 
are often senior officials who have not been through the experience 
and must be fully briefed and prepared. 

BPD--the bureau within Treasury that is responsible for implementing 
the extraordinary actions and the accounting associated with those 
transactions--also dedicates extensive resources on operations related 
to the debt limit. BPD estimates that a 2-month DISP results in 
roughly 1,900 hours of work including the time spent before, during, 
and after the debt limit increase. This includes more than 400 hours 
in the 6 weeks prior to the implementation of any extraordinary 
actions spent on meetings to prepare for when the debt limit is 
reached, preparation of parallel accounts and spreadsheets in the 
event that extraordinary actions involving the G-Fund and CSRDF are 
used, tests of the accounting system, and a mock auction to practice 
and verify procedures for potential auction postponements. BPD also 
estimates that it spends in excess of 140 hours on debt limit-related 
activities each week once the first extraordinary action is taken, and 
over 270 hours on activities such as unwinding past transactions and 
preparing reports after the debt limit has been increased. The 
increased workload could result in overtime hours for BPD employees. 

Treasury officials said that the increased focus on debt limit-related 
operations in the months and weeks approaching the debt limit can 
divert time and attention from other tasks that could improve Treasury 
operations. For example, according to Treasury, OFP is able to spend 
less time working to update or improve the models it uses in routine 
forecasting of tax receipts, expenditures, and borrowing needs. 
Similarly, Treasury officials said that ODM is able to spend less time 
analyzing short-term financing needs that could help inform auction 
amounts. Both of these activities help Treasury more accurately 
project future borrowing needs to avoid the following: 

(1) Borrowing more than is needed to fund the government's immediate 
needs, which results in increased interest costs. 

(2) Borrowing less than is sufficient to maintain Treasury's operating 
cash balance at a minimum level through regularly scheduled issuances 
of marketable Treasury securities. This may require Treasury to issue 
CM bills with little advance notice to the market, resulting in 
potentially higher interest costs for the federal government. 

Approaching the Debt Limit Can Add Uncertainty in the Treasury Market: 

Postponed Auctions and Other Disruptions May Lead to Increased 
Borrowing Costs: 

Some of the actions Treasury takes to manage the amount of debt as it 
approaches the debt limit disrupt the regular and predictable auction 
schedule that Treasury relies on to promote liquid markets and finance 
the government's borrowing needs at the lowest cost over time. Regular 
and predictable auctions provide investors greater certainty and 
better information with which to plan their investments. Meanwhile, a 
liquid market allows investors to more easily buy and sell Treasury 
securities in the secondary market. Market participants that we spoke 
with said that any actions that Treasury takes to manage debt as it 
approaches the limit that cause Treasury to deviate from its otherwise 
regular and predictable schedule or reduce liquidity introduce 
uncertainty into the Treasury market and have the potential to 
increase Treasury's borrowing costs. 

Since 1995, Treasury delayed the announcement of 17 regularly 
scheduled auctions by 1-½ hours to 7 business days and postponed the 
auction date for 11 auctions by as many as 8 business days (see table 
4). Treasury also reduced the offering size of a 13-week bill by $7 
billion after the initial auction announcement in October 1995 in 
order to stay under the debt limit. These actions introduced 
uncertainty into the market for Treasury securities, and in some 
circumstances may have increased borrowing costs. 

Table 4: Postponed Auctions and Delayed Auction Announcements, 1995- 
2010: 

Type of Security: 3-year note; 
Originally scheduled announcement date: 11/1/1995; 
Date of actual auction announcement: 11/13/1995; 
Original auction date: 11/7/1995; 
Actual auction date: 11/20/1995; 
Length of delay in announcement (business days): 7; 
Length of auction postponement (business days): 8. 

Type of Security: 10-year note; 
Originally scheduled announcement date: 11/1/1995; 
Date of actual auction announcement: 11/13/1995; 
Original auction date: 11/8/1995; 
Actual auction date: 11/21/1995; 
Length of delay in announcement (business days): 7; 
Length of auction postponement (business days): 8. 

Type of Security: 52-week bill; 
Originally scheduled announcement date: 11/2/1995; 
Date of actual auction announcement: 11/13/1995; 
Original auction date: 11/9/1995; 
Actual auction date: 11/15/1995; 
Length of delay in announcement (business days): 6; 
Length of auction postponement (business days): 3. 

Type of Security: 2-year note; 
Originally scheduled announcement date: 6/19/2002; 
Date of actual auction announcement: 6/28/2002; 
Original auction date: 6/26/2002; 
Actual auction date: 6/28/2002; 
Length of delay in announcement (business days): 7; 
Length of auction postponement (business days): 2. 

Type of Security: 13-week bill; 
Originally scheduled announcement date: 6/27/2002; 
Date of actual auction announcement: 6/28/2002; 
Original auction date: 7/1/2002; 
Actual auction date: 7/1/2002; 
Length of delay in announcement (business days): 1; 
Length of auction postponement (business days): 0. 

Type of Security: 26-week bill; 
Originally scheduled announcement date: 6/27/2002; 
Date of actual auction announcement: 6/28/2002; 
Original auction date: 7/1/2002; 
Actual auction date: 7/1/2002; 
Length of delay in announcement (business days): 1; 
Length of auction postponement (business days): 0. 

Type of Security: 13-week bill; 
Originally scheduled announcement date: 5/15/2003; 
Date of actual auction announcement: 5/19/2003; 
Original auction date: 5/19/2003; 
Actual auction date: 5/20/2003; 
Length of delay in announcement (business days): 2; 
Length of auction postponement (business days): 1. 

Type of Security: 26-week bill; 
Originally scheduled announcement date: 5/15/2003; 
Date of actual auction announcement: 5/19/2003; 
Original auction date: 5/19/2003; 
Actual auction date: 5/20/2003; 
Length of delay in announcement (business days): 2; 
Length of auction postponement (business days): 1. 

Type of Security: 4-week bill; 
Originally scheduled announcement date: 5/19/2003; 
Date of actual auction announcement: 5/19/2003; 
Original auction date: 5/20/2003; 
Actual auction date: 5/21/2003; 
Length of delay in announcement (business days): [Empty]; 
Length of auction postponement (business days): 1. 

Type of Security: 13-week bill; 
Originally scheduled announcement date: 5/22/2003; 
Date of actual auction announcement: 5/27/2003; 
Original auction date: 5/27/2003; 
Actual auction date: 5/28/2003; 
Length of delay in announcement (business days): 2; 
Length of auction postponement (business days): 1. 

Type of Security: 26-week bill; 
Originally scheduled announcement date: 5/22/2003; 
Date of actual auction announcement: 5/27/2003; 
Original auction date: 5/27/2003; 
Actual auction date: 5/28/2003; 
Length of delay in announcement (business days): 2; 
Length of auction postponement (business days): 1. 

Type of Security: 2-year note; 
Originally scheduled announcement date: 5/22/2003; 
Date of actual auction announcement: 5/27/2003; 
Original auction date: 5/28/2003; 
Actual auction date: 5/29/2003; 
Length of delay in announcement (business days): 2; 
Length of auction postponement (business days): 1. 

Type of Security: 4-week bill; 
Originally scheduled announcement date: 11/15/2004; 
Date of actual auction announcement: 11/19/2004; 
Original auction date: 11/16/2004; 
Actual auction date: 11/19/2004; 
Length of delay in announcement (business days): 4; 
Length of auction postponement (business days): 3. 

Type of Security: 13-week bill; 
Originally scheduled announcement date: 11/18/2004; 
Date of actual auction announcement: 11/19/2004; 
Original auction date: 11/22/2004; 
Actual auction date: 11/22/2004; 
Length of delay in announcement (business days): 1; 
Length of auction postponement (business days): 0. 

Type of Security: 26-week bill; 
Originally scheduled announcement date: 11/18/2004; 
Date of actual auction announcement: 11/19/2004; 
Original auction date: 11/22/2004; 
Actual auction date: 11/22/2004; 
Length of delay in announcement (business days): 1; 
Length of auction postponement (business days): 0. 

Type of Security: 2-year note; 
Originally scheduled announcement date: 11/18/2004; 
Date of actual auction announcement: 11/19/2004; 
Original auction date: 11/23/2004; 
Actual auction date: 11/23/2004; 
Length of delay in announcement (business days): 1; 
Length of auction postponement (business days): 0. 

Type of Security: 13-week bill; 
Originally scheduled announcement date: 3/16/2006; 
Date of actual auction announcement: 3/16/2006; 
Original auction date: 3/20/2006; 
Actual auction date: 3/20/2006; 
Length of delay in announcement (business days): 0[A]; 
Length of auction postponement (business days): 0. 

Type of Security: 26-week bill; 
Originally scheduled announcement date: 3/16/2006; 
Date of actual auction announcement: 3/16/2006; 
Original auction date: 3/20/2006; 
Actual auction date: 3/20/2006; 
Length of delay in announcement (business days): 0[A]; 
Length of auction postponement (business days): 0. 

Source: GAO analysis of Treasury data: 

[A] Treasury's auction announcement release time was delayed from 
11:00 a.m. to 12:30 p.m. 

