a

GAO

United States Government Accountability Office

Report to the Secretary of the Treasury

March 2006 DEBT 

MANAGEMENT

Treasury Has Refined 

Its Use of Cash 

Management Bills but 

Should Explore 

Options That May 

Reduce Cost Further

GAO-06-269
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

March 2006

DEBT MANAGEMENT

Treasury Has Refined Its Use of Cash 

Management Bills but Should Explore 

Options That May Reduce Cost Further 

Highlights of GAO-06-269, a report to the 

Secretary of the Treasury 

One result of persistent fiscal

imbalance is growing debt and net 

interest costs. Net interest is 

currently the fastest-growing 

“program” in the budget and if

unchecked, threatens to crowd out 

spending for other national

priorities. This report was done 

under the Comptroller General’s 

authority and examines the 

Department of the Treasury’s 

(Treasury) growing use of

unscheduled cash management

bills (CM bills). GAO describes 

(1) when Treasury uses CM bills 

and why, (2) the advantages and 

disadvantages of CM bills, and 

(3) steps taken by Treasury to 

reduce the overall borrowing costs 

associated with CM bills. GAO 

identifies possible options Treasury

could consider to reduce the use 

and cost of CM bills further. 

What GAO Recommends

GAO recommends that Treasury

explore options such as those 

identified in this report and any

others it identifies to help it

achieve its lowest-cost borrowing

objective. If Treasury determines

that any of these changes would be 

beneficial, GAO encourages 

Treasury to begin discussions with 

relevant federal agencies and the

Congress about obtaining the 

necessary authorities.

Treasury generally agreed with our

findings, conclusions, and

recommendations and is 

committed to exploring ways to 

reduce financing costs through

changes in the use of CM bills. 

Treasury makes large, regularly occurring payments, such as Social Security

and federal retirement payments, in the beginning of the month and often 

receives large cash inflows in the middle of the month from income tax 

payments and note issuances. Because regular bills alone are not sufficient 

to fill these intramonth cash financing gaps, since 2002 Treasury has 

increasingly issued CM bills to bridge this gap. CM bills allow Treasury to 

obtain cash outside of its regular borrowing schedule in varying amounts 

and maturities, but Treasury pays a premium for doing so. GAO’s analysis 

found that Treasury paid a higher yield on CM bills than that paid on 

outstanding bills of similar maturity in the secondary market. 

Treasury has taken steps to reduce the use and cost of CM bills. Treasury

added a 4-week bill to its regular auction schedule in 2001, which led to 

reduced CM bill issuance, shorter terms to maturity, and lower borrowing 

costs in 2002. Treasury has also fine-tuned CM bill issuance by borrowing 

closer to the time when it needs cash. However, borrowing costs associated 

with CM bills have increased since 2003. 

Borrowing Costs Associated with CM Bills (Fiscal Years 1996–2005) 

While Treasury has made progress towards reducing the cost of CM bills, it 

may be possible to do more. GAO’s analysis indicates that the yield 

differential has increased as short-term rates have risen. If these rates rise 

further, as market participants expect, so will the yield differential. While 

Treasury does not vary its debt management strategy in response to 

changing interest rates, it should be mindful of their effect on the relative 

cost of unscheduled CM bills and explore options to reduce the frequent use

of CM bills and ultimately overall borrowing costs. GAO identified options 

worth exploring such as any additional opportunities for closer alignment of 

large cash flows; possible options for increasing earnings on excess cash 

balances; and introduction of a shorter-term regular instrument. 

www.gao.gov/cgi-bin/getrpt?GAO-06-269. 

