What is Treasury's goal for federal debt management? View details
Treasury's overarching debt management goal is to ensure the federal government's financing needs are met at the lowest cost to taxpayers over time. To achieve this goal, Treasury issues a variety of marketable Treasury securities in sufficient amounts to ensure the liquidity of each and maintains a regular and predictable auction schedule. This schedule provides investors with greater certainty and better information with which to plan their investments.
How does the federal government borrow? View details
The federal government borrows by issuing securities. Most of the securities that are issued to the public are marketable, meaning that once the government issues them they can be resold by whoever owns them. Marketable debt consists of bills, notes, bonds, and Treasury Inflation-Protected Securities (TIPS). These are offered in a wide range of maturities to appeal to the broadest range of investors. In 2013, Treasury announced that it expects to begin issuing a new type of security, Treasury floating rate notesIn 2013, Treasury announced that it would begin issuing Treasury floating rate notes with a 2-year term in early 2014. Treasury floating rate notes are securities that pay a variable rate of interest every 3 months until they mature, which is when they pay their par value. Like traditional Treasury notes, Treasury floating rate notes mature in more than 1 year, but not more than 10 years from their issue date., with a 2-year term in early 2014. A small portion of securities are nonmarketable, meaning they are registered to the owner and cannot be sold in the financial market. U.S. Savings Bonds are an example.
Marketable Securities Offered by Treasury
Source: Department of the Treasury.
For more information and a discussion of inflation-protected securities, see Debt Management: Treasury Inflation Protected Securities Should Play a Heightened Role in Addressing Debt Management Challenges. Treasury also issues cash management bills Treasury supplements its regular and predictable auctions with unscheduled cash management bill auctions to finance short-term cash needs while providing short notice to market participants. Treasury sets the amount and time to maturity to meet its immediate borrowing needs. (see Debt Management: Treasury Has Refined Its Use of Cash Management Bills but Should Explore Options That May Reduce Cost Further).
How does the composition of outstanding debt affect federal borrowing costs? View details
The mix of outstanding Treasury securities can have a significant influence on the federal government's interest payments. Longer-term nominal (i.e. not inflation indexed) securities typically carry higher interest rates primarily due to investor concerns about the uncertainty of future inflation. While this translates to higher borrowing costs for the government, longer-term securities offer the government the certainty of fixed interest payments over their maturity and reduce the amount of debt that Treasury needs to refinance in the short term. In contrast, shorter-term securities generally carry lower interest rates but add uncertainty to the government's longer-term interest costs and also require Treasury to conduct more frequent auctions to refinance them as they mature, which poses rollover risk The risk that Treasury will have to refinance its debt at less favorable rates..
How does Treasury sell marketable securities? View details
BillsTreasury bills are short-term securities that mature in 1 year or less from their issue date. Investors pay less than the bills' par or face value, and when bills mature they receive the par or face value. For example, a $1,000 bill might sell at auction for $980. When the bill matures, the investor receives the face value, in this case $1,000. The difference ($20) equals the interest earned., notesTreasury notes are securities that pay a fixed rate of interest every 6 months until they mature, which is when they pay their par value. Treasury notes mature in more than 1 year, but not more than 10 years from their issue date., bondsTreasury bonds are securities that pay a fixed rate of interest every 6 months until they mature, which is when they pay their par value. Bonds mature in more than 10 years from their issue date., and TIPSTreasury Inflation-Protected Securities (TIPS) provide protection against inflation to investors who are willing to pay a premium for this protection in the form of a lower interest rate. The principal increases with inflation and decreases with deflation, but does not fall below par value. TIPS pay interest semiannually at a fixed rate. The rate is applied to the adjusted principal, so interest payments rise with inflation and fall with deflation. When it matures, an investor is paid the inflation-adjusted principal or the original principal (whichever is greater), thereby also being protected against deflation. are sold to institutional and individual investors through public auctions. Auctions are the cornerstone of Treasury's strategy of regular and predictable debt management. Key features are described below:
- Auctions are announced in advance, http://www.treasurydirect.gov/instit/instit.htm?upcoming.
- There are two options for bidding: competitive and non-competitive. Under a competitive bid, the investor specifies the yield (the rate of return) that is acceptable to him or her; that bid may or may not actually succeed in purchasing securities. In contrast, a non-competitive bid offers an uncertain yield that depends upon the offers of competitive bidders, but does guarantee that the bidder will receive a specific amount of securities.
- At the close of the auction, Treasury accepts all non-competitive bids that comply with the auction rules. Competitive bids are then accepted starting with the lowest yields and in order of increasing yields until it has reached the amount needed to borrow. All competitive and non-competitive bidders will receive the same yield as the highest accepted bid.
- Auction results are posted on Treasury's webpage, http://www.treasurydirect.gov/instit/annceresult/press/press_auctionresults.htm.
For additional information, see the Uniform Offering Circular and the Federal Reserve Bank of New York's (FRBNY) report on the auction process, The Treasury Auction Process: Objectives, Structure, and Recent Adaptations.
