GAO

United States General Accounting Office

Report to Congressional Requesters

February 2001 FEDERAL DEBT

Debt Management 

Actions and Future 

Challenges

GAO-01-317

Page 1 GAO-01-317 Federal Debt

Contents

Letter 3

Appendixes Appendix I: Outstanding U.S. Treasury Marketable Securities 

by Year of Maturity (or Callable Date), as of 

9/30/2000 28

Appendix II: U.S. Treasury Debt Buybacks, Calendar Year 2000 29

Figures Figure 1: Federal Debt Held by the Public as a Share of GDP

(1980-2000) 5

Figure 2: CBO’s Projections of Federal Debt Held by the Public 

as a Share of GDP (Under “Current Policies” Baseline 

Scenario) 6

Figure 3: Ownership of Outstanding U.S. Federal Debt 7

Figure 4: Year-to-year Change in Composition of Outstanding 

Marketable Public Debt 12

Figure 5: Composition of Outstanding Marketable Public Debt, 

at End of Fiscal Year 13

Figure 6: Month-to-month Change in Treasury Securities and

Budget Results, Fiscal Years 1999 and 2000 14

Figure 7: Treasury’s Daily Cash Balances, February - September 15

Figure 8: Callable High-Interest Rate Treasury Bonds, End of 

Fiscal Year 2000 17

Figure 9: Buybacks in Calendar Year 2000, Amount Bought Back

by Maturity 19

Figure 10: Debt Buybacks, Calendar Year 2000 20

Figure 11: Selected Data on Debt Buybacks, Calendar Year 2000 22
Page 2 GAO-01-317 Federal Debt
Page 3 GAO-01-317 Federal Debt

United States General Accounting Office

Washington, D.C. 20548

Letr

February 28, 2001

The Honorable Bill Thomas

Chairman, Committee on Ways and Means

House of Representatives

The Honorable E. Clay Shaw

Chairman, Social Security Subcommittee

Committee on Ways and Means

House of Representatives

The Honorable Pete V. Domenici

Chairman, Committee on the Budget

United States Senate 

You asked us to provide an updated analysis and status report on the 

Department of the Treasury’s debt management strategies and actions in a 

period of budget surplus. In addition to this analysis, we are completing 

work on your request that we review debt management experiences of 

selected nations that also have budget surpluses. We plan to issue a report 

on international experiences and “lessons learned” later in the year.

As we have stated in previous reports,1

 the transition from annual unified 

budget deficits to surpluses has had consequences for both the profile of 

federal debt held by the public and the Treasury’s strategies for achieving 

its three debt management objectives. These objectives are efficient cash 

management, lowest cost financing over time, and promoting efficient 

(broad and deep) capital markets. Balancing these debt management goals 

in a time of surplus has prompted the Treasury to consider and implement 

new approaches and techniques, which we will discuss in this report.

1

See Federal Debt: Debt Management in a Period of Budget Surplus (GAO/AIMD-99-270, 

September 29, 1999) and Federal Debt: Answers to Frequently Asked Questions—An Update

(GAO/OCG-99-27, May 28, 1999) for more extensive background information. 
Page 4 GAO-01-317 Federal Debt

To answer your request that we provide information on how the Treasury 

has managed down debt, we reviewed publications,2

 conducted analysis, 

and interviewed officials from the Treasury Department, Federal Reserve 

Board and Federal Reserve Bank of New York, and from private sector 

market participants in Washington, D.C., and New York City. We did our 

work in accordance with generally accepted government auditing 

standards from August 2000 through January 2001. The Treasury and 

Congressional Budget Office (CBO) generally agreed with this report and 

provided technical comments. We have incorporated these comments as 

appropriate.

Background At the end of federal fiscal year 2000,3

 the United States recorded its third 

consecutive budget surplus—an achievement not seen in 50 years. As a 

result of these surpluses, the debt held by the public has been reduced by 

approximately $363 billion since fiscal year 1997, with the government 

paying down $223 billion of publicly held debt in fiscal year 2000 alone.4

Figure 1 shows how federal debt held by the public generally increased as a 

share of gross domestic product (GDP) from 26.1 percent in 1980 to a high 

of 49.5 percent in 1993, and then declined to 34.8 percent in 2000. 

2

We used the Monthly and Daily Treasury Statements, the Monthly Statement of Public Debt

(recently renamed the Monthly Statement of Treasury Securities), Treasury’s public 

announcements, and publications from capital market participants to provide data for our 

analysis.

3

Federal fiscal year 2000 refers to the period from October 1, 1999, through September 30, 

2000. 

4

Gross federal debt includes debt held by the public and debt held by government accounts. 

Debt held by government accounts primarily represents balances in the Social Security and 

federal civilian employee and military retirement trust funds. The money is invested in 

special U.S. Treasury securities that are guaranteed for principal and interest by the full faith 

and credit of the U.S. government. Despite the current budget surpluses, gross federal debt 

continues to grow because debt held by government accounts has increased at a faster rate 

than debt held by the public has declined. Because the debt held by government accounts is 

an intragovernmental transaction, it is not the focus of this report. 
Page 5 GAO-01-317 Federal Debt

Figure 1: Federal Debt Held by the Public as a Share of GDP (1980−2000)

Source: OMB.