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Susan J. Irving 

at (202) 512-9142, irvings@gao.gov or 

Thomas J. McCool at (202) 512-2700, 

mccoolt@gao.gov. 
Page i GAO-06-269 Debt Management

Contents

Letter 1

Results in Brief 2

Background 5

Objectives, Scope, and Methodology 8

Treasury Uses CM Bills to Help Fill Cash Financing Gaps 11

CM Bills Generally Had Higher Yields than Outstanding Bills of 

Similar Maturity but Lower Borrowing Costs than Currently 

Available Alternatives 21

Treasury Has Refined Its Use of CM Bills but Costs Have Begun to 

Increase 37

Options Exist That May Reduce the Use and Cost of CM Bills 43

Conclusion 48

Recommendation for Executive Action 48

Agency Comments 49

Appendixes

Appendix I: Detailed Methodology and Findings of Statistical Analysis of 

Cash Management Bill Yield Differential 51

Previous Research Based on Earlier Data Suggests Some CM Bill 

Features May Reduce Costs 52

Comparing CM Bill Yields with Secondary Market Yields on 

Similar-maturing Treasury Bills 53

The Introduction of the 4-week Treasury Bill Reduced CM Bill 

Maturities and Their Relative Importance in Short-term 

Financing 55

Our Study Focused on CM Bills Issued during Fiscal Years 

2002–2005 57

Yield Differential Is Positively Correlated with Level of Treasury Bill 

Yields 59

Yield Differential Is Positively Correlated with Auction Amounts 59

Maturity on or around Large Tax Payment Dates Reduces Yield 

Differential 60

CM Bills Issued in Multiple Tranches May Require Higher Yield 

Differentials 61

Yield Differential Is Not Affected by Timing of Issuance 61

Several Findings from Earlier Studies Are No Longer Supported 62

Selected CM Bill Features Reduce Yields but Opportunities for 

Additional Exploitation of These Features May Be Limited 64

Appendix II: Analysis of CM Bill Auctions 66
Contents

Page ii GAO-06-269 Debt Management

Trading Activity Was Lower Prior to CM Bill Auctions than 4-week 

Bill Auctions 66

Yield Treasury Paid on CM Bills Generally Reflected Market 

Information at the Time of the Auction 67

CM Bill Auctions Are More Concentrated and Have Fewer Awarded 

Bidders than 4-week Bill Auctions 68

More Common Performance Measures Indicate High Demand for 

CM Bills but Greater Uncertainty in CM Bill Auctions Compared 

with 4-week Bill Auctions 70

Appendix III: Selected Bibliography 72

Appendix IV: Comments from the Department of the Treasury 74

Appendix V: GAO Contacts and Staff Acknowledgments 75

Tables Table 1: CM Bills Issued on the 1st–3rd Days of the Month That 

Mature on the 15th Day of the Month 16

Table 2: DISPs over the Last Decade (Fiscal Years 1996–2005) 19

Table 3: Illustrative Comparison of 4-week and CM Bill Borrowing 

Costs 36

Table 4: Illustrative Effect of Issuing CM Bills in Multiple Tranches 

on Borrowing Costs 39

Table 5: Key Features of CM Bills before and after the 4-week 

Treasury Bill’s Introduction 55

Table 6: Regressions Explaining the Yield Differential (Fiscal Years 

2002–2005) 58

Table 7: Pre- and Postauction Trading Activity in CM Bills and 

4-week Bills (Fiscal Years 2002–2005) 67

Table 8: Average Spread between Auction and When-issued Yields 

at Time of Auction (Fiscal Years 2002–2005) 68

Table 9: Bid-to-cover Ratios for CM and 4-week Bills (Fiscal Years 

2002–2005) 70

Table 10: Auction Tails for CM and 4-week Bill Auctions (Fiscal 

Years 2002–2005) 71

Figures Figure 1: Treasury’s April 2005 Regular Borrowing Schedule 7

Figure 2: Smoothing the Payment of Social Security Benefits 12

Figure 3: Cash Balance and CM Bill Issuance during Fiscal Year 

2005 14

Figure 4: Cash Receipts and Maturity Dates of CM Bills Issued 

during Fiscal Year 2005 15
Contents

Page iii GAO-06-269 Debt Management

Figure 5: Annualized Federal Funds Rate and CM Bill Yields (Fiscal 

Years 1996–2005) 22

Figure 6: Yield Differential (Fiscal Years 1996–2005) 23

Figure 7: Repurchase Agreements 25

Figure 8: Yield Differential and the Average Level of Short-term 

Treasury Yields (Fiscal Years 2001–2005) 30

Figure 9: Steps Taken in Recent Years to Increase the Rate Paid on 

Treasury’s Cash Balances 35

Figure 10: Amount of CM Bill Issuance (Fiscal Years 1996–2005) 38

Figure 11: Average Size of CM Bills Issued (Fiscal Years 

1996-2005) 40

Figure 12: Weighted Average Term to Maturity of CM Bills (Fiscal 

Years 1996–2005) 41

Figure 13: Annualized Amount Outstanding (Fiscal Years 1996–

2005) 42

Figure 14: Total Borrowing Costs Associated with CM Bills (Fiscal 

Years 1996–2005) 43

Abbreviations

BPD Bureau of the Public Debt 

CBO Congressional Budget Office 

CM bill Cash management bill 

DISP Debt issuance suspension period 

DMO Debt Management Office 

Fannie Mae Federal National Mortgage Association

FMS Financial Management Service 

Freddie Mac Federal Home Loan Mortgage Corporation 

SSA Social Security Administration 

TAD Treasury Auction Database 

TIO Term Investment Option 

TIPS Treasury Inflation-Protected Securities 

Treasury Department of the Treasury 

TT&L Treasury Tax and Loan 

WSJ Wall Street Journal
Page iv GAO-06-269 Debt Management

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Page 1 GAO-06-269 Debt Management

United States Government Accountability Office

Washington, D.C. 20548

A

March 30, 2006 Letr

The Honorable John W. Snow

Secretary of the Treasury

Dear Mr. Secretary:

One result of persistent fiscal imbalance is growing debt and net interest 

costs. Net interest on the federal debt is currently the fastest-growing 

“program” in the budget. The Congressional Budget Office (CBO) projects 

that interest cost will increase by more than 50 percent over the next 5 

years. If unchecked, interest spending threatens to crowd out spending for 

other national priorities such as educating our children, safeguarding the 

environment, and ensuring national security.1

The Department of the Treasury’s (Treasury) primary debt management 

goal is to finance the government’s borrowing needs at the lowest cost over 

time. To meet this objective, Treasury issues debt through auctions in a 

“regular and predictable” pattern across a wide range of securities 

including nominal bills, notes, and bonds, and Treasury Inflation-Protected 

Securities (TIPS).2

 According to Treasury, because investors and dealers 

rely upon the routine availability of Treasury securities they tend to pay a 

slight premium, which lowers Treasury’s borrowing costs. 

Since 1975, Treasury has supplemented its regular and predictable auctions 

with unscheduled cash management bill (CM bill) auctions to finance 

short-term cash needs while providing short notice to market participants. 