[End of table] 

Treasury officials and market participants both stated that postponing 
the announcement or auction of longer-dated securities such as notes 
and bonds is more disruptive to the Treasury market than postponing 
shorter-dated securities such as bills. This is due in part to the 
fact that dealers generally require additional time to work with 
customers and secure financing for note and bond auctions. There is 
generally about a week between the announcement of a note auction and 
the actual auction. The announcement of a 2-year note auction was 
delayed 7 business days in 2002, reducing the time that dealers had to 
prepare bids from 5 business days to less than 1. This auction had the 
lowest bid-to-cover ratio--the ratio of dollar value of bids at 
auction to the amount accepted--for any 2-year note auction since 
these data began to be recorded in 1998. It is difficult to say with 
certainty how much in additional interest Treasury paid because of the 
postponement of this auction. Based on one estimate that assumes that 
the rate on the note would have been roughly equal to the constant 
maturity rate, or the closing rate on actively traded Treasury 
securities maturing at the same time on the day that the auction 
actually took place, Treasury paid an additional 7 basis points--or 
0.07 percentage points--on the $27 billion in 2-year notes issued that 
day. This equals almost $19 million in additional interest costs each 
year. Based on an alternative estimate that assumes that Treasury 
would have received the prevailing interest rate on 2-year notes in 
the secondary market on the day that the auction was originally 
scheduled to take place, the increased interest costs would be even 
greater. 

The level of disruption resulting from a postponed auction depends in 
part on how early Treasury forewarns the market. Unlike the 2-year 
note auction in 2002, Treasury discussed the prospect of postponing a 
3-year note and a 10-year note auction with members of the Treasury 
Borrowing Committee at its regular committee meeting a week before the 
original auction date and released the auction announcement a week 
before the postponed auction took place. The yields at the subsequent 
auctions on November 20 and 21, 1995 were roughly the same as the 
constant maturity rate for each maturity on the day of the auction. 

Auctions that are postponed beyond the maturity date of a previously 
issued security can cause significant disruptions. Treasury generally 
makes the actual exchange of Treasury securities for cash--the 
settlement--a few days or more after the auction. Settlements 
frequently occur around the same time that previously issued 
securities are maturing. This allows Treasury to refund maturing 
securities--to use some or all of the cash that it raised in the 
auction to redeem maturing securities. It also allows investors to 
easily roll over, or reinvest, cash received from maturing securities 
in newly issued securities. Treasury stated that when the settlement 
date of a new security is moved past the maturity date of a previously 
issued security, investors are unable to rollover their investments in 
a timely way. As a result, they may choose to invest in a financial 
instrument other than Treasury securities. This could affect auction 
demand. Most of the postponed auctions in the past 16 years were 
delayed by only 1 to 3 days and therefore did not affect the refunding 
of maturing securities. However, in November 1995, the 3-and 10-year 
note auctions intended to refund notes maturing on November 15, 1995, 
were postponed past the maturity date. In this instance, Treasury 
bridged the gap between the maturity and settlement date by auctioning 
a short-term CM bill. 

Overall, Treasury issued 20 CM bills totaling more than $300 billion 
during DISPs in the past 16 years to manage the amount of debt near 
the limit. In some cases, these were used to augment Treasury's 
regular schedule of bill auctions. For example, because of debt limit 
constraints, Treasury delayed the 4-week bill auction scheduled for 
November 16, 2004. Treasury then auctioned a 5-day CM bill for $7 
billion on November 17, 2004. As mentioned previously, our prior work 
found that Treasury may have paid a premium, in the form of higher 
interest, on these CM bills compared to bills of a similar maturity. 
[Footnote 16] 

Treasury Sharply Reduced the Supply of Bills during Recent Debt Limit 
Debate: 

While Treasury did not postpone any of its regularly scheduled 
auctions during the most recent debt limit debate, it sharply reduced 
the total dollar amount of bills outstanding primarily to manage the 
amount of debt as it approached the limit. The total amount of 
Treasury bills outstanding dropped by $350 billion (or about 17 
percent) from September 23, 2009, to February 12, 2010, (see figure 
4). Roughly $200 billion of this was related to reductions to the SFP. 
The decline in Treasury bills outstanding was accompanied by a decline 
in short-term rates paid by Treasury. However, Treasury officials and 
market participants stated that a sharp and irregular bill reduction 
in such a short period of time could affect liquidity in the near term 
and add uncertainty in the market over the longer term. While several 
different types of investors use bills to invest their funds in the 
short term in a safe and highly liquid asset, market participants we 
spoke with said that money market funds were likely most affected by 
the reduction in bill supply. Market participants also noted that if 
Treasury had to make similar reductions to its issuance of notes or 
bonds because of proximity to the debt limit, the effect on the 
Treasury market would be greater. 

Figure 4: Supply of Treasury Bills Decreased Sharply during Debt Limit 
Event: 

[Refer to PDF for image: line graph] 

Dollars in billions: 

Date: May 2009:	
$2,023; 
$2,023; 
$2,023; 
$2,023; 
$2,023; 
$2,037; 
$2,032; 
$2,032; 
$2,032; 
$2,032; 
$2,048; 
$2,048; 
$2,048; 
$2,048; 
$2,065; 
$2,065. 

Date: June 2009: 
$2,065; 
$2,065; 
$2,065; 
$2,076; 
$2,076; 
$2,076; 
$2,076; 
$2,076; 
$2,076; 
$2,076; 
$2,050; 
$2,050; 
$2,050; 
$2,044; 
$2,044; 
$2,044; 
$2,044; 
$2,009; 
$2,006; 
$2,006; 
$2,006; 
$2,006. 

Date: July 2009: 
$2,006; 
$1,980; 
$1,980; 
$2,010; 
$2,010; 
$2,010; 
$2,020; 
$2,020; 
$2,020; 
$2,020; 
$2,020; 
$2,036; 
$2,036; 
$2,036; 
$2,036; 
$2,036; 
$2,046; 
$2,046; 
$2,046; 
$2,046; 
$2,046; 
$2,020; 
$2,020. 

Date: August 2009: 
$2,020; 
$2,020; 
$2,020; 
$2,020; 
$2,020; 
$2,020 (8/7/2009: Treasury notifies Congress that the debt limit needs 
to be raised); 
$2,020 ; 
$2,020; 
$2,024; 
$2,024; 
$2,024; 
$2,060; 
$2,060; 
$2,061; 
$2,061; 
$2,061; 
$2,061; 
$2,061; 
$2,068; 
$2,068; 
$2,068. 

Date: September 2009: 
$2,068; 
$2,068; 
$2,063; 
$2,063; 
$2,063; 
$2,063; 
$2,075; 
$2,075; 
$2,075; 
$2,055; 
$2,055; 
$2,036; 
$2,036; 
$2,036; 
$2,036; 
$2,036; 
$1,993; 
$1,993; 
$1,993; 
$1,993; 
$1,993. 

Date: October 2009: 
$1,952; 
$1,952; 
$1,952; 
$1,952; 
$1,952; 
$1,924; 
$1,924; 
$1,934; 
$1,934; 
$1,909; 
$1,909; 
$1,909; 
$1,909; 
$1,909; 
$1,853 (9/24/09: SFP reduction begins); 
$1,853; 
$1,853; 
$1,853; 
$1,853; 
$1,834; 
$1,859. 

Date: November 2009: 
$1,859; 
$1,859; 
$1,859; 
$1,862; 
$1,862; 
$1,862; 
$1,862; 
$1,867; 
$1,867; 
$1,867; 
$1,867; 
$1,867; 
$1,847; 
$1,847; 
$1,846; 
$1,846; 
$1,846; 
$1,850; 
$1,850. 

Date: December 2009: 
$1,850; 
$1,850; 
$1,853; 
$1,853; 
$1,853; 
$1,853; 
$1,853; 
$1,865; 
$1,865; 
$1,853; 
$1,853; 
$1,853; 
$1,816; 
$1,816; 
$1,816; 
$1,816; 
$1,816; 
$1,814; 
$1,814; 
$1,799; 
$1,804 (12/30/09: SFP is reduced to $5 billion); 
$1,793. 

Date: January 2010: 
$1,793; 
$1,793; 
$1,793; 
$1,770; 
$1,770; 
$1,770; 
$1,770; 
$1,770; 
$1,745; 
$1,745; 
$1,745; 
$1,745; 
$1,714; 
$1,714; 
$1,714; 
$1,714; 
$1,714; 
$1,689; 
$1,689. 

Date: February 2010: 
$1,689; 
$1,689; 
$1,689; 
$1,679; 
$1,679; 
$1,669; 
$1,679; 
$1,679 (2/12/2010: Debt limit increase is signed into law); 
$1,686; 
$1,686; 
$1,686; 
$1,686; 
$1,701; 
$1,701; 
$1,701; 
$1,701; 
$1,701; 
$1,736; 
$1,736. 

Date: March 2010: 
$1,736; 
$1,736; 
$1,736; 
$1,710; 
$1,770; 
$1,770; 
$1,770; 
$1,770; 
$1,774; 
$1,799; 
$1,799; 
$1,799; 
$1,799; 
$1,820; 
$1,820; 
$1,820; 
$1,820; 
$1,820; 
$1,843; 
$1,843; 
$1,843; 
$1,843; 
$1,843. 

Date: April 2010: 
$1,850; 
$1,850; 
$1,871; 
$1,871; 
$1,871; 
$1,902; 
$1,902; 
$1,902; 
$1,902; 
$1,902; 
$1,900; 
$1,900; 
$1,883; 
$1,883; 
$1,883; 
$1,868; 
$1,868; 
$1,868; 
$1,868; 
$1,868; 
$1,848; 
$1,848. 

Date: May 2010: 
$1,848; 
$1,848; 
$1,848; 
$1,833; 
$1,833; 
$1,833; 
$1,833; 
$1,833. 

Source: GAO analysis of Treasury data. 

