Maybe i am just looking for some goodnews, but this would seem to be some...
Top Financial News
Wed, 04 Aug 1999, 7:05pm EDT
U.S. Treasury May Buy Back Some Publicly Traded
Debt, Will Cut Bond Sales
By Vincent Del Giudice
U.S. Treasury Looks to Buy Back Debt, Cut Bond Sales (Update6)
(Adds closing markets.)
Washington, Aug. 4 (Bloomberg) -- The U.S. Treasury, its
coffers full of cash from two years of budget surpluses, said it
is preparing to buy back some of its higher yielding, long-term
debt in a move to save on borrowing costs.
The Treasury also announced it would sell $37 billion in new
notes and bonds next week, while cutting back the number of
auctions of 30-year bonds. News of the buyback and reduced
auctions triggered a rally in the bond market. The benchmark 30-
year bond rose 11/16 point, pushing down the yield 6 basis points
to 6.10 percent.
A debt buyback would be ''analagous to a homeowner
refinancing a mortgage or a company refinancing its debt,'' said
Treasury Secretary Lawrence Summers. Buying back debt would allow
the Treasury to ''refinance the debt and pay it down on the best
possible terms,'' he said.
The possibility of buying back some of the $3.6 trillion in
publicly traded debt comes as the U.S. economy enjoys its longest-
peacetime expansion, coupled with low unemployment, low
inflation, and record stock prices.
By reducing the size of some debt auctions, the Treasury has
been shrinking the size of investor-held debt for the past year
or so. The Treasury is forecasting it will reduce its publicly
held debt by $87 billion in the fiscal year that ends Sept. 30.
The government has retired about $112 billion in publicly traded
debt since May 1998.
''In the past seven years, we've balanced Washington's
books,'' President Bill Clinton said at the White House. ''Now
let's refinance our mortgage and wipe the ledger clean.''
Every Little Bit Helps
With $3.6 trillion in publicly traded debt outstanding,
''even a basis point reduction in federal borrowing costs will
ultimately produce savings of more than $1 billion per year,''
Summers said.
The Treasury posted proposed buyback rules on its Internet
site today (www.publicdebt.treas.gov), and will publish them
tomorrow in the Federal Register, with a 60-day comment period,
said Gary Gensler, the Treasury's undersecretary for domestic
finance. The buyback of debt would be for cash, and Gensler said
the Treasury hopes to have the final plans in place by early
2000.
Gensler also said the Treasury will cut back the frequency
of sale for its 30-year bonds to twice a year -- February and
August -- from three times a year because of its reduced need to
borrow in financial markets. The Treasury may also curtail its
sale of one-year bills and two-year notes, Gensler said.
Yields Could Fall
The announced move ''does help Treasuries,'' raising the
prospect of less outstanding debt that would making existing
issues more attractive, said Ned Riley, who oversees $25 billion
as chief investment officer at BankBoston Corp. Riley, who sees
30-year yields at 5.5 percent in the months ahead, has bought
Treasuries in recent weeks.
If put in place, the buyback would be the Treasury's first
cash for debt plan in recent history, Gensler said. The Treasury
extended a similar offer to investors in the 1960s and early
1970s in the form of an exchange of one debt security for
another, he said.
The buyback would act as a ''reverse auction,'' as few of
the Treasury's securities are subject to call. In a reverse
auction, the Treasury would announce its intention to purchase a
particular issue. It would review offers from investors,
accepting only those it viewed as competitive. The program would
be ''entirely voluntary'' for investors, Gensler said.
The Treasury will likely target securities due in 15 to 25
years in any buyback in an effort to reduce the average maturity
of the debt, said Lou Crandall, chief economist at Wrightson
Associates in New York. ''The presumption is that they're going
to target longer-dated securities,'' Crandall said, adding it
would be most efficient for the Treasury to have a regular
schedule of small, frequent buybacks.
Only primary bond dealers would be authorized to participate
in the redemption program, which the Treasury likened to the
Federal Reserve's open market operations. Other investors would
have to submit redemption offers through the primary dealers.
Growing Surplus
The Congressional Budget Office projects that the government
will record a $120 billion surplus for the fiscal year ending
Sept. 30 and a $161 billion surplus next year. That follows last
year's surplus of $70 billion -- the first in 29 years. The last
consecutive annual surpluses were in 1956 and 1957, during the
Eisenhower administration.
Through June, the government had posted a surplus of $94.3
billion compared with a surplus of $67.1 billion at the end of
June 1998. Federal spending has grown a little more than 1
percent on a year-over-year basis, and has declined as a portion
of gross domestic product this decade.
Congress may object to the buyback plan because it would
limit its ability to use the surplus to reduce taxes. Legislators
may also balk at the cost because accelerating principal
repayments would be counted as government spending. Interest cost
savings from buying back notes and bonds would be recorded in the
future.
Additionally, Wall Street reaction to a debt buyback could
be mixed because some investors will probably hold on to
securities paying high interest rates.
Details of Auctions
The announced sale of new securities for next week includes:
-- $15 billion in five-year notes on Tuesday, Aug. 10, to be
dated Aug. 15, settle Aug. 16, and mature Aug. 15, 2004. Five-
year notes are sold quarterly. The CUSIP, or identification,
number will be 912827 5M 0.
-- $12 billion in 10-year notes on Wednesday, Aug. 11, to be
dated Aug. 15, settle on Aug. 16, and mature Aug. 15, 2009. Ten-
year notes are sold quarterly. The CUSIP number will be 912827 5N
8.
-- $10 billion in 30-year bonds on Thursday, Aug. 12, to be
dated Aug. 15, settle on Aug. 16, and mature Aug. 15, 2029. The
CUSIP number will be 912810 FJ 2.
The Treasury also said it intends to sell short-term cash-
management bills in mid-August and in late August or early
September ''to bridge seasonal low points in our cash position.''
The auctions will raise $8.1 billion in cash and refund
$28.890 billion in maturing securities, including $3.982 billion
held by the Federal Reserve for its own accounts. Fed district
banks also hold $4.919 billion of the maturing securities for
international monetary authorities.
The securities will sell in minimum denominations of $1,000,
the Treasury said.
The notes and bonds will be eligible for the Strips program.
Strips is an abbreviation for Separate Trading of Registered
Interest and Principal of Securities. In the Strips program,
coupons are separated from a note or bond and become a separate
security. The remaining face value bond becomes another security,
known as a zero-coupon bond.
On Monday, the Treasury estimated it will retire a net $11
billion in debt during the July-September quarter, assuming a
cash balance of $45 billion on Sept. 30. The paydown expected for
the current quarter follows a record debt retirement of $113.8
billion during the April-June quarter. |