However, Treasury officials and researchers indicated that Treasury pays a 

premium on CM bills in part because of their irregularity and short-term 

1

For more information on these trends and our nation’s fiscal challenges, see GAO, 21st

Century Challenges: Reexamining the Base of the Federal Government, GAO-05-325SP

(February 2005).

2

Bills are short-term securities that mature in 1 year or less from their issue date. Bills are 

sold at a discount from their face value. When the bill matures, Treasury pays the investor 

the face value of the bill. The difference between the purchase price and face value is the 

interest paid by Treasury or conversely the return to the investor. Treasury notes and bonds 

are securities that pay a fixed rate of interest every 6 months until they mature and then pay 

their face value. Treasury notes mature in at least 1 year but not more than 10 years from 

their issue date. Bonds mature in more than 10 years from their issue date. TIPS are issued 

in terms of 5, 10, and 20 years. The principal value of TIPS is tied to inflation. TIPS pay 

interest twice a year, at a fixed rate that is applied to the adjusted principal. At maturity, 

Treasury pays the adjusted principal or original principal, whichever is greater. 
Page 2 GAO-06-269 Debt Management

nature. We examined Treasury’s use of CM bills to provide insights into 

options Treasury might consider to reduce CM bill use, the premium paid 

on CM bills, and ultimately government borrowing costs. 

This report is part of GAO’s ongoing work on Treasury’s cash and debt 

management practices and was done under the Comptroller General’s 

authority. We examined general patterns of CM bill issuance over the last 

10 fiscal years—fiscal years 1996–2005, but focused on the last 4 fiscal 

years after Treasury introduced a new regular 4-week bill in 2001 to reduce 

the use of CM bills. The objectives of this report are to (1) describe when 

Treasury uses CM bills and why, (2) describe the advantages and 

disadvantages of CM bills, (3) describe steps taken by Treasury to reduce 

the overall borrowing costs associated with CM bills, and (4) identify 

possible options Treasury could consider to reduce the use and cost of CM 

bills further.

Results in Brief Since 2002, Treasury has increasingly issued CM bills to fill intramonth 

cash financing gaps that regular bills alone cannot fill. Treasury issues CM 

bills in the beginning of the month to raise cash for Social Security, federal 

retirement, and other scheduled payments. Treasury typically sets the 

maturity of CM bills to the 15th of the month when notes are issued and tax 

payments are received. Treasury has also relied on CM bills when it is 

nearing the debt ceiling to help it pay the government’s bills while keeping 

debt under the statutory limit.3

CM bills provide Treasury flexibility to obtain cash outside its regular 

borrowing schedule, but Treasury pays a premium for doing so. During our 

study period (fiscal years 1996 through 2005) Treasury paid a higher yield 

on most CM bills than outstanding bills of similar maturity paid in the

3

The statutory debt limit established by 31 U.S.C. Section 3101 is the legal ceiling on the 

amount of gross federal debt. The limit applies to the total of the face amount of obligations 

issued under chapter 31 of title 31, United States Code, and the face amount of obligations 

whose principal and interest are guaranteed by the U.S. government that are outstanding at 

any one time. 
Page 3 GAO-06-269 Debt Management

secondary market.4 The higher yield, hereafter called the “yield 

differential,” is measured as the difference between the CM bill yield 

Treasury obtained at auction and the average secondary market yield on 

outstanding Treasury bills that are most similar (in terms of maturity) to 

the CM bill on the day of auction.5

 Our statistical analysis of certain 

features of CM bills, such as size issued and dates of issuance and maturity, 

from fiscal year 2002–2005 (after the introduction of the 4-week bill) shows 

that, all other things equal, issuing relatively larger CM bills resulted in a 

higher yield differential. We also found that CM bills that were part of a 

“multiple tranche”—successively issued CM bills maturing on the same 

day6

—tended to have higher yield differentials but this is only significant at 

the 10 percent level and it is sensitive to the inclusion of other explanatory 

variables. CM bills maturing around large tax payment dates tended to 

have lower yield differentials. We also found that a key driver of the yield 

differential is the general level of short-term yields in the economy, a factor 

that is outside Treasury’s control. A continuation in the rise of short-term 

yields is therefore likely to result in higher yield differentials. Although 

auction performance theoretically has an effect on the yields Treasury 

obtained at auction, we did not find any statistically significant 

relationships between the auction performance measures we examined 

and the yield differential.

Treasury can accumulate and maintain higher cash balances or issue

4-week bills instead of using CM bills to meet short-term cash shortfalls. 

However, despite their higher yield, CM bills are generally less costly than 

either of these alternatives. Treasury faces a negative funding spread—the 

interest earned on cash balances is generally insufficient to cover the cost 

of increased borrowing necessary to maintain these balances. The negative 

4

Yields are generally equal to the amount of interest divided by the price paid by investors 

with an adjustment for the portion of the year the bill is outstanding. The secondary market 

is a market in which an investor purchases a security from another investor rather than the 

issuer.

5

Throughout this report, the yield differential is used as a measure of the premium Treasury 

pays to borrow outside its regular schedule. It is not a measure of the total additional cost 

of CM bills compared with other alternatives for raising short-term funds. Total borrowing 

costs are based on the amount borrowed, the yield, and the time the debt is outstanding.