[End of figure] 

This sharp reduction in Treasury bills was unique to this most-recent 
debt limit debate and largely related to the SFP, though large TARP 
repayments in December, a reduction in Treasury's operating cash 
balance, and the transition to longer-dated securities were also 
factors. When Treasury approached the debt limit earlier in the 
decade, the amount of Treasury bills outstanding tended to fluctuate 
within a narrower range. To finance the SFP program, Treasury auctions 
a series of CM bills, and places the proceeds in a special account at 
the Federal Reserve Bank of New York. These outstanding CM bills count 
against the debt limit. On September 16, 2009, Treasury announced it 
intended to reduce the SFP account from $200 billion to $15 billion to 
preserve flexibility in debt management. This amount dropped to as low 
as zero in December 2009. As late as February 2, 2010, Treasury 
announced that both the outlook for Treasury bills issuance and the 
future of the SFP were uncertain. Shortly after the debt limit was 
raised on February 12, 2010, Treasury returned the SFP account to 
approximately $200 billion. 

Evidence Suggests Borrowing Costs Increased during Some Debt Limit 
Event Periods: 

Our analysis suggests that the general uncertainty surrounding some 
debt limit events including the most recent in 2009-2010 increased 
Treasury's borrowing costs in the months immediately prior to a debt 
limit increase.[Footnote 17] To measure changes in Treasury's 
borrowing costs, we examined the spread between 13-week (i.e., 3-
month) Treasury bill yields and 3-month commercial paper yields around 
debt limit events since 2001.[Footnote 18] Rates for Treasury bills, 
commercial paper, and other financial assets can fluctuate from day to 
day in response to changes in the broader economy. By focusing on a 
yield spread rather than changes in individual interest rates, we are 
able to better measure changes in the relative risk of 3-month 
Treasury bills and identify potential risk premiums. A narrowing of 
the spread indicates that the market perceives the risk of Treasury 
bills to be closer to that of commercial paper, while a widening of 
this spread means that Treasury bills are perceived to be less risky 
relative to commercial paper. We found that Treasury paid a premium on 
3-month Treasury bills issued during debt limit events in 2001-2002 
and 2002-2003, but not in 2004-2005 and 2005-2006.[Footnote 19] For 
the most-recent debt limit event--which lasted from August 7, 2009, to 
February 12, 2010--we found that Treasury again paid a premium on 3-
month Treasury bills. Figure 5 shows that the average spread narrowed 
during the debt limit event in 2009-2010 compared to the average for 
the proceeding 3 months, implying that Treasury paid a premium on 3-
month Treasury bills issued during this time period. 

Figure 5: Spreads between Yields of 3-Month Commercial Paper and 3- 
Month Treasury Bills Were Lower during the 2009-2010 Debt Limit Event 
Period: 

[Refer to PDF for image: line graph] 

Percentage points: 

Preevent: 

Date: 5/7/09; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.24; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.18; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.09; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.24; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.18; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.23; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.18; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.17. 

Date: 5/19/09; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.22; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.1; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.07; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.05; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.1; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.18; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.16; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.26. 

Date: 6/1/09; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.17; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.22; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.19; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.2; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.14; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.14; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.13; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.14. 

Date: 6/11/09; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.16; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.06; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.16; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.14; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.33; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.22; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.14; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.43. 

Date: 6/23/09; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.17; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.15; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.2; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.15; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.13; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.16; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.25; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.13. 

Date: 7/6/09; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.16; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.16; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.16; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.14; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.26; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.13; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.13; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.14. 

Date: 7/16/09; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.09; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.18; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.12; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.1; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.14; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.12; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.13; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.12. 

Date: 7/28/09; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.11; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.11; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.12; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.12; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.11; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.16; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.12; 

Average: 0.16; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.13. 

End Preevent, begin Event: 
8/7/09: Treasury notifies Congress that the debt limit need to be 
raised; 

Date: 8/7/09; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.12; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.11; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.11; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.11; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.09; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.1; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.1; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.08. 

Date: 8/19/09; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.11; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.12; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.18; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.1; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.12; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.08; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.11; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.14. 

Date: 8/31/09; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.11; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.1; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.12; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.08; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.11; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.11; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.1; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.11. 

Date: 9/11/09; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.11; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.1; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.12; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.14; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.12; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.13; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.11; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.1. 

Date: 9/23/09; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.12; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.13; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.1; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.1; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.08; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.03; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.13; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.12. 

Date: 10/5/09; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.14; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.15; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.12; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.14; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.14; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.14; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.11; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.13. 

Date: 10/16/09; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.15; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.11; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.14; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.16; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.15; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.15; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.14; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.17. 

Date: 10/28/09; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.16; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.16; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.16; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.14; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.12; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.17; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.15; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.16. 

Date: 11/9/09; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.12; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.14; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.12; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.14; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.13; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.15; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.13; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.2. 

Date: 11/20/09; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.15; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.12; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.14; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.14; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.16; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.13; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.14; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.15. 

Date: 12/3/09; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.14; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.14; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.16; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.17; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.18; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.16; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.18; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.17. 

Date: 12/15/09; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.15; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.17; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.15; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.15; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.1; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.1; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.13; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.14. 

Date: 12/28/09; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.14; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.1; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.09; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.07; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.09; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.12; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.15; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.15. 

Date: 1/11/10; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.12; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.1; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.11; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.11; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.1; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.11; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.12; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.1. 

Date: 1/22/10; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.12; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.13; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.13; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.11; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.12; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.15; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.12; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.09. 

Date: 2/3/10; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.11; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.14; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.08; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.06; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.1; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.13; 

2/12/10: Debt limit increase is signed into law: 
End Event; Begin Postevent: 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.06; 

Average: 0.125; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.1. 

Date: 2/16/10; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.17; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.09; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.06; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.08; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.08; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.08; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.08; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.06. 

Date: 2/26/10; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.07; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.05; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.07; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.1; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.09; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.12; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.04; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.07. 

Date: 3/10/10; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.05; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.04; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.04; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.03; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.1; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.13; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.05; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.06. 

Date: 3/22/10; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.12; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.2; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.2; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.1; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.1; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.11; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.16; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.17. 

Date: 4/5/10; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.13; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.09; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.09; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.11; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.08; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.18; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.14; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.13. 

Date: 4/15/10; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.11; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.12; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.12; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.12; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.15; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.12; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.14; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.24. 

Date: 4/27/10; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.15; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.21; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.17; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.2; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.15; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.15; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.19; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.24. 

Date: 5/7/10; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.18; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.33; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.21; 

Average: 0.126; 
Yield spread on 3-month commercial paper and 3-month Treasury bills: 
0.33. 

Source: GAO analysis of Board of Governors of the Federal Reserve 
System data. 

[End of figure] 

After controlling for other factors that could have affected the yield 
spread, such as economic uncertainty and liquidity in the bill market, 
we estimated that the debt limit added a premium of about 4 basis 
points during the debt limit event period in 2009-2010.[Footnote 20] 
Applying this premium to all 3-month Treasury bills issued during this 
period, we estimate that Treasury paid $78 million in additional 
borrowing costs as a result of the debt limit. We did not estimate the 
effects of nearing the debt limit on yields of other Treasury 
securities, and therefore, do not know whether a premium of the same 
size would apply to Treasury securities with longer or shorter terms 
to maturity. However, even a smaller premium on the large amount of 
Treasury securities issued during the debt limit event period would 
result in a notable increase in borrowing costs. For instance, for 
each additional basis point paid on bills issued during the 2009-2010 
debt limit event period, Treasury's borrowing cost would increase by 
roughly $92 million. For more information on our statistical analysis, 
including a discussion of the limitations, see appendix II. 

Trends in U.S. credit default swap (CDS) premia, or "spreads" also 
suggest that Treasury securities were perceived to be relatively more 
risky as debt approached the limit in 2009-2010. While CDS are used in 
a variety of ways other than to insure against a default, such as 
hedging against counterparty risk, or the risk that another party will 
not fulfill its contractual obligation, CDS spreads serve as an 
indicator of changes in the market's perception of risk in the 
Treasury market. U.S. CDS spreads increase when risk in the Treasury 
market increases and therefore have an inverse relationship to the 
yield spread. Not long after Treasury notified Congress that the debt 
limit would need to be raised and Treasury began reducing issuance of 
CM bills for the SFP, rates for 1-year U.S. CDS spreads increased 
while the yield spread trend decreased (see figure 6). Similarly, in 
the weeks after the debt limit was raised, U.S. CDS spreads decreased 
sharply. Some of the increase in U.S. CDS spreads likely reflects 
general uncertainty about the global economy rather than the debt 
limit; CDS spreads increased from late 2009 to early 2010 for other 
countries, not just for the United States. However, 1-year U.S. CDS 
spreads tended to increase more than comparable spreads for Germany, 
Japan, and the United Kingdom during the event period. 

Figure 6: Trends in Treasury's CDS Spreads Were Consistent with Trends 
in the Yield Spread for the 2009-2010 Debt Limit Event: 

[Refer to PDF for image: multiple line graph] 

Graph depicts the following: 

For the time period 5/7/2009 through 5/12/2010: 

1-year Treasury CDS spread (in basis points); 
Yield spread on 3-month commercial paper and 3-month Treasury bills 
(in percentage points). 

CDS basis points range: from 0 to 50; 
Yield spread on 3-month commercial paper and 3-month Treasury bills 
percentage points range: from 0 to 0.5. 

The following kep dates are depicted on the graph: 

8/7/09: Treasury notifies Congress that the debt limit needs to be 
raised. 

9/24/09: SFP reduction begins. 

2/4/10: Legislation increasing debt limit is passed by Congress. 

2/12/10: Debt limit increase is signed into law. 

[Specific data points are available upon request] 

Source: GAO analysis of Board of Governors of the Federal Reserve 
System data and Datastream data. 