This lower debt has already produced benefits for the federal budget by 

decreasing net interest from 15.2 percent of total outlays in fiscal year 1997 

to 12.5 percent of outlays in fiscal year 2000. Lower interest payments and 

increased budgetary flexibility—along with increased national savings, 

increased productivity, and output growth in the private sector—are the 

government’s reward for the debt reduction.

Figure 2 shows the CBO’s January 2001 projection of debt held by the 

public for the period from fiscal year 2001 through 2011. This baseline 

assumes that the total surplus—both on- and off-budget—is used to reduce 

debt to the extent possible.5

 As a result, debt held by the public could fall 

significantly, declining to below 5 percent of GDP by 2011.

5

CBO’s projection assumes that a portion of the debt—including some long-term bonds and 

savings bonds—will not be available for redemption during CBO’s 10-year projection period. 

Therefore, in any given year, some debt will remain outstanding and incur interest costs, 

regardless of the size of the surplus. CBO estimates that the amount of debt unavailable for 

redemption will decline each year, eventually falling to $818 billion by 2011. 

0

10

20

30

40

50

60

198019811982198319841985198619871988198919901991199219931994199519961997199819992000

Fiscal year

Percent of GDP
Page 6 GAO-01-317 Federal Debt

Figure 2: CBO’s Projections of Federal Debt Held by the Public as a Share of GDP 

(Under “Current Policies” Baseline Scenario)

Source: CBO, The Budget and Economic Outlook: Fiscal Years 2002-2011, January 2001.

Most U.S. Treasury securities held by the public are marketable, meaning 

that once the government issues them, they can be resold. The Treasury’s 

marketable securities may consist of bills that mature in a year or less, 

notes with original maturities of at least 1 year to not over 10 years, and 

bonds with original maturities of more than 10 years out to 30 years. 

Nonmarketable debt held by the public consists primarily of savings bonds 

and special securities for state and local governments.6

The ownership of the debt held by the public also has changed since 1995. 

The share of debt held by the Federal Reserve increased from about 10.5 to 

over 15 percent. In addition, estimated foreign-held holdings increased 

from about 23 percent to over 35 percent of the total in that period. (See 

figure 3.) 

6

The amount of these nonmarketable securities is determined by demand from individual 

investors and state and local governments, given the terms and conditions of the securities 

as set by the federal government.

0

5

10

15

20

25

30

35

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Fiscal year

Percent of GDP
Page 7 GAO-01-317 Federal Debt

Figure 3: Ownership of Outstanding U.S. Federal Debt

Note: For 1995 through 1999, the data represent the amounts at the end of each calendar year; for 

2000 the data represent the amounts at the end of September.

Source: Board of Governors of the Federal Reserve System.

Results in Brief Three consecutive fiscal years of unified budget surpluses have reduced 

significantly the amount of debt held by the public—by nearly $363 billion 

or approximately 10 percent since the end of fiscal year 1997. The Treasury 

achieved this result by redeeming maturing debt, reducing the number and 

size of new debt auctions, redeeming callable securities when the 

opportunity arose, reopening existing issues, and buying back debt before 

its final maturity.

As the level of debt held by the public has decreased, the Treasury has had 

to rethink its strategies for best achieving its three goals—having sufficient 

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1995 1996 1997 1998 1999 2000

Calendar year

Percent of total

Household sector Other State and local governments

Foreign Federal Reserve Commercial banking and finance
Page 8 GAO-01-317 Federal Debt

cash on hand, minimizing cost over time, and promoting efficient (broad 

and deep) markets. The Treasury has used existing and new debt 

management tools in response to the challenges posed by declining debt. In 

calendar year 2000, the Treasury began two new programs designed to 

improve market liquidity: regularly reopening existing debt issues rather 

than creating new issues, and conducting buybacks of about $30 billion in 

longer-term bonds before they matured, thereby enabling the Treasury to 

issue more new securities. In addition, higher issuance levels of short-term 

bills were made possible by eliminating longer-term notes. Nevertheless, 

promoting market efficiency has proven to be challenging as the amount of 

debt has declined. As this new environment evolves, the strategies for 

achieving any one of the three goals may change and, thus, the trade-offs 

made among them will be different.

Capital markets have been adjusting to the reduced supply of Treasury 

securities. For example, capital market participants have begun using 

financial instruments other than Treasury securities as pricing tools for 

transactions (that is, as an alternative pricing benchmark); investors have 

begun to include other fixed-income instruments in their portfolios; and 

some government-sponsored enterprises7

 have increased their issuance of 

securities to appeal to investors in Treasury securities with the aim of 

becoming an alternative benchmark. 

If projected budget surpluses materialize, the current combination of debt 

auction schedules, issue sizes, and maturities will be unsustainable over 

the next several years. Even with changes to the debt profile, analysts point 

out that the federal government will reach the point where annual 

surpluses will exceed the amount of debt available to be redeemed or that 

can be bought back at reasonable prices. Although estimates as to when 

this point will be reached vary depending on several assumptions, most 

analysts agree that it could occur within the decade. If this happens, the 

federal government will be faced with the prospect of accumulating cash 

balances or acquiring other financial assets.