6

For example, instead of issuing one $30 billion CM bill on the 1st that matured on the 15th, 

Treasury has issued three smaller CM bills on the 1st, 3rd, and 9th (all maturing on the 15th). 

Other meanings of multiple tranche exist. For example, in bond markets a multiple tranche 

refers to a package of investments offered at the same time. Unlike this definition, Treasury 

does not announce the tranches together.
Page 4 GAO-06-269 Debt Management

funding spread is due in part to the formula it established in 1978 for the 

interest it earns on cash balances.7As a result, it is generally more costefficient to repay debt and then issue a CM bill than run higher cash 

balances. CM bills are also less costly than a regular 4-week bill for shorterterm needs (i.e., less than 28 days). This is true because although 4-week 

bills tend to have a lower yield, they are outstanding for a longer period of 

time. As a result, the borrowing cost of a 4-week bill is generally greater 

than a CM bill of shorter maturity (less than 28 days).

Treasury has taken steps to lower the use and overall cost of CM bills. In 

2001, Treasury introduced the 4-week bill to help reduce the use of CM 

bills. This led to a reduction in the amount of CM bills issued and their 

term to maturity. Also, instead of issuing one large CM bill, Treasury has 

increasingly issued CM bills in multiple tranches. Although CM bills issued 

as part of a multiple tranche may have higher yield differentials than CM 

bills not part of a multiple tranche, they allow Treasury to borrow cash 

closer to the day it is needed, which reduces the average issue size, term to 

maturity, and annualized amount outstanding. Therefore, the savings that 

multiple tranche CM bills provide more than offset the higher yields such 

issues might entail. Declining interest rates, which reached historical lows 

in recent years, also helped reduce borrowing costs from 2001 to 2002. 

However, the cost of CM bill issuance has increased since 2003.

CM bills will continue to be a necessary debt management tool to meet 

unexpected cash needs when Treasury has low cash balances and when 

Treasury is nearing the debt ceiling. Our analysis indicates that the yield 

differential has increased as short-term rates have risen. If these rates rise 

further, as market participants expect, so will the yield differential. While 

Treasury does not vary its debt management strategy in response to 

changing interest rates, it should be mindful that increasing rates are likely 

to raise the relative cost of unscheduled CM bills. As a result, Treasury 

should consider options that may reduce the frequent use of CM bills and 

ultimately overall borrowing costs.

We identified a range of options Treasury can consider that may reduce the 

use of CM bills, the premium paid on CM bills, and overall borrowing costs. 

7

Treasury invests its excess cash—funds that would otherwise cause its balance at the 

Federal Reserve to rise above the target level of $5 billion—in Treasury Tax and Loan 

(TT&L) accounts. TT&L accounts are held at financial institutions and earn interest rates 

equal to the federal funds rate less .25 percentage points, or 25 basis points.
Page 5 GAO-06-269 Debt Management

One of the more promising options is exploring additional opportunities for 

closer alignment of large cash flows to help eliminate the frequent cash 

financing gap in the first two weeks of the month. Treasury can also 

reexamine options for increasing earnings on its excess cash balances, 

which would narrow the negative funding spread and may ultimately 

reduce the need to rely on CM bills. Other options include introducing a 

shorter-term instrument; increasing transparency on the potential size of 

CM bills; relaxing rules for CM bill auctions; and exploring other nations’ 

debt management practices. 

We recommend that Treasury explore options such as those discussed in 

this report and any others it identifies that may help it achieve its lowestcost borrowing objective. We recognize that there are a number of tradeoffs to consider with each of these options. In its exploration Treasury 

should consider the costs and benefits, including how options may be 

combined to produce more beneficial outcomes, and determine whether 

the benefits—in the form of lower borrowing costs—to the federal 

government (and so to taxpayers) outweigh any costs imposed on 

individuals, business, or other nonfederal entities. Implementing some of 

these options would require changes to statutes or regulations. If Treasury 

determines that any of these changes would be beneficial, we encourage 

Treasury to begin discussions with relevant federal agencies and the 

Congress about obtaining the necessary authorities.

In oral and written comments on a draft of this report, Treasury generally 

agreed with our findings, conclusions, and recommendations. Treasury 

said that it is committed to continuing to explore ways to further reduce 

financing costs through changes in the use of CM bills and that many of the 

options we identified are embodied in its current debt management policy. 

Treasury emphasized that statutory authority is needed for some options, 

particularly changing the timing of receipts and expenditures and 

improving earnings on excess cash balances. Treasury also suggested 

some technical changes throughout the report that we have incorporated 

as appropriate. Treasury’s comments appear in appendix IV. In addition, 

the Federal Reserve Board provided technical comments that we 

incorporated as appropriate.

Background Congress has delegated to Treasury the power to borrow the money needed 

to operate the federal government and manage the government’s
Page 6 GAO-06-269 Debt Management

outstanding debt subject to a statutory limit.8 Treasury’s primary debt 

management goal is to finance the government’s borrowing needs at the 

lowest cost over time. To meet this objective, Treasury issues debt through 

auctions in a “regular and predictable” pattern across a wide range of 

securities. Treasury does not “time the market”—or take advantage of 

lower interest rates—when it issues securities. According to Treasury, 

because investors and dealers rely upon the routine availability of Treasury 

securities they tend to pay a slight premium, which lowers Treasury’s 

borrowing costs. In addition, Treasury also states that to support liquidity, 

it must issue “enough but not too much” at each auction.9

 If Treasury 

issued too little, it could not sustain a deep and liquid secondary market for 

its securities. If it issued too much, Treasury creates concern among 

primary market participants that they may find it difficult to distribute their 

holdings in the secondary market.