[End of figure] 

Overall, the debt limit requires Treasury to deviate from its regular 
debt management practices in ways that add uncertainty to the Treasury 
market. While there are limitations to our analysis of changes to the 
auction schedule and to Treasury yields around debt limit events, 
collectively the analyses provide strong evidence that this 
uncertainty does not come without a cost. 

Beyond the immediate costs associated with the debt limit, some market 
participants and others that we spoke with said that failing to raise 
the debt limit in a timely manner added an additional level of risk to 
the Treasury market. As noted above, the extraordinary actions provide 
less borrowing capacity and therefore less time for debate about 
raising the debt limit once debt reaches the limit than they have in 
the past. Analysts and observers--including former congressional 
staff--expressed concern that a miscalculation in when the debt limit 
needs to be increased by could trigger a financial crisis in the 
Treasury market. Despite these concerns, most of those whom we spoke 
with believe that Congress will raise the debt limit before there is a 
significant market disruption and that Treasury will continue to 
successfully manage debt near the debt limit as it has done in the 
past. Treasury continues to consistently borrow at relatively low 
interest rates, and demand for Treasury securities both in the United 
States and abroad remains strong during periods of economic 
instability because of their liquidity and low risk. 

Experts and Practices of Other Countries Offer Insights for Better 
Linking Policy Decisions with Their Effect on Debt: 

Tying Debt Limit Increases to Annual Budget Decisions Is Similar to a 
Practice Used in Some Other Countries: 

We spoke with participants, observers, analysts, and other experts 
representing a range of backgrounds and political perspectives-- 
including former congressional staff, former CBO Directors, former 
Treasury officials, and representatives from credit rating agencies-- 
about the role of the debt limit in the U.S. budget process. Many 
cited the failure to link fiscal policy decisions to changes in the 
debt limit as a weakness in the process. Credit rating agencies, for 
example, consider a number of different factors when assigning a 
credit rating to sovereign nations' debt, including the strength of 
the national economy, overall levels of government debt, and monetary 
policy, as well as the budgetary framework. While the debt limit has 
not compromised the United States' AAA credit rating, credit rating 
agencies expressed concern about separating the vote for spending 
increases and revenue decreases that increase debt from the vote for 
additional borrowing authority. One credit rating agency described 
this delinking as a weakness in the U.S. budgetary framework.[Footnote 
21] Another credit rating agency said that anything that has the 
potential to delay the timely redemption of federal debt is viewed as 
a negative.[Footnote 22] In 1996, Moody's Investors Service (Moody's) 
indicated a possible downgrade for some Treasury securities with 
interest payments coming due in part because Treasury had nearly 
exhausted its options for managing debt near the debt limit. According 
to Moody's this was the only time that Moody's has officially taken a 
negative rating action related to U.S. Treasury securities. None of 
the experts that we spoke with said that the existence of the debt 
limit served to restrain spending and tax decisions prior to the debt 
limit debate, but some believe the debt limit has served a useful 
purpose in highlighting the growth of federal debt. 

Many of the experts that we spoke with identified possible changes to 
the legislative process that would better link decisions about fiscal 
policy and debt. Some suggested that since the budget resolution 
reflects aggregate fiscal policy decisions, it should be used to 
consider the level of debt implied by those decisions. The budget 
resolution generally sets out the level for spending, revenues, and 
debt for the next fiscal year and the following 4 fiscal years. Some 
favored a mechanism similar to what was House Rule XXVIII in the 111th 
Congress. This rule provided for the automatic engrossment and 
transmittal to the Senate of a joint resolution changing the debt 
limit by the amount specified in the budget resolution. This joint 
resolution was considered to have passed the House and was then sent 
to the Senate. The Senate did not have a similar rule; it sometimes, 
though not always, passed the joint resolution from the House, albeit 
with a lag. In the last 16 years, this lag has ranged from 1 month to 
more than 10 months. Others believed that this process still gave too 
little visibility to the implications of spending and tax decisions on 
federal debt and preferred separate votes on stand-alone legislation. 
They too believed that the vote should be timed to go with the budget 
resolution--in part to keep the link and in part to avoid reaching the 
debt limit later in the year after the spending and tax decisions had 
been made. 

Opinions varied on how to address increases in borrowing needs not 
contemplated in budget resolutions. The actual amount of debt can 
differ from the amount anticipated in the budget resolution because of 
newly enacted legislation or because of the automatic stabilizers 
through which changes in the economy affect government spending and 
revenue.[Footnote 23] Some supported a formal or informal process 
whereby any legislation that would increase debt beyond that 
envisioned in the resolution would contain a separate title raising 
the debt limit by the appropriate amount. Congress took this approach 
with three pieces of legislation enacted in 2008 and 2009 in response 
to the financial market crisis and economic downturn. The Housing and 
Economic Recovery Act of 2008, the Emergency Economic Stabilization 
Act of 2008, and the Recovery Act each included a separate provision 
increasing the debt limit. Some congressional observers pointed out 
that while this would tie spending and revenue decisions to the debt-
level effect of those decisions, it would not address increases in 
debt arising from an economic downturn. Some of the ideas for dealing 
with both the policy linkage and any increases in debt driven by 
economic conditions were (1) considering further changes to the debt 
limit at the time that the annual mid-session review is released; 
[Footnote 24] (2) setting aside a reserve fund in the budget 
resolution for unanticipated borrowing needs; and (3) delegating 
additional authority to Treasury to borrow for intrayear financing 
needs that resulted from changes in the economy rather than direct 
policy decisions. 

The practice of approving borrowing authority in connection with 
approval of the annual budget is used in other countries we examined. 
For example, in Canada, the Ministry of Finance is provided with a 
fixed amount that it is authorized to borrow for the fiscal year. When 
necessary, the Ministry of Finance can request increased borrowing 
authority from the executive branch of government to fund unforeseen 
borrowing needs. In Sweden, the legislature approves borrowing 
authority annually; however, it is limited to purpose--to finance 
current deficits, provide loans, and redeem national debt, for 
example--rather than by amount. 

Some Suggested Delegating Broader Authority to Treasury--a Practice 
Used in Some Other Countries: 

Some budget experts and a former Treasury official said that Congress 
could delegate authority to Treasury to borrow as needed to fund 
congressionally approved expenditures subject to a periodic review. 
They suggested that Congress could vote to renew this authority at the 
start of a new Congress or a new legislative session. This would 
preserve Congress's ability to have periodic debates over the current 
path of federal debt, they argue, but change the trigger for debate 
from proximity to the debt limit to another point in the legislative 
process to minimize disruptions to debt management and the Treasury 
market. 

Providing finance departments with broad authority to borrow is 
consistent with practices in four of the countries we examined. In the 
United Kingdom, for example, the Treasury is given broad authority to 
raise money in a manner it "considers expedient for the purpose of 
promoting sound monetary conditions." In New Zealand, the Minister of 
Finance is given similarly broad borrowing authority to borrow in the 
public interest. However, when comparing borrowing authority across 
countries, it is important to recognize that the division of power 
between the legislative and executive branches varies among different 
political systems. In parliamentary systems, the government is 
generally formed by the political party that has the support of the 
majority of the parliament; therefore, the interests of the 
legislative and executive branches are likely more aligned, making the 
delegation of borrowing authority more of a formality and not a 
subject of extensive deliberation. Of the countries that we reviewed, 
only Denmark has a fixed nominal debt limit that is raised through 
legislation outside the annual budget process comparable to the U.S. 
debt limit. According to a Danish official, the limit is set high 
enough that it does not impede debt managers' ability to issue debt. 

Some of those with whom we spoke said that tying delegation of 
borrowing authority to a fixed nominal debt limit creates an action- 
forcing event that draws attention to the growth in federal debt. They 
noted that previous debt limit debates provided opportunities for the 
Congress and the President to consider the implications of past fiscal 
policy decisions on federal borrowing and sometimes played a role in 
the enactment of budget process agreements intended to slow the growth 
of future federal borrowing. For example, debt limit increases were 
passed jointly with budget controls legislation five times between 
1985 and 1997[Footnote 25]--and again in February 2010 with the 
reenactment of a statutory pay-as-you-go, or PAYGO, rule.[Footnote 26] 
Meanwhile, others said that the debate over debt limit increases 
played a smaller role in fiscal policy discussions in recent years 
than it had in the past and expected that the debt limit would not be 
needed to trigger debate over federal borrowing in the future given 
the already increasing attention to debt and deficits. In addition, 
some thought that risks associated with the debates--such as the 
potential for Congress to delay or to miscalculate the timing of a 
debt limit increase given the small amount of borrowing capacity 
provided by the extraordinary actions--outweighed the benefits. 

Some Countries Have Mechanisms to Increase Attention to or Control 
over Fiscal Policy Decisions That Lead to an Increase in Debt: 

The United States is unusual among the countries we reviewed in using 
the authorization of additional borrowing authority as an occasion to 
draw attention to past fiscal policy decisions. Other countries that 
we reviewed generally use fiscal rules or targets to increase 
attention to or control over fiscal policy decisions that lead to an 
increase in debt. Fiscal rules generally refer to permanent or 
multiyear constraints on fiscal policy through simple numerical limits 
on budgetary aggregates. For example, Switzerland has adopted a 
constitutional "debt brake" that places a limit on expenditures that 
is equal to the expected revenue for the year adjusted to reflect the 
country's place in the current business cycle. Differences between 
estimated and actual numbers are recorded in a separate account that 
must by law be reduced if it reaches a certain level. Germany has 
adopted a "golden rule" limiting net borrowing to the amount of 
investment spending. Germany also approved a constitutional amendment 
in 2009 requiring that structural deficits not exceed 0.35 percent of 
gross domestic product (GDP)--or very close to balance. 