7

Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage 

Corporation (Freddie Mac) are two of the largest government-sponsored enterprises.
Page 9 GAO-01-317 Federal Debt

Treasury’s Debt 

Management Strategy

Even as budget deficits have turned to surpluses and borrowing has 

declined, the Treasury has maintained three principal goals of debt 

management: 

• to ensure efficient cash management, 

• to ensure that the government finances its debt at the lowest cost over 

time, and

• to promote efficient capital markets.

The Treasury’s present debt issuance schedule will have to be changed 

given the current budget surplus projections. Appendix 1 shows 

outstanding Treasury securities by year of maturity and amount as of 

September 30, 2000. Although major changes may not be needed this year, 

the Treasury will have to make significant changes after fiscal year 2001 to 

achieve its debt management goals. As surpluses continue, the Treasury 

will not be able to issue all of the securities it currently offers in sufficient 

amounts and regularity to maintain the interest savings that come from 

being benchmark securities. 

As surpluses continue, the Treasury will face greater challenges in meeting 

its three debt management goals. Declining debt can be expected to 

accentuate the tensions between promoting efficient markets and 

achieving lowest-cost financing for the government. For instance, the 

Treasury has stated that financing across the yield curve (that is, issuing 

short-, medium-, and long-term debt) appeals to the broadest range of 

investors, mitigates refunding risks, and provides the market with a pricing 

mechanism for setting interest rates. These all contribute to overall market 

liquidity and promotion of efficient capital markets. However, as the debt 

declines it will not be cost efficient to issue across the current 30-year yield 

curve, and it will be more difficult to maintain market liquidity. 

This new environment has already prompted the Treasury to add to its 

existing set of tools in both managing the outstanding stock of debt and 

changing the mix of new debt issued. The Treasury has changed the 

issuance schedule of several securities, initiated regular reopenings, 

redeemed callable bonds, and implemented debt buybacks. 

Fewer Benchmark 

Securities

With the advent of sustained surpluses, a key Treasury strategy in meeting 

its goals has been to concentrate outstanding debt into a smaller number of 

liquid benchmark issues. The term “liquid” refers to a market’s having 
Page 10 GAO-01-317 Federal Debt

sufficient depth to handle trades of a significant size without significantly 

changing the price. A “benchmark issue” is a debt instrument that is large 

enough and attractive enough that it will be readily bought and sold by 

participants in the debt market. Governments issue a set of benchmark 

securities at different maturities to build a yield curve that can be used as a 

reference point by capital markets and others to price other financial 

transactions. 

Over the past several years, the Treasury has reduced the number and 

frequency of instruments it issues to the public. The result of these changes 

has been that the Treasury has reduced the number of note and bond 

auctions by more than one-third since 1996. For example, the Treasury 

eliminated the 3-year note in May 1998. Appendix 1 shows the elimination 

of the 3-year note and the discontinuation of the 20-year bond, which 

occurred much earlier. 

Early in 2000, the Treasury indicated that it would consider eliminating the 

52-week bill. On November 1, 2000, the Treasury announced that the 

Treasury Borrowing Advisory Committee8

 recommended that the Treasury 

eliminate the 52-week bill in early 2001. The Committee has stated that the 

52-week bill provides the least utility to the Treasury and the market 

compared to other regular offerings. In addition, it noted that the 

elimination of the 52-week bill would be less disruptive to the Treasury’s 

monthly cash flows than other alternatives. The Congress, in December 

2000, facilitated the transition to ending auctions of the 52-week bill by 

passing legislation that substituted another reference rate for the 1-year bill 

in certain programs.9

 On January 31, 2001, the Treasury announced the 

elimination of the 52-week bill, with the final auction of this type of security 

to take place on February 27, 2001.

In addition to eliminating issues, the Treasury decreased the frequency of 

its auctions of certain maturities. The effects of this change also can be 

8

The Treasury Borrowing Advisory Committee was chartered under the Federal Advisory 

Committee Act, as amended, and is composed of between 20 and 25 members who are from 

securities firms, banks, and investor groups. The Committee is self-selecting in that new 

members are nominated by the Committee and approved by the Treasury.

9

The legislation was contained in two acts: the Consolidated Appropriations Act, 2001, Pub. 

L. No. 106-554,______Stat.___(2000), incorporating by reference the Labor, HHS Education 

Appropriation Act for fiscal year 2001, H.R. 5656, SEC. 318, as introduced December 14, 

2000, and the Community Renewal Tax Relief Act of 2000, H.R. 5662, SEC. 307, as 

introduced on December 14, 2000.
Page 11 GAO-01-317 Federal Debt

seen in appendix 1. For example, the 5-year note auction schedule was 

changed from monthly to quarterly in 1998. As a result, the amount of 

maturing 5-year notes decreases sharply from $162 billion in 2001 to 

$61 billion in 2005. In another example, the Treasury changed the auction 

schedule of the 30-year bond from three times a year to twice a year—one 

new issue and one reopening of that issue. Appendix 1 shows that only 

$17 billion in 30-year bonds will mature in 2030 compared to $33 billion in 

2029. However, the $17 billion in 2030 is a single, liquid issue while the $33 

billion is split into three, less liquid, $11 billion issues. 