Treasury publishes a schedule with tentative announcement, auction, and 

settlement (issue) dates up to 6 months in advance of regular security 

auctions. Depending on the type of security, Treasury typically auctions 

and then issues a security within a week or less. Treasury generally issues 

short-term regular bills with 4-, 13-, and 26-week maturities every Thursday 

and issues 2- and 5-year notes at the end of each month.10 Three- and 10- 

year notes are issued in the middle of each quarter and Treasury reopens 

10-year notes 1 month after their initial issuance.11 In addition, Treasury 

issues TIPS in 5-, 10-, and 20-year maturities in certain months according to 

the TIPS’ maturity. Finally, Treasury issues 30-year bonds in the middle of

8

Treasury's authorities are codified in chapter 31 of title 31 of the United States Code. 

9

A liquid debt issue is one that is large enough for market participants to trade easily, and 

one for which the offer and purchase prices differ only slightly.

10Prior to February 2006, Treasury issued the 5-year note in the middle of each month.

11Instead of issuing a new security, Treasury may add to, or reopen, an existing issue, 

increasing the amount outstanding of the issue. Larger issues tend to be more liquid and 

attractive to investors. In addition to the 10-year note, Treasury reopens 30-year bonds 6 

months after their initial issuance. It also reopens the 5- and 20-year TIPS 6 months after 

initial issuance and the 10-year TIPS 3 months after initial issuance. Moreover, shorter-term 

bills are fungible with previously issued bills, so that every 13-week bill is a reopening of a 

previously issued 26-week bill and every 4-week bill is a reopening of previously issued 

13- and 26-week bills.
Page 7 GAO-06-269 Debt Management

February12 and reopens the bonds in the middle of August. Figure 1 depicts 

Treasury’s April 2005 borrowing schedule.13 

Figure 1: Treasury’s April 2005 Regular Borrowing Schedule

Note: The April 2-year note was issued on May 2 since the end of April fell on a weekend. The 3-year 

note was not issued since April did not fall in the middle of the quarter (i.e., quarterly refunding 

months—February, May, August, and November).

12Treasury suspended issuance of the 30-year bond in October 2001 and resumed issuance in 

February 2006.

13Treasury’s current tentative auction schedule can be viewed at: 

http://www.treas.gov/offices/domestic-finance/debt-management/auctions/.

1

45678

11 12 13 14 15

18 19 20 21 22

25 26 27 28 29

2 3 456

April 2005

M T W Th F

May 2005

4-, 13-, 26-week bills

4-, 13-, 26-week bills

4-, 13-, 26-week bills

4-, 13-, 26-week bills 5-year TIPS

10-year TIPS

5-year note

2-year note 4-, 13-, 26-week bills

Source: GAO analysis of Bureau of the Public Debt (BPD) information.
Page 8 GAO-06-269 Debt Management

Treasury supplements its regular and predictable schedule with flexible 

securities called CM bills. Unlike other securities, Treasury does not 

publish information on CM bills on its auction schedule. Instead, Treasury 

generally announces CM bill auctions anywhere from 1 to 4 days ahead of 

the auction. The term to maturity—or length of time the bill is 

outstanding—varies according to Treasury’s cash needs. CM bills allow 

Treasury to finance very short-term cash needs—for as little as 1 day—

while providing short notice to market participants. 

The United States Treasury is not alone in using CM bill-type instruments to 

finance short-term needs and smooth cash flows. For example, in the 

United Kingdom, the Debt Management Office (DMO) issues CM bills to 

meet temporary cash flow needs that the DMO cannot conveniently meet 

through its structured bill auctions and to help smooth cash flows. The 

Bank of Canada, which auctions securities for Canada’s debt management, 

issues CM bills to help it minimize the level and cost of carrying cash 

balances. Australia uses short-term securities with 5-, 13-, and 26-week 

maturities to bridge within-year cash flow mismatches, but may vary the 

maturities and issue shorter-term securities of 3 to 6 weeks. 

Objectives, Scope, and 

Methodology

To understand when Treasury uses CM bills, we analyzed CM bills issued 

over the last 10 fiscal years—fiscal years 1996–2005. This time period 

provides a sufficiently large sample of CM bills—121—and allowed us to 

analyze and show trends in CM bill use before, during, and after the 

following events: 4 years of surpluses, five debt issuance suspension 

periods (DISP) declared by the Secretary of the Treasury,14 and the 

introduction of two new debt instruments—TIPS in 1997 and the 4-week 

bill in 2001. CM bill data were obtained from the Bureau of the Public Debt 

(BPD). BPD’s online database has 22 different features for each Treasury 

security, including the amount, announcement, auction and issue dates, the 

maturity date, and the yield. We examined these features as well as others 

14A DISP is any period for which the Secretary of the Treasury has determined that 

obligations of the United States may not be issued without exceeding the public debt limit. 