Instead of budget constraints, some countries use debt targets to 
establish an acceptable outcome for policymakers to work toward when 
making fiscal policy decisions. These can be either statutory 
requirements or political commitments by the current government. For 
example, in part to keep debt at a sustainable level, Sweden targets a 
net surplus of 1 percent of GDP over the course of the business cycle. 
In New Zealand, the government is required to maintain debt at a 
"prudent level" and set specific short-term and long-term targets for 
meeting this goal. If the government deviates from these targets, the 
Minister of Finance must explain the approach the government intends 
to take to return to prudent levels. Members of the European Union 
agreed to target a ratio of gross general government debt to GDP of 60 
percent and budget deficits of not more than 3 percent of GDP. Several 
nations have struggled to meet these targets in recent years, raising 
concerns about the effectiveness of the current enforcement 
mechanisms. In general, budget experts and other observers have noted 
that the success of fiscal rules depends on effective enforcement 
along with a sustained commitment by policymakers and the public. 

Specific fiscal rules and targets used in other countries may not be 
appropriate for the United States given differences in the national 
economies and political institutions. Nevertheless, some of the fiscal 
rules and targets that we reviewed shared some common features that 
distinguish them from the U.S. debt limit and offer insights for 
increasing attention to or control over fiscal policy decisions that 
lead to an increase in debt. These rules and targets: 

(1) measure debt in relation to the overall size of the economy (e.g., 
debt-to-GDP ratio), 

(2) take into consideration whether the economy is in a period of 
expansion or contraction, 

(3) provide a near-term or medium-term debt target, as opposed to a 
ceiling, for policymakers to work toward. 

In recent years, several bipartisan and nonpartisan groups have 
suggested the establishment of fiscal rules with one or more of these 
features in the United States such as a debt-to-GDP target.[Footnote 
27] 

Conclusions: 

The debt limit does not control or limit the ability of the federal 
government to run deficits or incur obligations. Rather, it is a limit 
on the ability to pay bills incurred. The decisions that create the 
need to borrow are made separately from--and generally earlier than-- 
the decision about the debt limit. Debates surrounding the debt limit 
may raise awareness about the federal government's current debt 
trajectory and also provide Congress with an opportunity to debate the 
fiscal policy decisions driving that trajectory. However, since this 
debate generally occurs after tax and spending decisions have been 
enacted into law, Congress has a narrower range of options to effect 
an immediate change to fiscal policy decisions and hence to federal 
debt. 

Failure to raise the debt limit could lead to serious negative 
consequences in the Treasury market and for the ability of the United 
States to finance federal debt at the lowest cost over time. Any delay 
in raising the debt limit that affects Treasury's regular and 
predictable schedule of auctions can create uncertainty in the 
Treasury market. So too some of the actions Treasury takes to manage 
the amount of debt near the debt limit, such as reducing the size of 
auctions, can compromise the certainty of supply that Treasury relies 
on to achieve the lowest borrowing cost over time. This uncertainty 
can, in turn, raise the cost of financing the federal debt. In 
addition, managing debt near the debt limit diverts Treasury's limited 
resources away from other cash and debt management issues at a time 
when Treasury already faces significant challenges in lengthening the 
average maturity of its debt portfolio, which reduces rollover risk 
and uncertainty about future interest payments. 

Recently--and for the foreseeable future--Treasury's actions take 
place in the context of rapidly growing federal debt. Treasury's past 
success at managing cash and debt when near or at the debt limit is no 
guarantee that it can continue to manage successfully in the future 
and may be misleading. Given the size of current and projected 
borrowing needs, the extraordinary actions Treasury uses to manage 
debt near or at the debt limit will be more limited in coming years. 
As a result, once debt is at the debt limit, Congress will likely have 
less time to debate raising the debt limit before there are 
disruptions to government programs and services and to the Treasury 
market. 

Observers and participants with whom we spoke suggested that improving 
the link between the spending and revenue decisions that increase the 
need to borrow and changes in the debt limit would improve the 
situation. Better alignment could be possible if decisions about the 
debt level occur in conjunction with spending and revenue decisions as 
opposed to the after-the-fact approach now used. This would help avoid 
the uncertainty and disruptions that occur during debates on the debt 
limit today. It might also facilitate efforts to change the fiscal 
path by highlighting the implications of these spending and revenue 
decisions on debt. This will be particularly important in coming years 
as the federal government addresses the challenge of unsustainable 
increases in federal debt. 

Matter for Congressional Consideration: 

The projections of a growing debt burden have raised concerns both in 
Congress and in the public. Well-designed budget processes and metrics 
can help as Congress and the President seek to address the federal 
government's long-term fiscal challenge. The current design of the 
debt limit does not engender or facilitate debate over specific tax or 
spending proposals and their effect on debt. In addition, the 
uncertainty it creates can lead to disruptions in the Treasury market 
and in turn to higher borrowing costs. To avoid these potential 
disruptions to the Treasury market and to help inform the fiscal 
policy debate in a timely way, Congress should consider ways to better 
link decisions about the debt limit with decisions about spending and 
revenue. Such a process would build on the approach used in 2008 and 
2009 when Congress passed and the President signed three laws that 
were expected to increase borrowing with a corresponding increase in 
the debt limit.[Footnote 28] This report presents a number of 
approaches that could serve as a basis for better linking decisions 
about spending and revenue with decisions about the debt limit. 

Agency Comments: 

We requested comments on a draft of this report from the Secretary of 
the Treasury. Treasury officials told us they appreciated the in-depth 
and careful analysis contained in the report. They also provided 
technical comments, which we incorporated as appropriate. 

We will send copies of this report to interested congressional 
committees, the Secretary of the Treasury, and other interested 
parties. We will also make copies available at no charge on the GAO 
Web site at [hyperlink, http://www.gao.gov]. 

If you or your staff have any questions about this report, please 
contact Susan J. Irving at (202) 512-6806 or irvings@gao.gov or Gary 
T. Engel at (202) 512-3406 or engelg@gao.gov. Contact points for our 
Offices of Congressional Relations and Public Affairs may be found on 
the last page of this report. GAO staff who made major contributions 
to this report are listed in appendix III. 

Signed by: 

Susan J. Irving: 
Director for Federal Budget Analysis: 
Strategic Issues: 

Signed by: 

Gary T. Engel: 
Director Financial Management and Assurance: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

Our objectives were to (1) describe the actions that the Department of 
the Treasury (Treasury) has taken to manage debt near the debt limit 
and challenges that arise, (2) analyze the effects that approaching 
the debt limit had on the market for Treasury securities, including 
Treasury's borrowing costs, and (3) in light of the disconnect between 
the debt limit and the policy decisions that have an effect on the 
size of federal debt, describe alternative triggers or mechanisms that 
would permit consideration of the link between policy decisions and 
the effect on debt when or before decisions are made. 

To answer our first objective, we reviewed Treasury documents and 
prior GAO reports describing the actions that Treasury has taken 
during debt limit debates since 1995. We used publicly available data 
including Treasury's Monthly Statement of Public Debt and federal 
investment account statements to estimate the amount of potential 
borrowing capacity these actions could provide in fiscal year 2010 in 
comparison to previous years since 2002 in which debt approached the 
debt limit. To identify challenges that might arise when managing debt 
near the debt limit, we examined publicly available data from the 
Daily Treasury Statement to identify trends in federal receipts and 
expenditures, issuance and redemption of federal debt, and changes in 
Treasury's operating cash balance. To understand how managing debt 
near the debt limit affected agency operations, we reviewed documents 
provided by Treasury, interviewed Treasury officials involved in both 
the decision-making process and implementation of extraordinary 
actions, and obtained estimates when possible of the time and staff 
involved in planning for when the debt limit will be reached and 
implementing the extraordinary actions. To assess the reasonableness 
of Treasury estimates, we reviewed calendar appointments and other 
supporting documents. However, we did not obtain sufficient supporting 
documentation to independently verify Treasury's estimates. We were 
also unable to independently verify the foregone opportunities that 
Treasury identified, such as less time to analyze short-term financing 
needs, in part because it is difficult to prove what would happen in 
the absence of the debt limit event. 

To identify the potential effects of approaching the debt limit on the 
market for Treasury securities, we reviewed publicly available 
Treasury documents such as minutes from meetings of the Treasury 
Borrowing Advisory Committee and academic literature, and interviewed 
Treasury officials. Our review covered the last 16 years (1995-2010) 
in order to include a particularly disruptive debt limit debate in 
1995-1996 that required Treasury to take a number of extraordinary 
actions, as well as the most recent debt limit increase. In February 
2010, we asked eight market experts including six primary dealers for 
their general views on the effects of delays in raising the debt limit 
on the market for Treasury securities and Treasury operations. 

On the basis of this initial analysis, we performed the following: (1) 
We used press releases, auction announcements, and historical auction 
data since 1995 to identify instances when auctions or auction 
announcements or both, were delayed as a result of the debt limit. We 
compared the yields at postponed auctions with yields on Treasury 
securities of the same maturity being sold in the secondary market to 
estimate the effect of delaying auctions or auction announcements on 
Treasury's borrowing costs. We discussed our methodology with Treasury 
officials and staff at the Federal Reserve Bank of New York and 
incorporated their suggestions and feedback when appropriate. (2) We 
used data provided by Treasury to analyze changes in the amount of 
Treasury bills outstanding during debt limit debates since 2002. (3) 
We performed a multivariate regression analysis to estimate the effect 
of the debt limit on Treasury's borrowing costs. See appendix II for 
more details on our methodology used for estimating these costs and 
limitations to our analysis. (4) In August 2010, we received written 
or oral responses to a standard questionnaire from four primary 
dealers and managers of a large mutual fund asking for their views on 
postponed auctions, reductions in bills outstanding, Treasury's 
extraordinary actions, and the general uncertainty related to the 
timing of debt limit increases. To obtain a broader perspective on the 
effects of approaching the debt limit on financial markets, we also 
spoke with representatives from two of the three major rating 
agencies, a major trade organization representing securities firms and 
other financial institutions, a research and consulting firm for the 
municipal bond market, and a State and Local Government Series 
securities subscriber. 