The Treasury has also sought to prevent the undue lengthening of the debt 

maturity profile. Absent the Treasury’s recent actions, declining debt would 

have disproportionately reduced bill volume since these short-term 

instruments come due most often. While bill issuance has dropped since 

1996, the Treasury has taken steps to forestall further declines in the past 2 

years. The Treasury has concentrated debt reduction more on notes and 

less on bills, thereby addressing the liquidity problem in the bill market, 

preventing the undue lengthening of the average maturity of outstanding 

debt, and promoting efficient cash management.

As a result of these debt management choices, the relative amounts of bills, 

notes, and bonds in the market have changed. Because bills are a shortterm borrowing instrument that the Treasury adjusts weekly to meet 

borrowing needs, the volume of bills has fluctuated more than that of other 

types of instruments. The Treasury recently changed the relative amounts 

of 3-month and 6-month bills. Historically, the Treasury has issued 

approximately the same amount of 3-month and 6-month bills, but this year 

increased the overall issuance of 3-month bills by nearly $100 billion to 

increase its flexibility in cash management.

Over the past 3 years of budget surpluses, the amount of outstanding notes 

decreased while outstanding bonds increased. (See figure 4.) Issuing fewer 

notes allowed the Treasury to reverse the decline in bill issuance that 

resulted from unexpectedly large revenue inflows in 1997 and 1998, in part 

caused by the “April surprises”—larger than expected influx of April tax 

receipts—in those years. 
Page 12 GAO-01-317 Federal Debt

Figure 4: Year-to-year Change in Composition of Outstanding Marketable Public Debt 

Source: Department of the Treasury.

In the last year, although the amount of outstanding long-term bonds fell in 

absolute terms, it increased relative to the sizes of other instruments as the 

amounts of outstanding notes and bills fell by larger amounts. (See figure 

5.) One goal of the Treasury’s ongoing program to buy back certain bonds 

before they mature is to allow continued issuance of new benchmark notes 

and bonds.

-250

-200

-150

-100

-50

0

50

9/30/96 - 9/30/97 9/30/97 - 9/30/98 9/30/98 - 9/30/99 9/30/99 - 9/30/00

Billions of dollars

Bills Notes Bonds Inflation-Indexed Securities
Page 13 GAO-01-317 Federal Debt

Figure 5: Composition of Outstanding Marketable Public Debt, at End of Fiscal Year

Source: Department of the Treasury.

Figure 6 shows the month-to-month change in Treasury securities with 

monthly budget results. The figure indicates that even during two 

consecutive years of budget surpluses and overall debt reduction there 

were still months in which the government ran deficits, suggesting that 

even if surpluses continue some future borrowing may be required. 

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

09/30/1996 09/30/1997 09/30/1998 09/30/1999 09/30/2000

Percent of total

Bills Notes Bonds Inflation-Indexed Securities Other
Page 14 GAO-01-317 Federal Debt

Figure 6: Month-to-month Change in Treasury Securities and Budget Results, Fiscal Years 1999 and 2000

Source: Department of the Treasury.

Higher Cash Balances Efficient cash management is the first of the Treasury’s three debt 

management goals. Cash balances both drive and result from the Treasury’s 

debt management decisions. Figure 7 shows that between February and 

September of 2000,10 cash balances were generally higher than they were 

for the same period in 1999. A Treasury official indicated the higher cash 

balances and increased volatility were due, in part, to the uneven cash 

flows resulting from lower issuance of bills, notes, and bonds, fewer 

auctions, debt buybacks, and the revenue from higher monthly surpluses.11

This has caused the Treasury’s cash balances to fluctuate more widely than 

-$125

-$100

-$75

-$50

-$25

$0

$25

$50

$75

$100

$125

$150

$175

Oct98Nov98Dec98Jan99Feb99Mar99Apr99May99Jun99Jul99Aug99Sep99Oct99Nov99Dec99Jan00Feb00Mar00Apr00May00Jun00Jul00Aug00Sep00

Millions of dollars

Borrowing from the public Deficit (-) or surplus (+)

10We chose to show fiscal year 2000 cash balances from February 2000 rather than 

October 1999 because cash management decisions related to Y2K distorted balances.

11The fiscal year 2000 average daily cash balance was $37.7 billion, a 40-percent increase 

from the previous year. 
Page 15 GAO-01-317 Federal Debt

in the past, leading to increased use of very short-term cash management 

bills12 to provide funds to meet the government’s obligations. 

Figure 7: Treasury’s Daily Cash Balances, February − September

Source: Department of the Treasury.

Regular Reopenings Regular reopening of existing issues is another technique that has allowed 

the Treasury to further concentrate outstanding debt into liquid 

benchmarks. Reopening is the practice of adding new amounts of debt to 

an existing issue rather than issuing a new security. A regular schedule of 

12Cash management bills are short-term variable dated securities used to bridge gaps in cash 

flows.