During DISPs, the Secretary of the Treasury has statutory authority to depart from 

Treasury’s normal investment and redemption procedures for certain federal government 

accounts. See GAO, Debt Ceiling: Analysis of Actions Taken During the 2003 Debt 

Issuance Suspension Period, GAO-04-526 (Washington, D.C.: May 20, 2004) for additional 

information on DISPs and the public debt limit. CM bills may also be issued by Treasury 

prior to a DISP.
Page 9 GAO-06-269 Debt Management

examined in earlier studies of CM bills to identify patterns of CM bill 

auctions, issuance, and maturity. 

To understand why CM bills are issued or mature at these times, we 

examined Treasury’s cash flows from fiscal years 1996–2005 using publicly 

available data from the Financial Management Service’s (FMS) Daily 

Treasury Statements. We also met with Treasury officials from the Office 

of Debt Management and the Office of Fiscal Projections. We reviewed 

Treasury documents, including quarterly refunding statements and policy 

statements, and Treasury Borrowing Advisory Committee reports and 

minutes from quarterly refunding meetings.15

We obtained views on the perceived advantages and disadvantages of CM 

bills for Treasury, Federal Reserve operations, and investors in meetings 

with Treasury officials, Federal Reserve officials, market participants, 

including primary dealers and money market fund managers, and market 

analysts. We also reviewed financial and economic literature. We did not 

identify any key advantages or disadvantages of CM bills for Federal 

Reserve operations and as a result these operations are not a focus in this 

report.

To describe the key disadvantage of CM bills for Treasury—higher yields—

we estimated the differential between CM bill yields and the yields on 

outstanding Treasury bills of similar maturity at the time of auction using 

data from BPD and the Wall Street Journal (WSJ).16 To determine whether 

certain features might reduce the yield paid on CM bills, we regressed the 

yield differential on key features. We determined which features to 

examine on the basis of previous studies of CM bills and Treasury auctions, 

15Treasury’s quarterly refunding process, during which debt management policy is examined 

and sometimes changed, is held near the middle of each calendar quarter (i.e., February, 

May, August, and November). As part of this process, Treasury solicits advice and views 

from the private sector, including primary dealers and the Borrowing Advisory Committee. 

Primary dealers are banks and securities broker-dealers that trade in U.S. government 

securities with the Federal Reserve Bank of New York. The Borrowing Advisory Committee 

is a committee of the Bond Market Association governed by federal statute and comprising 

senior representatives from firms that actively trade or make large investments in Treasury 

securities.

16Similar measures, also called butterfly spreads, were used by Jason Seligman, “Does 

Urgency Affect Price at Market? An Analysis of U.S. Treasury Short-Term Finance,” Journal 

of Money, Credit, and Banking (forthcoming), pp. 6–8 and Michael J. Fleming, “Are Larger 

Treasury Issues More Liquid? Evidence from Bill Reopenings,” Journal of Money, Credit, 

and Banking, vol. 34, no. 3 (August 2002), p. 707.
Page 10 GAO-06-269 Debt Management

our interviews with Treasury and market participants, and our own 

analysis. While we analyzed the yield differential for all CM bills issued 

during fiscal years 1996–2005, we focused on the 55 CM bills issued during 

fiscal years 2002–2005 because the introduction of the 4-week bill in 2001 

substantially reduced CM bill maturities and caused a structural change in 

the CM bill market. For more information on our statistical analysis, see 

appendix I. 

Because CM bill rates are determined in auctions, we examined auction 

performance to determine whether there is any relationship between 

selected performance measures and the yield differential. We also 

examined whether CM bill auctions perform as well as regular 4-week bill 

auctions because the 4-week bill is more similar to a CM bill—in terms of 

issuance amount variance and its term to maturity—than other Treasury 

securities. We evaluated each of the 284 CM and 4-week bill auctions in 

fiscal years 2001–2005 (years since the introduction of the 4-week bill) 

using proprietary data from the Treasury Auction Database (TAD) and 

GovPX—an interdealer broker database with information on primary 

dealer transactions for all U.S. Treasury securities. We analyzed auction 

performance measures mentioned in Treasury interviews, Treasury studies 

of auctions,17 Borrowing Advisory Committee minutes, and economic and 

financial literature/textbooks describing or evaluating Treasury auction 

performance. See appendix II for more information on our analysis of CM 

bill auctions.

We identified possible options to reduce the use and cost of CM bills on the 

basis of our analysis of CM bill use, the yield differential, and CM bill 

auction performance. We discussed these options with Treasury, market 

participants, and others and we include their comments as appropriate.

In order to assess the reliability of data used in this study, including 

proprietary data from TAD and GovPX, and the publicly available data from 

FMS, BPD, and WSJ, we examined the data to look for outliers and 

anomalies and addressed such issues as appropriate. In general, we chose 

databases that were used by Treasury and researchers to examine Treasury 

markets and auction performance. Where possible and appropriate, we 

corroborated the results of our data analysis with other sources. On the 

17For example, see Paul F. Malvey and Christine M. Archibald, Uniform-Price Auctions: 

Update of the Treasury Experience (Washington, D.C.: Department of the Treasury, Oct. 26, 

1998).
Page 11 GAO-06-269 Debt Management

basis of our assessment we believe the data are reliable for the purposes of 

this review. 

We conducted our review in Washington, D.C., from February 2005 through 

March 2006 in accordance with generally accepted government auditing 

standards. 