To examine the disconnect between the debt limit and the policy 
decisions that have an effect on the size of federal debt, we 
conducted a literature review and reviewed the legislative history of 
laws increasing the debt limit. We began our review with the debt 
limit increase enacted on December 12, 1985, because (1) this was the 
first in a series of debt limit increases enacted in legislation 
containing budget process reforms, and (2) after 1985, Congress 
provided Treasury with its current authorities related to the G-Fund 
and Civil Service Retirement and Disability Fund (CSRDF) thereby 
changing the way in which Treasury manages debt near or at the debt 
limit. 

To identify and describe alternative triggers or mechanisms that would 
permit consideration of the link between policy decisions and the 
effect on debt when or before decisions are made, we reviewed articles 
in academic journals and reports and other information published by 
credit rating agencies and policy research organizations. We conducted 
semistructured interviews with budget and legislative experts. To 
ensure that we captured a broad range of perspectives, we sought to 
include a minimum number of representatives from the following 
categories: former congressional staff with experience working for one 
or more of relevant committees (i.e., the House Budget Committee, the 
House Committee on Ways and Means, the Senate Budget Committee, and 
the Senate Finance Committee) or senior party leadership in the House 
or Senate; former Congressional Budget Office or Office of Management 
and Budget Directors; representatives from a broad range of policy 
research organizations that focus on issues related to the federal 
debt; and academics and other experts on the legislative process. We 
interviewed a total of 17 budget and legislative experts representing 
one or more of these different categories. Five of those interviewed 
also had experience working at Treasury. 

To put U.S. practices into perspective, we examined triggers and 
mechanisms used by members of the Organisation for Economic Co- 
operation and Development (OECD)--an international organization 
comprised of countries committed to democracy and market-based 
economies. To identify countries for review, we analyzed countries' 
responses to the 2007 OECD International Database of Budget Practices 
and Procedures Survey, particularly questions asking about debt, 
deficit, and other fiscal rules used when developing a budget. 
[Footnote 29] We selected countries for further review based on their 
responses to the survey as well as our review of reports by the OECD 
and the International Monetary Fund. We sought to include countries 
that provided a range of different mechanisms for (1) monitoring or 
controlling debt and (2) delegating borrowing authority from their 
legislature to debt managers. Our selection was limited to those 
countries with information on fiscal rules and borrowing authority 
available in English. We chose seven countries for further review: 
Canada, Denmark, Germany, New Zealand, Switzerland, Sweden, and the 
United Kingdom. We contacted representatives from budget offices, debt 
management offices, or supreme audit institutions in each of these 
countries for additional information on their respective country's 
fiscal rules and borrowing authority. While selected countries offer 
illustrative examples, their experiences are not always applicable to 
the United States given differences in political systems and economies. 

In order to assess the reliability of the data used in this report, 
including proprietary data from Datastream and IHS Global Insight and 
publicly available data from Treasury and the Federal Reserve, we 
examined the data to look for outliers and anomalies and, when 
possible, compared data from multiple sources for consistency. In 
general, we chose databases that were commonly used by Treasury and 
researchers to monitor changes in federal debt and related 
transactions. Where possible and appropriate, we corroborated the 
results of our data analysis with other sources. On the basis of our 
assessment, we believe the data are reliable for the purpose of this 
review. 

We conducted our work from December 2009 to January 2011 in accordance 
with generally accepted government auditing standards. Those standards 
require that we plan and perform the audit to obtain sufficient, 
appropriate evidence to provide a reasonable basis for our findings 
and conclusions based on our audit objectives. We believe that the 
evidence obtained provides a reasonable basis for our findings and 
conclusions based on our audit objectives. 

[End of section] 

Appendix II: Detailed Methodology and Findings of Statistical Analysis 
of Treasury Borrowing Costs near the Debt Limit: 

To measure changes in the Department of the Treasury's (Treasury) 
borrowing costs when debt is approaching the debt limit, we performed 
a multivariate regression analysis of yields paid on 13-week (i.e., 3- 
month) Treasury bills issued during the five debt limit events 
beginning in fiscal year 2002. For our purposes, a debt limit event 
begins when the Secretary notifies Congress that the debt limit needs 
to be raised and ends when legislation increasing the debt limit is 
signed into law. The dependent variable in our analysis is the spread, 
or difference, between yields on 3-month Treasury bills and yields on 
3-month commercial paper. We used yield spreads during the preevent 
period 3 months prior to the Secretary's letter as a benchmark against 
which yields during the event can be compared. A narrowing of the 
spread indicates that the market perceives the relative risk of 
Treasury bills to be closer to that of commercial paper, increasing 
their cost to Treasury. Conversely, a widening of the spread indicates 
that the market perceives the relative risk of Treasury bills to be 
less than that of commercial paper, making them less costly to 
Treasury. We regressed the yield spread on key variables affecting 
risk and liquidity of the financial market. Our results suggest that 
Treasury paid a premium ranging from 1 to 4 basis points on 3-month 
Treasury bills issued during debt limit events in 2001-2002, 2002-
2003, and most recently in 2009-2010.[Footnote 30] However, we did not 
observe premiums in 2004-2005 and 2005-2006. 

Variables and Model Specifications: 

The existing literature on the effect of the debt limit on Treasury's 
borrowing costs is limited. Our analysis was based in part on a prior 
study of the effect of debt limit events on Treasury interest rates by 
Liu, Shao, and Yeager.[Footnote 31] Similar to the results of our 
analysis, Liu et al. (2009) found that during debt limit events in 
2001-2002 and 2002-2003, the spread between 3-month Treasury bill 
yields and 3-month commercial paper yields narrowed, implying that 
Treasury bills were relatively more costly during this period; 
however, this relationship was not observed in either the 2004-2005 or 
2005-2006 debt limit events. The authors hypothesized that, during 
these latter two debt limit events, investors may have assumed based 
on past experience that members of Congress would resolve their 
differences before there were any serious disruptions in the Treasury 
market and therefore did not charge a premium on securities issued 
near the debt limit. We also reviewed an earlier study by Nippani, 
Liu, and Schulman which found that Treasury paid a premium on 3-month 
and 6-month Treasury bills issued during the debt limit event in 1995- 
1996.[Footnote 32] 

On the basis of discussions with Treasury officials, staff at the 
Federal Reserve Bank of New York, and market experts such as primary 
dealers and larger investment funds, we determined that the model 
developed by Liu et al. (2009) provided a reasonable starting point 
for our analysis. We made modifications to reflect the Federal 
Reserve's purchases of commercial paper through its Commercial Paper 
Funding Facility (CPFF) in 2008 to enhance the liquidity of the 
commercial paper market. We included a variable to control for the 
volume of commercial paper held by the Federal Reserve as a percentage 
of total commercial paper outstanding. We also included the Chicago 
Board Options Exchange's Volatility Index (VIX) to control for 
volatility and uncertainty in financial markets. The equation we used 
is: 

Yield Spread = B0 + B1*EVENT + B2*POST + B3*SPRET + B4*VIX + 
B5*LOG(CPISSUE) + B6*LOG(TBILLTRANS) + B7*CPFFSHARE + Error: 

Table 5 below describes each of the variables in the equation and 
indicates the expected sign of the coefficient. Treasury officials and 
market experts said that our modifications to their equation were 
reasonable. 

Table 5: Variables Used in Multivariate Regression: 

Variable name: EVENT; 
Variable description: This variable is equal to 1 during the event 
period and is 0 otherwise. Consistent with the academic literature, we 
defined the debt limit event period as beginning when Treasury 
notified Congress that the debt limit needed to be raised and as 
ending when the legislation is passed to raise the debt limit. We 
expect the variable's coefficient to be negative because debt limit 
events may raise the perceived risk of Treasury securities and reduce 
the yield spread compared to the preevent period. 

Variable name: POST; 
Variable description: This variable is equal to 1 in the 3-month 
postevent period and is otherwise 0. A negative coefficient indicates 
that the perceived increased risk of Treasury securities persisted 
beyond the end of the debt limit event period. 

Variable name: SPRET; 
Variable description: This variable is the daily return of the 
Standard & Poor's 500 index and is an indicator of the market's 
assessment of economic activity. We expect the variable's coefficient 
to be negative because a stronger economy should reduce the default 
risk of commercial paper, lower its yield, and reduce the yield 
differential. The data for this variable were downloaded from Thomson 
Reuters' proprietary statistical database Datastream. 

Variable name: VIX; 
Variable description: This variable represents the market expectations 
of volatility over the next 30-day period and is calculated by the 
Chicago Board Options Exchange using Standard & Poor's 500 stock index 
option bid/ask quotes. The variable is intended to control for 
volatility and uncertainty in financial markets. We expect the 
coefficient to be positive because increased financial market 
uncertainty should cause investors to move from private-sector 
securities into Treasury securities and reduce Treasury yields 
relative to other securities. The data for this variable were 
downloaded from proprietary data provider IHS Global Insight. 

Variable name: LOG(CPISSUE); 
Variable description: This is the natural log of weekly AA commercial 
paper issues with a maturity greater than 80 days and is intended to 
control for the liquidity of commercial paper. Weekly data for this 
variable were downloaded from the Board of Governors of the Federal 
Reserve System Web site and then back-filled to obtain daily 
values.[A] We expect the variable's coefficient to be negative because 
an increase in liquidity should raise commercial paper prices, lower 
their yields, and thus decrease the yield spread. 

