Interesting...Remarks by Chairman Alan Greenspan
The paydown of federal debt
Before the Bond Market Association, White Sulphur Springs, West Virginia
April 27, 2001
"Thus, the elimination of Treasury debt does remove something of economic value, and it will
require that significant adjustments be made by market participants. Indeed, with marketable
Treasury debt held by the public--that is, excluding the Federal Reserve but including foreign
central banks--having declined about 20 percent in recent years, to less than $2.5 trillion, some of
these adjustments have already begun. Reportedly, firms have increasingly turned to swaps,
agency securities, and even larger corporate debt issues to do their hedging. After a period of
transition, such shifts arguably should not have any significant adverse effect on risk management.
As hedging activity moves from the shrinking Treasury market to alternative markets, the liquidity
of those markets should improve. Yields on the alternative hedging instruments likely will track at
least as closely with those on instruments commonly being hedged as do Treasury yields.
Similarly, the loss of Treasury securities as benchmarks seems unlikely to result in major difficulties
for market participants because alternative benchmarks are easy to envision. For example, in
European bond markets, swaps are already the most common benchmark. Even in the United
States, the Treasury bill market has lost its “benchmark status” in recent years, and has been
replaced in that role by the eurodollar and eurodollar futures markets, with no evident adverse
effects on the operation of short-term credit markets.
All of these alternative assets, of course, involve some degree of credit risk. However, given
sufficient demand, it seems likely to me that you or your colleagues could produce a nearly riskless
security. For example, this could be accomplished with a very senior tranche of a collateralized
debt obligation backed by high-grade corporate debt. "
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