Treasury Uses CM Bills 

to Help Fill Cash 

Financing Gaps

Treasury frequently faces a cash financing gap of about 2-weeks duration 

because of timing differences of large cash inflows and outflows. Treasury 

makes large regular payments (e.g., Social Security and federal retirement) 

in the beginning of the month and it often receives large cash inflows in the 

middle of the month from income tax payments and note issuances. 

Because regular bills alone are not sufficient to fill this cash financing gap, 

Treasury has increasingly used CM bills since 2002. Treasury has also 

relied on CM bills when nearing the debt ceiling to help pay its bills while 

keeping debt under the statutory limit. 

Large Cash Outflows Occur 

at the Beginning of the 

Month 

Treasury’s largest cash outflows generally occur in the beginning of the 

month. For example, in fiscal year 2005, almost one-quarter of the 

government’s annual fiscal cash outlays (withdrawals excluding debt 

redemption) were paid in the first 3 days of each month.18 On or around the 

1st of every month Treasury paid about $14 billion to active duty military 

personnel, military and civilian retirees, and others. In the beginning of 

some months, Treasury also paid up to $6 billion for Medicare. On or 

around the 3rd of every month it paid about $21 billion in Social Security 

benefits. In total, Treasury made $718 billion cash payments in the first 3 

days of months in fiscal year 2005. 

These large payments in the beginning of the month are not anticipated to 

decline soon. A Treasury official explained that Social Security benefits 

paid on the 3rd of the month are anticipated to remain relatively steady for a 

number of years and then decline because of steps taken by the Social 

Security Administration (SSA) in 1997 that have helped smooth cash 

payments out of Treasury. (Fig. 2 describes these steps in more detail.) 

18Treasury must also repay regular bills that mature on Thursdays and notes that mature in 

the middle and end of each month. However, Treasury generally pays them by rolling over 

debt (i.e., issuing new debt to repay maturing debt).
Page 12 GAO-06-269 Debt Management

However, because beneficiaries receiving benefits before 1997 continue to 

receive their benefits at the beginning of the month, we estimate the large 

payments could last another 10 years. Other federal benefit programs 

continue to pay all or most of their benefits at the beginning of the month. 

If these payments were, like Social Security, spread throughout the month, 

it would help smooth cash flows and might reduce Treasury’s need to use 

unscheduled large CM bills at the beginning of the month.

Figure 2: Smoothing the Payment of Social Security Benefits

Large Receipts Often Occur 

in the Middle of the Month

In contrast to outlays, Treasury’s largest cash inflows generally occur in the 

middle of the month. Although the majority of federal tax receipts are 

already fairly smoothed throughout the year, most corporate and 

nonwithheld individual tax payments are made in the middle of certain

Source: GAO analysis.

In the late 1990s, the SSA took steps to smooth the payment of Social Security 

benefits—the largest federal benefit payment. Prior to June 1997 regular monthly 

Social Security benefits were paid on (or around) the 3rd of each month. In 1997, 

the payment date was changed for beneficiaries filing after May 1997. These new 

beneficiaries are paid on the 2nd, 3rd, or 4th Wednesdays of the month depending 

on their date of birth. Beneficiaries with birthdays on or before the 10th of the 

month are paid on the second Wednesday; those born on the 11th–20th receive 

their benefits on the third Wednesday; and the rest receive their benefits on the 

fourth Wednesday. Those receiving benefits before May 1997 and all Supplemental 

Security Income recipients still receive payments on (or around) the 3rd of each 

month. In fiscal year 2005, the amount paid on or around the 3rd of each month 

was at least $20 billion while the amount paid on the Wednesday schedule 

averaged only $4 billion. Over time, Social Security payments will become more 

even throughout the month.
Page 13 GAO-06-269 Debt Management

months throughout the year.19 Treasury receives large corporate tax 

payments on (or around) the 15th of March, April, June, September, and 

December. During fiscal year 2005, Treasury received just over $213 billion 

of cash on these days. Treasury also had large receipts in the middle of 

January, April, June, and September from nonwithheld individual estimated 

tax payments, and after April 15 from the settlement of prior year 

individual income tax liability. 

In addition to tax receipts, net cash raised from note issuances (i.e., 

issuance less redemption) on or around the 15th of the month more than 

tripled from $78 billion in fiscal year 2002 to $297 billion in fiscal year 2005. 

However, some large midmonth cash inflows from note issuance will not 

endure because Treasury shifted 5-year note auctions from the middle to 

the end of each month beginning in February 2006. As a result, cash 

inflows from new 5-year debt issuance shifted from the middle to the end of 

the month.

Regular Bill Issuances Alone 

Are Not Sufficient to Fill 

Cash Financing Gap 

To achieve the lowest borrowing costs over time, Treasury seeks to provide 

the market with a high degree of stability in the amount issued of each 

security, with the requisite stability increasing with issuance maturity. 