Variable name: LOG(TBILLTRANS); 
Variable description: This is the natural log of weekly transactions 
in Treasury bills traded among primary dealers and is intended to 
control for the liquidity of Treasury bills. Weekly data for this 
variable were downloaded from the Federal Reserve Bank of New York's 
Web site and then back-filled to obtain daily values.[B] We expect the 
variable's coefficient to be positive because an increase in the 
liquidity of Treasury bills should reduce their yield and increase the 
yield spread. 

Variable name: CPFFSHARE; 
Variable description: This variable is the volume of commercial paper 
held by Federal Reserve through its Commercial Paper Funding Facility 
(CPFF) as a percentage of total commercial paper outstanding. The 
variable is intended to control for temporary increases in liquidity 
from CPFF purchases. The CPFF was initiated in October 2008 to enhance 
the liquidity of commercial paper during the financial crisis. Because 
this facility did not exist during previous debt limit events, it is 
included only in the 2009-2010 debt limit regression. Weekly data for 
this variable were downloaded from the Board of Governors of the 
Federal Reserve System Web site and then back-filled to obtain daily 
values.[C] We expect the variable's coefficient to be negative because 
increases in liquidity should raise commercial paper prices and reduce 
yields, thus decreasing the yield spread. 

Source: GAO analysis. 

[A] Downloaded from [hyperlink, 
http://www.federalreserve.gov/DataDownload/Choose.aspx?rel=CP] on May 
17, 2010. 

[B] Downloaded from [hyperlink, 
http://www.newyorkfed.org/markets/statrel.html] on May 18, 2010. 

[C] Downloaded from [hyperlink, 
http://www.federalreserve.gov/datadownload/Choose.aspx?rel=H41] on May 
13, 2010. 

[End of table] 

The regression results based on the variables listed above are 
presented in table 6. Negative EVENT coefficients suggest that debt 
limit events reduced the spread between commercial paper and Treasury 
yields compared to the preevent period. Consistent with the Liu et al. 
(2009) study, the EVENT coefficients for the debt limit events in 2001-
2002 and 2002-2003 had the expected negative sign and were 
statistically significant.[Footnote 33] In addition, the coefficient 
of the EVENT variable had the expected negative sign and was 
statistically significant for the most recent debt limit event in 2009-
2010. 

Table 6: Regression Results for Debt Limit Event Periods from Fiscal 
Year 2002 to 2010: 

CONSTANT; 
Expected sign: n.a.; 
2001-2002: Event 1 coefficients: -0.540; 
2002-2003: Event 2 coefficients: 0.246; 
2004-2005: Event 3 coefficients: 1.395; 
2005-2006: Event 4 coefficients: -0.595; 
2009-2010: Event 5 coefficients: -0.642. 

EVENT; 
Expected sign: -; 
2001-2002: Event 1 coefficients: -0.011 [gray] [bold]; 
2002-2003: Event 2 coefficients: -0.038 [gray] [bold]; 
2004-2005: Event 3 coefficients: 0.025 [gray]; 
2005-2006: Event 4 coefficients: -0.006 [bold]; 
2009-2010: Event 5 coefficients: -0.040 [gray] [bold]. 

POST; 
Expected sign: -/+; 
2001-2002: Event 1 coefficients: -0.011 [bold]; 
2002-2003: Event 2 coefficients: -0.041 [gray] [bold]; 
2004-2005: Event 3 coefficients: 0.034 [gray] [bold]; 
2005-2006: Event 4 coefficients: 0.034 [gray] [bold]; 
2009-2010: Event 5 coefficients: -0.030 [bold]. 

SPRET; 
Expected sign: -; 
2001-2002: Event 1 coefficients: -0.268 [gray] [bold]; 
2002-2003: Event 2 coefficients: -0.433 [gray] [bold]; 
2004-2005: Event 3 coefficients: -1.092 [gray] [bold]; 
2005-2006: Event 4 coefficients: 0.579; 
2009-2010: Event 5 coefficients: 0.083. 

VIX; 
Expected sign: +; 
2001-2002: Event 1 coefficients: 0.000; 
2002-2003: Event 2 coefficients: -0.002 [gray]; 
2004-2005: Event 3 coefficients: -0.008 [gray]; 
2005-2006: Event 4 coefficients: 0.005 [gray] [bold]; 
2009-2010: Event 5 coefficients: 0.005 [gray] [bold]. 

LOG(CPISSUE); 
Expected sign: -; 
2001-2002: Event 1 coefficients: 0.014 [gray]; 
2002-2003: Event 2 coefficients: -0.001 [bold]; 
2004-2005: Event 3 coefficients: 0.006; 
2005-2006: Event 4 coefficients: -0.010 [gray] [bold]; 
2009-2010: Event 5 coefficients: 0.007 [gray]. 

LOG(TBILLTRANS); 
Expected sign: +; 
2001-2002: Event 1 coefficients: 0.052 [gray] [bold]; 
2002-2003: Event 2 coefficients: -0.004; 
2004-2005: Event 3 coefficients: -0.107 [gray]; 
2005-2006: Event 4 coefficients: 0.084 [bold]; 
2009-2010: Event 5 coefficients: 0.060 [gray] [bold]. 

CPFFSHARE; 
Expected sign: -; 
2001-2002: Event 1 coefficients: n.a.; 
2002-2003: Event 2 coefficients: n.a.; 
2004-2005: Event 3 coefficients: n.a.; 
2005-2006: Event 4 coefficients: n.a.; 
2009-2010: Event 5 coefficients: -0.515 [gray] [bold]. 

Number of variables with correct sign and are statistically 
significant; 
2001-2002: Event 1 coefficients: 3; 
2002-2003: Event 2 coefficients: 3; 
2004-2005: Event 3 coefficients: 2; 
2005-2006: Event 4 coefficients: 3; 
2009-2010: Event 5 coefficients: 4. 

Adjusted R-squared; 
2001-2002: Event 1 coefficients: 0.102; 
2002-2003: Event 2 coefficients: 0.241; 
2004-2005: Event 3 coefficients: 0.228; 
2005-2006: Event 4 coefficients: 0.029; 
2009-2010: Event 5 coefficients: 0.187. 

Source: GAO analysis. 

Note: The bolded coefficients have the correct signs while the cells 
highlighted in gray are the estimated coefficients that are 
statistically significant at least at the 10 percent level. 

n.a.= not applicable. 

[End of table] 

We explored a variety of alternative specifications to see whether our 
model could be improved but found that no specification proved 
particularly robust across all the events studied. On the basis of 
discussions with Treasury staff and market experts, we added, 
replaced, and removed variables and defined the event period 
differently. For example, we explored several alternative controls for 
credit risk, including the spread between London interbank offer rate 
(LIBOR) and the Overnight Indexed Swap that measures risk and 
liquidity in the money market, and the spread between Baa corporate 
bond yields and 10-year Treasury note yields. We also redefined the 
event period to begin when Treasury took its first extraordinary 
actions or, in the case of 2009-2010, reduced the amount in the 
Supplementary Financing Program (SFP). None of the alternative 
variables or specifications produced statistically significant 
results. Using the Liu et al. (2009) specifications did not result in 
statistically significant results for the most recent event in 2009-
2010. 

Effect of Debt Limit on Borrowing Costs: 

One the basis of our analysis, we estimate that Treasury paid $78 
million in additional interest costs for newly issued 3-month 
securities issued during the 2009-2010 debt limit event period. We 
arrived at this estimate by translating the coefficient of the EVENT 
in 2009-2010 (-.040) to basis points (4) and multiplying by the amount 
of 3-month Treasury bills issued during the event period. We selected 
3-month bills for our analysis because it is a commonly used benchmark 
in economic indicators such as the TED spread--a key indicator of 
credit risk.[Footnote 34] We did not estimate the effects of the debt 
limit on other Treasury securities with longer terms to maturity in 
part because of a lack of reliable data on yields for private-sector 
fixed-income assets with maturity dates comparable to medium-term 
Treasury securities such as a 2-year note. Therefore, we do not know 
whether the same 4-basis-point premium would apply to other Treasury 
securities with longer or shorter terms to maturity issued during the 
debt limit event period. Nippani et al. (2001) found that the effect 
of the debate over the debt limit in 1995-1996 was greater on 3-month 
Treasury bills than on 6-month Treasury bills, indicating the 
investors may have believed that debate over the debt limit would be 
resolved over time and that longer-dated securities would therefore be 
less affected. However, even a smaller premium when applied to the 
large amount of Treasury securities offered by Treasury would result 
in a notable increase in borrowing costs. For instance, for each 
additional basis point paid on bills issued during the 2009-2010 debt 
limit event period, Treasury's borrowing cost would increase by 
roughly $92 million. 

Limitations of the Analysis: 

There are a number of limitations to using a multivariate regression 
to measure changes in Treasury's borrowing costs. First, the results 
of our analysis explain only a small portion of the variation in the 
yield spread, as indicated by the relatively low R-squared statistics. 
Any equation attempting to explain the yield spread would have limited 
explanatory power given inherent randomness in daily time series data 
such as Treasury bill and commercial paper yields. Furthermore, the 
estimates are subject to omitted variable bias. Second, there was 
substantial variation in the sign, size, and significance of the 
estimated coefficients across debt limit events. However, the EVENT 
variable's coefficient, which is the central focus of our analysis, 
had the expected negative sign in four of the five debt limit periods 
included in our analysis and was significant in three of these 
periods. We discussed these and other limitations with Treasury 
officials, staff at the Federal Reserve Bank of New York, and other 
market experts such as primary dealers and incorporated their 
suggestions and feedback when appropriate. Despite these limitations, 
the estimates do suggest that a debt limit event may result in a 
premium. 