0

20

40

60

80

100

120

01-Feb

10-Feb

21-Feb

01-Mar

10-Mar

21-Mar

30-Mar

10-Apr

19-Apr

28-Apr

09-May

18-May

29-May

07-Jun

16-Jun

27-Jun

06-Jul

17-Jul

26-Jul

04-Aug

15-Aug

24-Aug

04-Sep

13-Sep

22-Sep

Dollars in billions

Feb. 1999 - Sept. 1999 Feb. 2000 - Sept. 2000
Page 16 GAO-01-317 Federal Debt

reopenings, adopted in early 2000, has allowed the Treasury to add to the 

size of existing benchmark issues of a note or bond rather than creating 

smaller, and less liquid, new issues. This has added benefits to the Treasury 

and the market by extending the most recently issued (or “on-the-run”) 

securities. On February 2, 2000, the Treasury announced that it was 

planning to reduce issuance of the 5- and 10-year notes and the 30-year 

bond at the same time that it was adopting a regular reopening schedule for 

those securities.

Callable Bonds In some years, the Treasury has an option to redeem certain securities 

before their maturity dates. Before February 1985, the Treasury issued 

bonds that can be redeemed at the Treasury’s option 5 years in advance of 

the maturity dates (or on any interest payment date thereafter, after 

providing 4 months notice) without paying a premium. Although the 

Treasury has not issued “callable” bonds since 1985, there are a number of 

outstanding callable bonds with relatively high interest rates that could be 

redeemed before their maturity dates. The coupon rates on these callable 

bonds range from 7.625 percent to 14 percent. The Treasury is expected to 

exercise its option to redeem these bonds on their call dates. Most recently, 

$4.2 billion in 30-year bonds issued on May 15, 1975, was eligible to be 

called on May 15, 2000, and the Treasury redeemed them at that time. 

Figure 8 shows the inventory of callable bonds as of the end of fiscal year 

2000 and the earliest dates on which they can be redeemed by the Treasury.
Page 17 GAO-01-317 Federal Debt

Figure 8: Callable High-Interest Rate Treasury Bonds, End of Fiscal Year 2000

Source: Department of the Treasury.

Buybacks According to Treasury officials, debt buybacks (repurchasing debt in 

advance of its maturity date) have become an important debt management 

tool in the environment of continuing budget surpluses and have been 

beneficial in a number of ways. First, debt buybacks have helped the 

Treasury manage the maturity structure of outstanding debt, allowing for 

more balance in the debt paydown. According to capital market and 

Treasury sources, buybacks prevented the lengthening of the average life of 

outstanding Treasury debt by about 2 months by permitting the Treasury to 

reduce the volume of outstanding long-term bonds. Second, buybacks have 

allowed the Treasury to add to the liquidity of benchmark issues. By using 

excess cash to buy back high-interest, less liquid outstanding debt issues, 

$4.2

$1.5

$2.1

$5.2

$4.6 $4.2

$2.5

$3.0

$4.7 $4.6 $4.9

$11.0

$14.5

$4.8 $4.8

$6.0

$0

$2

$4

$6

$8

$10

$12

$14

$16

7.625% - Feb/20027.875% - Nov/20028.375% - Aug/2003

8.75% - Nov/2003

9.125% - May/2004

10.375% - Nov/2004

11.75% - Feb/2005

10% - May/2005

12.75% - Nov/2005

13.875% - May/2006

14% - Nov/2006

10.375% - Nov/2007

12% - Aug/2008

13.25% - May/2009

12.5% - Aug/2009

11.75% - Nov/2009

Coupon rate - callable date

Amount outstanding (billions)
Page 18 GAO-01-317 Federal Debt

the Treasury has been able to maintain more liquid benchmark issues than 

would otherwise have been possible.

In early 1998, the Treasury announced it was considering implementing a 

buyback program, and in August 1999 it made available draft regulations 

for public comment. In January 2000, the final regulations for the buyback 

program were issued, and the Treasury announced plans to buy back

$30 billion in debt (par value) by the end of calendar year 2000. On March 9, 

2000, the Treasury held the first in a series of reverse auctions13 to buy back 

outstanding debt. In May 2000, the Treasury announced it would implement 

a program of regular buybacks in the third and fourth weeks of each 

month. By acting at a measured pace with input from market participants, 

the Treasury sought to minimize the effects on the market of this new 

program.

The Treasury’s buybacks have targeted bonds maturing between 2010 and 

2026. On August 2, 2000, the Treasury announced it would start including 

callable bonds in the buyback program. The three buybacks of callable 

bonds conducted in calendar year 2000 targeted bonds with final maturity 

dates from 2010 through 2014. The Treasury targeted these callable bonds 

for buyback because of their relatively long maturities. 

The August 24, 2000, buyback of $0.8 billion (plus $0.3 billion in premium) 

was the first to include callable bonds. The buyback consisted entirely of 

callables because isolating buybacks of callable bonds facilitates pricing. 

