ANALYSIS: WILL US TREASURY DEBT BUYBACKS EVER BE USED?
--Some Buyback Details Still Being Worked Out; Some in Federal Register --'Reverse Auctions' For Primary Dealers Proposed
By Joseph Plocek
WASHINGTON (MktNews) - Almost lost among the details of the U.S. Treasury's quarterly refunding press conference was the fact that debt buybacks may never be implemented.
"The question of how to conduct debt buybacks raises a number of complex issues that will need to be worked out," said Treasury Secretary Lawrence Summers in introducing the new program, leaving the door open as to whether the buybacks will be implemented.
The proposed rules for debt buybacks, to be published Thursday in the Federal Register for a 60-day comment period, are to be finalized and in place by January 2000, Treasury officials said. Details of the program, available on the Internet at www.publicdebt.treas.gov, are pretty well set, however, since the law gives the Treasury Secretary broad authority to set the terms of selling and redeeming government securities.
Under the proposed regulations, the buybacks would be via a "reverse auction" for competitive tenders from primary dealers, conducted by the Federal Reserve Bank of New York. The buying would be in a multiple price process "in which successful offerers receive the price at which they offered securities." There would not be a 35% limit as in auctions, and prices would be to three decimals, in 32nds. Settlement would be next day.
Despite the well developed details for the buyback, which would make it rather like a Federal Reserve open market go-around, it is still not clear how and when the buybacks would be used, or what their effect might be on individuals who hold debt.
"This is just another tool in our tool kit," said Treasury UnderSecretary Gary Gensler, in referring to the buybacks. He said the Treasury has not yet decided the amounts of debt that may be affected, which will be determined based on bond market conditions. But he added that the most likely candidates for buybacks would be longer issues so the Treasury could prevent an acceleration in the average maturity of the public debt.
Sources say if the program is used at all, it is most likely to be tested first in a small amount of say $200 million. In contrast, the typical Fed market operation is for $1 billion or more. The math on a $200 million purchase at a savings of a few basis points in interest -- a savings of few hundred thousand dollars for a repurchase -- will not even cover the cost of programming computers for the new program.
Moreover, the success of the buyback program depends on being able to issue new debt at lower rates than on the outstanding issues, a function of lower rates and the upward slope of the yield curve, and possibly on being able to take up issues that are mispriced.
Regarding possible mispricings, one source said that dealers can do present value calculations to price bonds as well as the Treasury staff, and that the liquidity of an issue may be the biggest determinant of how it is priced. In conducting a buyback, the Treasury would essentially be taking advantage of mispricings on behalf of taxpayers, he said.
Regarding the slope of the yield curve, another trader noted that it is negative about 20% of the time when the Fed tightens credit, and that recent tax cuts make it possible that budget surpluses will not materialize. The latter may raise the overall structure of rates.
That may be one reason the Treasury is now emphasizing that it is likely to follow the advice of the Bond Market Association and sell issues in large enough dollar size to enhance trading and maintain market liquidity. |