[End of section] 

Appendix III: GAO Contacts and Staff Acknowledgments: 

GAO Contacts: 

Susan J. Irving, (202) 512-6806 or irvings@gao.gov: 

Gary T. Engel, (202) 512-3406 or engelg@gao.gov. 

Staff Acknowledgments: 

In addition to the contacts named above, Melissa Wolf, Assistant 
Director; Dawn Simpson, Assistant Director; Thomas J. McCabe, analyst- 
in-charge; Richard Krashevski, Claire Li, Inna Livits, and Nicole 
McGuire made key contributions to this report. 

[End of section] 

Footnotes: 

[1] A very small amount of total federal debt is not subject to the 
debt limit. This amount is primarily comprised of unamortized 
discounts on Treasury bills and Zero Coupon Treasury bonds; debt 
securities issued by agencies other than Treasury, such as the 
Tennessee Valley Authority; and debt securities issued by the Federal 
Financing Bank. As of September 30, 2010, 99.5 percent of federal debt 
was subject to the debt limit. 

[2] Budget resolutions are concurrent resolutions, which are not 
presented to the President for his signature and do not become law. 
Therefore, debt limit increases must be passed as part of separate 
legislation such as a bill or joint resolution. 

[3] This was House Rule XXVIII in the 111th Congress but was not 
included in the House Rules for the 112thCongress. 

[4] Pub. L. No. 111-5. The other acts were the Housing and Economic 
Recovery Act of 2008 (Pub. L. No. 110-289) and the Emergency Economic 
Stabilization Act of 2008 (Pub. L. No. 110-343). 

[5] We have issued a number of prior reports on Treasury's efforts to 
achieve this goal including more recently Debt Management: Treasury 
Was Able to Fund Economic Stabilization and Recovery Expenditures in a 
Short Period of Time, but Debt Management Challenges Remain, 
[hyperlink, http://www.gao.gov/products/GAO-10-498] (Washington, D.C.: 
May 18, 2010), Debt Management: Treasury Inflation Protected 
Securities Should Play a Heightened Role in Addressing Debt Management 
Challenges, [hyperlink, http://www.gao.gov/products/GAO-09-932] 
(Washington, D.C.: Sept. 29, 2009), and Debt Management: Treasury Has 
Refined Its Use of Cash Management Bills but Should Explore Options 
That May Reduce Cost Further, [hyperlink, 
http://www.gao.gov/products/GAO-06-269] (Washington, D.C.: Mar. 30, 
2006). 

[6] See [hyperlink, http://www.gao.gov/special.pubs/longterm/debt/], 
which updates information in Federal Debt: Answers to Frequently Asked 
Questions: An Update, [hyperlink, 
http://www.gao.gov/products/GAO-04-485SP] (Washington, D.C.: Aug. 12, 
2004). 

[7] Treasury generally uses CM bills to finance intramonth funding 
gaps due to timing differences of large cash inflows and outflows but 
has also used them in recent years to raise funds for the 
Supplementary Financing Program--a temporary program begun in 2008 to 
assist the Federal Reserve with its monetary policy. 

[8] For information on the costs associated with issuing CM bills, see 
[hyperlink, http://www.gao.gov/products/GAO-06-269] and [hyperlink, 
http://www.gao.gov/products/GAO-10-498]. 

[9] Pub. L. No. 104-103 (Feb. 8, 1996). 

[10] For additional information on the costs associated with past 
transactions, see GAO, Debt Ceiling: Analysis of Actions Taken during 
the 2003 Debt Issuance Suspension Period, [hyperlink, 
http://www.gao.gov/products/GAO-04-526] (Washington, D.C.: May 20, 
2004). 

[11] Treasury also called back compensating balances after a 
cancellation of a 4-week bill auction the week of September 11, 2001, 
to help meet its obligations on time. 

[12] Interest payments on debt held in government accounts are 
credited to government accounts and do not require additional 
borrowing from the public, but the investment of these interest 
payments is subject to the debt limit. 

[13] The increase in nonmarketable debt on December 31, 2009, includes 
roughly $18 billion in interest payments on debt held by the CSRDF 
trust fund that Treasury could choose to suspend during a DISP. 

[14] Cash held in the Treasury's Supplementary Financing Program 
account is excluded because it has not been used to finance federal 
expenditures. 

[15] The amount of disinvestment of securities held by CSRDF is 
determined based on the length of the declared DISP, which affects the 
total amount of the available extraordinary actions. 

[16] [hyperlink, http://www.gao.gov/products/GAO-06-269]. 

[17] Our methodology was based on a prior academic study: Pu Liu, 
Yingying Shao, and Timothy J. Yeager, "Did the repeated debt ceiling 
controversies embed default risk in U.S. Treasury securities?" Journal 
of Banking & Finance, vol. 33 (2009): 1464-1471. The regression 
specification we used for the recent debt limit was different from the 
Liu et al. regression specification because the financial markets were 
operating in unique economic conditions (e.g., the Federal Reserve 
began purchasing commercial paper in 2008 to enhance the liquidity of 
the commercial paper market). We also reviewed a similar study: 
Srinivas Nippani, Pu Liu, and Craig T. Schulman, "Are Treasury 
Securities Free of Default?" Journal of Financial and Quantitative 
Analysis, vol. 36, no. 2 (2001): 251-265. This study also found that 
the market charged a premium on Treasury securities issued during the 
debt limit debate in 1995-1996. See appendix II for more information. 

[18] For the purposes of this study, a debt limit event period begins 
when Treasury first warns of the need to raise the debt limit and ends 
when legislation to raise the limit is passed. For the first four debt 
limit events, we use the same dates used by Liu et al. (2009). For the 
fifth debt limit event in 2009-2010, the event period began when 
Treasury notified Congress that the debt limit needed to be raised and 
ended when legislation increasing the debt limit was signed into law. 

[19] This is consistent with the Liu et al. (2009). The authors of the 
study hypothesized that during these latter two debt limit events, 
investors may have assumed based on past experience that members of 
Congress would resolve their differences before there were any serious 
disruptions in the Treasury market and therefore did not charge a 
premium on securities issued near the debt limit. 

[20] The 95 percent confidence interval of the premium estimate ranges 
from 1.0 to 7.1 basis points. 

[21] Standard & Poor's, The U.S. Debt Ceiling: As Headroom Shrinks, 
It's Time to Raise the Room Beams (Oct. 9, 2009). 

[22] Moody's, U.S. Statutory Debt Limit to be Raised; Longer-Term 
Fiscal Strategy the Real Question (September 2009). 

[23] Automatic stabilizers are provisions built into the structure of 
the federal budget that alter tax or spending levels based on economic 
fluctuations without any explicit government action. 

[24] Under 31 U.S.C. § 1106, the President is required to submit an 
update of the federal budget, often referred to as a mid-session 
review, before July 16 of each year. 

[25] Congress reached agreement on budget procedures in the Balanced 
Budget and Emergency Deficit Control Act of 1985 (Pub. L. No. 99-177), 
Balanced Budget and Emergency Deficit Control Reaffirmation Act of 
1987 (Pub. L. No. 100-119), the Budget Enforcement Act of 1990 (Pub. 
L. No. 101-508), the extended budget process provisions of the Budget 
Enforcement Act of 1990 (Pub. L. No. 103-66), and the Budget 
Enforcement Act of 1997 (Pub. L. No. 105-33). 

[26] PAYGO is a procedure requiring that the aggregate effect of 
increases in mandatory spending or reductions in revenue generally be 
offset (Pub. L. No. 111-139). 

[27] These are the National Commission on Fiscal Responsibility and 
Reform, The Moment of Truth: Report of the National Commission on 
Fiscal Responsibility and Reform (Washington, D.C.: December 2010); 
Bipartisan Policy Center, Restoring America's Future: Reviving the 
Economy, Cutting Spending and Debt, and Creating a Simple Pro-Growth 
Tax System (Washington, D.C.: November 2010); National Research 
Council and National Academy of Public Administration, Choosing the 
Nation's Fiscal Future (Washington, D.C.: 2010); and Peterson-Pew 
Commission on Budget Reform, Red Ink Rising: A Call to Action to Stem 
Mounting Federal Debt (Washington, D.C.: December 2009). 

[28] The American Recovery and Reinvestment Act of 2009 (Pub. L. No. 
111-5), the Housing and Economic Recovery Act of 2008 (Pub. L. No. 110-
289) and the Emergency Economic Stabilization Act of 2008 (Pub. L. No. 
110-343). 

[29] See [hyperlink, http://www.oecd.org/gov/budget/database] for the 
results of the survey. 

[30] One basis point is equal to 1/100th of 1 percent. Thus, 4 basis 
points is 0.04 percent. 

[31] Pu Liu, Yingying Shao, and Timothy J. Yeager, "Did the repeated 
debt ceiling controversies embed default risk in U.S. Treasury 
securities?" Journal of Banking and Finance, vol. 33 (2009): 1464-1471. 

[32] Srinivas Nippani, Pu Liu, and Craig T. Schulman, "Are Treasury 
Securities Free of Default?" Journal of Financial and Quantitative 
Analysis, vol. 36, no. 2 (2001): 251-265. 

[33] Because these are estimates, a test of statistical significance 
attempts to rule out an effect purely attributable to chance. Our 
criterion for statistical significance is that there is less than a 10 
percent probability of rejecting the null hypothesis that the 
coefficient is zero when the null hypothesis is true. 

[34] The TED spread is the difference between the 3-month LIBOR rate 
and 3-month Treasury yield. 

[End of section] 

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