Since then, the buybacks on September 28 and November 16, 2000, also 

targeted callable bonds. These auctions had higher market participation 

than recent buybacks of noncallable securities. 

The results of the buybacks through the end of December 2000 are shown 

in appendix 2. In each buyback operation, the Treasury specifies the 

maturity ranges of securities it will consider buying back. Figure 9 shows 

the distribution of the securities bought back in terms of their maturity 

dates. The buybacks have been concentrated in issues maturing in three 

narrow ranges, namely, 2020 to 2021, 2018 to 2019, and 2014 to 2015.

13In a reverse auction, market participants submit offers and the Treasury accepts the most 

competitive offers. 
Page 19 GAO-01-317 Federal Debt

Figure 9: Buybacks in Calendar Year 2000, Amount Bought Back by Maturity

Source: Department of the Treasury.

In calendar year 2000, the Treasury completed 20 reverse auctions and 

bought back $30 billion (par value) in bonds for which it paid a premium of 

$8.3 billion (for a total of $38.3 billion).14 (See figure 10.) The premium is 

essentially the amount paid above the bonds’ par or face value. However, 

the prices paid by the Treasury could also reflect other market-driven 

factors such as a bond’s increasing scarcity, overcoming the reluctance of 

some long-term investors to sell, and the fact that some less-liquid bonds 

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

2010-

2011

2012-

2013

2014-

2015

2016-

2017

2018-

2019

2020-

2021

2022-

2023

2024-

2025

2026-

2027

2028-

2029

2030

Maturity range by calendar year

Millions of dollars

14In January 2001, the Treasury conducted two buybacks—the par amount bought back was 

$2.75 billion and the premiums paid totaled $751 million. The buyback on January 25, 2001, 

was for callable bonds.
Page 20 GAO-01-317 Federal Debt

could become less desirable. Market analysts have suggested that the 

Treasury’s ability to perform debt buybacks at a reasonable cost could 

become more difficult as the debt available for repurchasing shrinks and 

Treasury investors demand higher bond premiums. The premium is treated 

in the federal budget as a “means of financing other than borrowing from 

the public;” that is, the amount is reflected as a use of cash but is not 

included in budget totals. 

Figure 10: Debt Buybacks, Calendar Year 2000

Source: Department of the Treasury.

Figure 11 shows the 20 buyback operations varied in terms of size, number 

of issues included, market participation, and cost. The size of buyback 

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

3/9

3/164/204/275/185/256/226/29

7/20

7/27

8/178/24

9/219/28

10/19

10/26

11/9

11/16

12/7

12/14

Date of buyback

Millions of dollars

Par value Premium
Page 21 GAO-01-317 Federal Debt

operations in calendar year 2000 ranged from $750 million in par value for 

bonds in three issues to $3 billion for bonds in 24 issues. A measure of 

market interest and participation in the buybacks is indicated by the “bidto-cover” ratio. The bid-to-cover ratio is the par value of securities offered 

to the Treasury divided by the par value of the securities that Treasury 

bought back. This ratio indicates the volume of offers the Treasury had to 

select from at each buyback operation. While this ratio fluctuated, Treasury 

officials told us that the bid-to-cover ratio for buybacks have generally been 

larger than the ratio for auctions of Treasury securities, indicating market 

interest in the buybacks.

Also included in figure 11 is a cost measure used by private market 

participants called the “average concession.” The average concession is the 

difference between the price of a security on the morning of the buybacks 

and the price paid by the Treasury, in this case measured in basis points 

(one basis point equals one one-hundredth of a percent or 0.0001). The 

average concession could be used to indicate whether Treasury paid more 

or less than other buyers. A positive average concession could indicate 

securities were bought back at higher than market price, while a negative 

number could indicate below market price. Figure 11 shows that while 

there was variation across the 20 buyback operations, generally the 

average concession was small or negative. For example, for the first 

buyback the average concession was 0.36 basis points which, when 

multiplied by the total price paid by the Treasury of $1.345 billion, equates 

to $48,420.15

Market analysts have raised the question of whether there was an 

“announcement effect” that increased the premium the Treasury paid to 

buy back debt. While comparing the price the Treasury paid and the market 

price of the securities the day of the purchase measures the price asked by 

the markets for buybacks, there may have been an announcement effect 

dating back as far as the Treasury’s August 1999 release of draft regulations 

for a buyback program. Quantifying this effect is quite difficult because its 

effect on prices of coupon securities cannot be isolated from that of other 

15Treasury officials explained that the “bid” and “ask” prices could also be used as indicators 

to determine whether the transaction was conducted at a fair market price. The “bid-ask” 

spread is defined as the difference between the highest price a potential buyer is willing to 

pay (the bid price) and lowest price the potential seller is willing to accept (the ask price). 

Treasury officials stated that the prices paid in the buybacks have fallen within the bid-ask 

spreads observed in the market, indicating that the Treasury has been paying fair market 

prices.
Page 22 GAO-01-317 Federal Debt

economic factors such as changes in monetary policy and announcements 

of budget projections, inflation, unemployment, and other data.