Primary dealers are particularly important in the distribution system. Primary dealers are a group of banks and securities broker/dealers selected by the FRBNY that trade in U.S. government securities with the FRBNY to implement monetary policyThe use of reserve requirements, discount rates, and purchases and sales of Treasury securities (open market operations) by the Federal Reserve (the nation's central bank) to affect the rate of growth of the nation's money supply. The goals of monetary policy are to promote maximum employment, stable prices, and moderate long-term interest rates.. All primary dealers are required to participate in all Treasury auctions, and they buy the largest share of Treasury securities at auction. They then sell these securities to other investors in the secondary marketThe marketplace in which marketable Treasury securities (which constitute most debt held by the public, and which can be sold by whoever owns it) are traded. For example, Treasury securities are resold by primary dealers, who purchase large amounts of Treasury securities.. To ensure a liquid secondary market, Treasury limits each competitive bidder to bidding for no more than 35 percent of the offer amount at a single yield or discount rate. As of June 2012, FRBNY reports there are 21 primary dealers. (A list of primary dealers can be found at http://www.newyorkfed.org/markets/pridealers_current.html.)
How can individual investors purchase Treasury securities? View details
Individual investors have several options available to purchase Treasury securities:
- The TreasuryDirect website is the Treasury's mechanism for communicating ways for individual investors to purchase Treasury securities directly from the Treasury. (See http://www.treasurydirect.gov/indiv/myaccount/myaccount.htm.)
- Investors can also purchase securities through an investment advisor. Most marketable Treasury securitiesThe Treasury issues two major types of debt securities to the public: marketable and nonmarketable securities. Marketable securities, which consist of Treasury bills, notes, bonds, and TIPS, can be resold by whoever owns them. Marketable securities are auctioned at regular intervals during the year. are sold initially to dealers and brokers for resale in the secondary marketThe marketplace in which marketable Treasury securities (which constitute most debt held by the public, and which can be sold by whoever owns it) are traded. For example, Treasury securities are resold by primary dealers, who purchase large amounts of Treasury securities..
- Individuals can also invest in many pension funds and money market accounts that purchase Treasury securities as well.
How do federal budget conditions and other events affect debt management? View details
The Treasury's debt management goal—to meet the government's financing needs at the lowest cost over time—remains the same regardless of whether the unified budget is in surplus or deficit. However, the Treasury will vary the size and frequency of auctions, as well as the types of debt instruments to be auctioned, according to budget conditions and borrowing needs.
During the period of budget surpluses from 1998 to 2001, the Treasury reduced debt held by the public by issuing less debt than was maturing. Treasury also reduced the number of auctions and suspended or eliminated several types of securities, including the 30-year bond, because issuances of some maturities would otherwise have been small and less liquid. Treasury even bought back some outstanding securities before their maturity date. [For more information on debt buybacks, which could also be used in times of deficit, see Buybacks Can Enhance Treasury's Capacity to Manage under Changing Market Conditions.]
Treasury responds to increases in borrowing needs by increasing the issuance size of existing securities; increasing the frequency of issuances; and introducing new securities to its auction calendar as necessary. During 2008 and 2009, Treasury had to finance a large increase in federal borrowing in a short amount of time. Treasury increased its issuance of bills—the "shock absorbers" in Treasury's portfolio of debt instruments—which in turn changed the composition of Treasury's debt portfolio as billsTreasury bills are short-term securities that mature in 1 year or less from their issue date. Investors pay less than the bills' par or face value, and when bills mature they receive the par or face value. For example, a $1,000 bill might sell at auction for $980. When the bill matures, the investor receives the face value, in this case $1,000. The difference ($20) equals the interest earned. increased from approximately 20 percent of marketable debtThe Treasury issues two major types of debt securities to the public: marketable and nonmarketable securities. Marketable securities, which consist of Treasury bills, notes, bonds, and TIPS, can be resold by whoever owns them. Marketable securities are auctioned at regular intervals during the year outstanding at the end of fiscal year 2007 to nearly 30 percent at the end of fiscal year 2008. Treasury also resumed issuance of some securities, such as the 52-week bill and 7-year note, and increased the frequency of issuance for other securities, such as the 30-year bond.
Source: GAO analysis of data from the Department of the Treasury.
What challenges does the Treasury face in achieving its debt management goal? View details
Treasury deals with challenges of constantly changing financial markets, uncertainties surrounding the government's future borrowing needs, and at times uncertainty about the debt limitA legal ceiling on the amount of outstanding total federal debt (excluding some minor adjustments), which must be raised periodically to accommodate additional federal borrowing..
- Treasury must consider the volume of securities to be issued at a given maturity in relation to changing market demands for Treasury securities. Treasury market participants purchase Treasury securities for a variety of purposes, including securing stable sources of income, trading to take advantage of their anticipations of interest rate movements, or reducing risk (also known as "hedging"). If the Treasury offers too much of any given security, it may have to pay a higher yield to attract investors. If the Treasury offers too little of a given security, it may reduce the security's liquidity in the secondary market, which, in the long run, may also increase the yield Treasury has to pay.
- The Treasury must make current debt management decisions with uncertain information about the future of government borrowing needs. Policy changes and national economic performance are difficult to project and can quickly and substantially affect federal cash flow.
- GAO reported in 2011 that delays in raising the debt limitA legal ceiling on the amount of outstanding total federal debt (excluding some minor adjustments), which must be raised periodically to accommodate additional federal borrowing. create debt and cash management challenges for the Treasury that have been exacerbated in recent years by the large growth in federal 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 debt limit (see, for example, Debt Limit: Analysis of 2011-2012 Actions Taken and Effect of Delayed Increase on Borrowing Costs). However, the extraordinary actions available to the Treasury have not kept pace with the growth in borrowing needs. For additional information, see Debt Limit: Delays Create Debt Management Challenges and Increase Uncertainty in the Treasury Market.