Treasury Bond System Is Radically Overhauled : Securities: The government, seeking to save money, will eliminate seven-year notes and cut sales of key 30-year issue.
The government on Wednesday drastically overhauled its quarterly borrowing to finance the national debt, eliminating seven-year notes and reducing sales of its bellwether 30-year bond.
The purpose was to reduce costs to taxpayers of financing the $4.1-trillion debt, the Treasury Department said.
After the government’s usual refunding auctions next week, the department will do away with the seven-year notes, reduce the amount of 30-year bonds and sell them only twice a year, in August and February, rather than four times.
The news jolted the bond market, where Treasury issues are traded after they are auctioned. Prices first plunged, then rose and fell again as traders, used to years of stability in government bond sales, sought to determine what effect the changes might have on the overall debt market.
Next Thursday, the government will sell $8.25 billion in 30-year bonds, which is $1 billion less than in February and $2 billion less than last November.
The borrowing will be shifted to securities with maturities of three years or less. By 1998, the average maturity of Treasury borrowing will be trimmed by one year.
Some financial analysts and critics in Congress have said the government is shifting its mix of borrowing at exactly the wrong time. Long-term bond rates are near their lowest level in 16 years and are unlikely to fall much further, the critics argue.
By borrowing more via short-term securities, the government is making itself vulnerable to an increase in rates that is almost sure to come as economic growth improves, they say. Now is the time to be locking in historically low long-term rates, they say.
However, Sen. Jim Sasser (D-Tenn.), chairman of the Senate Budget Committee, said the move should “save billions in lower interest costs” for the government. It also “should contribute to lower interest rates that can help create a robust, sustainable recovery.”
Treasury officials conceded their new strategy could cost more during a given period, but insisted that over time it would save money.
“We have considered this issue very carefully and believe the restructuring of our debt mix, over the long run, is in the best interests of American taxpayers,” Treasury Secretary Lloyd Bentsen said in a statement. “This action to shorten the maturity of Treasury borrowing will produce real savings on interest costs over time. It is a carefully crafted and moderate move.”
At a news conference, Deborah J. Danker, acting assistant secretary for domestic finance, said it was difficult to estimate the exact savings but said borrowing on a short-term basis should be cheaper over time because short-term rates usually are lower than long-term rates.
The Treasury now pays nearly four percentage points more interest on 30-year bonds than on three-month bills.
“We are not engaged in a market-timing strategy here. We do not intend to flip-flop on this. This is now our strategy,” Danker said.
In its budget, the Clinton Administration estimated savings over five years of $16.4 billion from changing the mix of Treasury borrowing, a figure attacked as overly optimistic.
Some analysts have said reduced long-term borrowing by the government could bring down other long-term market rates, such as corporate bonds and home mortgages. However, Danker said studies have been divided over the effect of the change, and she said it was only a peripheral factor in the department’s decision.
On Tuesday, bond prices rose on speculation that the Treasury would significantly cut its sale of 30-year bonds next week. But Danker said next week’s securities sales were being used as a transition to the new financing pattern.