Figure 11: Selected Data on Debt Buybacks, Calendar Year 2000

Notes 

The average concession data was obtained from Goldman, Sachs & Co., and were calculated as the 

difference in basis points between the price of an issue at about 11 a.m. on the day the buyback is 

implemented and the price paid by the Treasury.

Basis point: one basis point equals one one-hundredth of a percent or 0.0001.

Bid-to-cover: a ratio of the par value of securities offered to the Treasury divided by the par value of the 

securities the Treasury bought back.

Sources: Department of the Treasury and Goldman, Sachs & Co.

Future Debt 

Management 

Challenges

While the national economy and budget will benefit substantially from 

sustained surpluses, surpluses have and will continue to pose challenges to 

the Treasury’s debt management. Declining levels of debt prompt the need 

to make choices on how to allocate debt reduction across the full maturity 

range of securities. In addition, both declining amounts of Treasury 

securities as well as shifts in composition affect the use of Treasury 

securities as benchmarks to price other financial transactions. Although 

markets tend to adjust to these shifts over time, changes are not seamless 

Date of 

buyback 3/9 3/16 4/20 4/27 5/18 5/25 6/22 6/29 7/20 7/27 8/17 8/24 9/21 9/28 10/19 10/26 11/09 11/16 12/07 12/14

Number of 

issues offered 13 11 14 26 12 13 12 13 8 6 11 10 11 10 10 11 11 10 11 9

Number of 

issues 

accepted 9 11 12 24 10 12 11 11 7 5 8 3 10 2 9 9 10 3 6 7

Average 

concession 

(basis points) 0.36 0.23 -0.13 1.52 -0.18 -0.4 0.18 0.3 0.14 -0.08 -0.03 0.29 0.31 0.66 0.03 0.24 0.19 0.3 -0.04 0.16

Bid-to-cover 

ratio 8.63 6.45 4.26 3.61 4.56 4.06 3.67 3.51 2.96 3.64 4.59 6.60 3.93 5.66 3.19 3.54 3.84 4.90 3.99 3.35

Total price 

paid by the 

Treasury ($ 

millions) 1,345 1,268 2,431 3,724 2,556 2,380 2,678 2,478 1,803 1,300 1,760 1,068 1,917 1,394 2,075 1,935 1,398 1,313 1,810 1,670
Page 23 GAO-01-317 Federal Debt

or without cost. In fact, capital market participants have begun using 

alternative benchmarks as pricing tools for transactions; investors have 

begun to include other fixed-income instruments in their portfolios; and 

some government-sponsored enterprises have increased their issuance of 

securities to appeal to investors in Treasury securities with the aim of 

becoming an alternative benchmark.

As debt held by the public continues to shrink, there will be greater 

pressure on the Treasury to further concentrate debt into fewer issues to 

maintain deep and liquid markets. Moreover, the Treasury ultimately may 

be forced to reassess its issuance of nonmarketable securities, such as the 

state and local government series. The Federal Reserve Bank System 

currently has a study underway to examine what debt instruments might be 

used to replace U.S. Treasury securities for use in the Federal Reserve’s 

open market operations.16

Surplus Available for Debt 

Reduction May Exceed 

Amount of Debt Maturing 

Analysts have estimated that the United States will reach a point within this 

decade when the Treasury will be unable to fully use annual budget 

surpluses to either redeem maturing debt or buy back outstanding debt at a 

reasonable price. A number of sources have estimated this point but all of 

these estimates occur in a fairly narrow time frame—from a private market 

projection of 200417 to the CBO’s January 2001 estimate of 2006. This point 

will occur well before the level of zero debt held by the public is reached, 

and the resulting accumulation of cash will require decisions about what to 

do with these cash balances.

16On July 5, 2000, the Federal Reserve announced that it was placing limits on the amount of 

an issue it acquires and holds. The new investment guidelines would effectively reduce the 

Federal Reserve’s holdings of the most liquid—referred to as “on-the-run”—Treasury 

securities, thus allowing a larger portion of these securities to remain available to private 

investors.

17Salomon Smith Barney, Bond Market Roundup: Strategy, January 5, 2001, pages 9-18.
Page 24 GAO-01-317 Federal Debt

We completed four simulations to identify the potential range of dates in 

which annual budget surpluses could not be fully used to reduce debt. The 

estimates of the dates vary by debt management choices and the size of the 

budget surplus.18 In the first simulation we assume the Treasury uses the 

total budget surplus to reduce debt and continues to issue debt in current 

benchmark securities (albeit at lower levels). The first simulation showed 

that cash accumulation would start in 2005.

In the second simulation we assumed that Treasury uses the total budget 

surplus for debt reduction and eventually stops issuing debt in all but the 

shortest-term borrowing—effectively eliminating the debt market for most 

new issues and rollovers. These assumptions postpone the start of cash 

accumulation by one year to 2006. 

In the third simulation we found that cash accumulation would begin in 

2009 if the Treasury maintained current benchmark securities at lower 

levels and used only the off-budget (mostly Social Security Trust Fund) 

surpluses to reduce debt. In our final simulation, we assumed again that 

only the shortest-term borrowing was maintained and that just the offbudget surplus was used to reduce debt. In this last simulation we found 

that cash accumulation would begin in 2011.

All of these estimates put the time at which maturing debt is less than the 

surplus within the next 10 years. This event is significant because when the 

United States reaches this point, policymakers will face a decision about 

how to deal with the excess cash balances. Today the Treasury cannot 

legally invest operating cash in assets other than tax and loan accounts and

18In simulations 1 and 2 we used CBO’s estimates of the total budget surplus. In simulations 

3 and 4 we used CBO’s estimates of the off-budget surplus and assumed that the on-budget 

surplus would not be available for debt reduction or accumulating cash (for example, it 

would be allocated to tax cuts and/or spending increases). In the two simulations in which 

we maintained current benchmark securities (the first and third simulations mentioned 

above), we assumed that the Treasury would gradually reduce both the auction frequency 

and issue size of the benchmark securities. In all four simulations, we assumed a declining 

level of debt buybacks over the 10-year period.
Page 25 GAO-01-317 Federal Debt

obligations of the U.S. government for purposes of cash management;19

therefore, the Congress will need to consider what other types of assets it 

might be beneficial for the U.S. government to hold.20

Governments in some countries—for example, Norway, Australia, and New 

Zealand—have decided to maintain a government securities market (by 

keeping a certain level of gross debt) in order to maintain a role for the 

central government in the domestic and international debt markets and/or 

to facilitate potentially higher levels of borrowing in the future. 

Consequently, they have begun to acquire and hold financial assets, 

although the type of the financial assets differs among countries. However, 

the United States may face a more difficult challenge than did these nations 

because U.S. debt reduction is projected to be much larger and the time 

horizon is projected to be much faster. Nevertheless, examining the 

experiences of these nations can be useful. 

As these other nations already have done, the United States will face 

progressively harder choices and more difficult debt management tradeoffs. Continuing the reduction in outstanding debt means the Treasury will 

face increasing pressure with regard to two of its goals—lowest borrowing 

cost and efficient markets. As debt continues to fall, the Treasury will be 

hard pressed to continue to promote liquid markets for its securities and to 

keep cost at a minimum. Further, analysts estimate that if surplus 

projections hold the United States will reach a point within 10 years when 

the Treasury will be unable to fully use the annual budget surpluses to 

either redeem maturing debt or buy back outstanding debt at a reasonable 

price. U.S. policymakers will have to address the questions sooner rather 

than later of whether and how to maintain a domestic debt market and 

whether and how to hold and invest excess cash. 

19The Treasury is authorized for cash management purposes to invest any portion of its 

operating cash for periods of up to 90 days in obligations of depository institutions that 

maintain collateralized Treasury tax and loan accounts and obligations of the United States 

government. There are other statutes that authorize the Treasury to invest in other 

obligations, such as foreign currency and securities, for the purpose specified in the law that 

created the Exchange Stabilization Fund. The Treasury can also hold cash in a non-interestbearing account at the Federal Reserve.

20See Social Security Financing: Implications of Government Stock Investing for the Trust 

Fund, the Federal Budget, and the Economy (GAO/AIMD/HEHS-98-74, April 22, 1998) for a 

discussion of the issues surrounding government investment in equities.
Page 26 GAO-01-317 Federal Debt

We are sending copies of this report to Representative Charles B. Rangel, 

Ranking Member, House Committee on Ways and Means; Representative 

Robert T. Matsui, Ranking Member, Social Security Subcommittee; Senator 

Kent Conrad, Ranking Democrat, Senate Committee on the Budget, the 

Honorable Paul O’Neill, Secretary of the Treasury; and other interested 

parties. We will also make copies available to others upon request.

If you or your staff have any questions concerning this letter, please contact 

me at (202) 512-9573. Key contributors to this assignment were Thomas 

James, Jose Oyola, Carolyn Litsinger, and Melinda Bowman.

Paul L. Posner

Managing Director

Federal Budget Issues, Strategic Issues
Page 27 GAO-01-317 Federal Debt
Page 28 GAO-01-317 Federal Debt

Appendix I

Outstanding U.S. Treasury Marketable Apendxies

Securities by Year of Maturity (or Callable 

Date), as of 9/30/2000 ApendxiI

(Dollars in billions)

Source: Department of the Treasury.

 	
 	 	
 
 
 
 	
 
   

   	 	  
	   

	  	 
    

 
 	   	

     

 
  		  


 
   

    

  	
  

 
   

 
 
 	 

 

	 

 

 

  


 	 	

  

  

  

	  

	 	 	

		 	 	

	  

	 

	  

	
 	 	

	  

	   	

	   

  

   	   
 
 
  	  	

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Page 29 GAO-01-317 Federal Debt

Appendix II

U.S. Treasury Debt Buybacks, Calendar Year 

2000 ApendxiI

(Dollars in millions

$%& '%
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Appendix II

U.S. Treasury Debt Buybacks, Calendar Year 

2000

Page 30 GAO-01-317 Federal Debt

(Dollars in millions)

Note: * indicates that the security is a callable security − the dates shown are the earliest call date and 

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