Treasury officials said they try to limit swings in regular bill offerings. This 

means regular bill issuances cannot suddenly increase by the amount 

needed to make large payments in the beginning of the month nor suddenly 

decrease in the middle of the month to absorb large inflows. In practice, 

Treasury only varied the amount of 13- and 26-week bills by $2 billion (less 

than 10 percent of the average amount issued) from week to week in fiscal 

year 2005. Since Treasury introduced the 4-week bill in 2001 to help reduce 

cash balance swings, its issuance size varies more than that of other regular 

Treasury bills. In fiscal year 2005, the size of the 4-week bill varied by as 

much as $13 billion (more than three-quarters of the average amount 

issued). Even so, to meet cash needs—which in fiscal year 2005 averaged 

19Withheld taxes include personal income, Social Security, and Medicare taxes withheld 

from employee paychecks by employers. Nonwithheld taxes, such as estimated individual 

income taxes, and corporate income taxes are paid on a periodic basis. Generally, a 

corporation must make four payments a year, which are due by the 15th day of the 4th, 6th, 9th, 

and 12th months of the corporation’s tax year, which may vary. So, for corporations with a 

tax year ending December 31, payments are due on April 15, June 15, September 15, and 

December 15. If the corporation’s year ends June 30, payments are due on the 15th of 

October, December, March, and June. If any due date falls on a Saturday, Sunday, or legal 

holiday, the payment is due on the next business day.
Page 14 GAO-06-269 Debt Management

almost $60 billion at the beginning of the month—Treasury has come to 

rely on CM bills.

Treasury Has Increasingly 

Used CM Bills to Fill 

Frequent Cash Financing 

Gaps

The combination of low cash balances in the beginning of the month with 

large cash inflows in the middle of the month has led to a general pattern of 

CM bill issuance. Our analysis shows that from 2002 to 2005, on average 

about half of CM bills were issued in the first 3 days of the month. 

According to Treasury officials, Treasury decides to issue CM bills when it 

has low cash balances, which often track the timing of large payments. In 

fiscal year 2005, for example, Treasury issued 11 of its 21 CM bills in the 

first 3 days of the month when it had below average cash balances (the 

average cash balance for fiscal year 2005 was $25.5 billion) (see fig. 3). The 

amounts issued varied from $4 billion to $42 billion. 

Figure 3: Cash Balance and CM Bill Issuance during Fiscal Year 2005

The maturity dates of CM bills have varied over the 10-year period we 

examined, but since 2002 CM bills have increasingly matured on the 15th of 

the month when Treasury receives large cash inflows. In fiscal year 2005, 

Treasury set 68 percent of its $268 billion CM bill borrowings to mature in 

Source: GAO analysis of FMS data.

0

20

40

60

80

100

Cash balance

Amount of CM bill issued

Dollars in billions

Average cash balance

10/1, 10/13 11/18, 12/1, 12/3, 12/ 7 1/3, 1/13 2/11 3/3, 3/8 4/1, 4/7, 4/14 6/1, 6/3, 6/7 7/1 9/1, 9/2, 9/8
Page 15 GAO-06-269 Debt Management

the middle of March, April, June, September, and December when Treasury 

receives large corporate and individual income taxes. In these 5 months 

Treasury received 72 percent ($213.3 billion) of fiscal year 2005 corporate 

income tax deposits.20 With only one exception, all CM bills issued in fiscal 

year 2005, regardless of when Treasury issued them, matured on or around 

the 15th of the month (see fig. 4).21 

Figure 4: Cash Receipts and Maturity Dates of CM Bills Issued during Fiscal Year 2005

a

Cash receipts exclude net issuance of debt.

Since 2002, Treasury has increasingly filled the approximately 2-week 

financing gap by issuing CM bills at the beginning of the month and setting

20Our calculation of total corporate income tax deposits for fiscal year 2005 does not include 

the $4.5 billion payment received on Oct. 1, 2004, that was caused by Congress’s 

postponement of the corporate tax payment date in mid-September 2004.

21All 21 CM bill issuances in fiscal year 2005 matured between the 14th and the 18th of the 

month, except one CM bill that matured on Nov. 23, 2004.

Source: GAO analysis of FMS data.

0

10

20

30

40

50

60

70

80

Cash receiptsa

Amount of CM bill maturing

Dollars in billions

10/15 11/23 12/15 1/18 2/14 3/15 4/15, 4/18 6/15 7/15 9/14, 9/15
Page 16 GAO-06-269 Debt Management

the maturity date of these CM bills for the middle of month.22 Table 1 

shows that since 2002, 23 CM bills—or more than 40 percent of the number 

of CM bills issued—have been issued on the 1st–3rd days of the month and 

matured on the 15th day of the month. These CM bills accounted for more 

than half of the total dollar amount of CM bills issued in the last 4 fiscal 

years.

Table 1: CM Bills Issued on the 1st–3rd Days of the Month That Mature on the 15th Day 

of the Month

Source: GAO analysis of BPD data.

Treasury Also Uses CM Bills 

to Help Smooth Cash Flows 

during the April Tax Season

Over the last 10 years Treasury has relied on multiple CM bills to help 

manage cash flows in April. The large cash balance swings in April could 

not be accommodated by changes in the regular bill issuance schedule 

according to Treasury officials and our analysis. To help smooth large April 

22It may seem counterintuitive for Treasury to borrow to pay Social Security benefits when 

the Social Security trust funds are running surpluses. When the Social Security trust funds 

receive payroll taxes or other contributions that are not needed to pay benefits, the excess 

cash is invested in special Treasury securities and Treasury uses the cash for other 

government purposes. Thus, this cash is not on hand to pay Social Security benefits at the 

beginning of each month.

Number

 Percent of 

total number 

issued

Amount

(billions 

of dollars)

Percent of total 

amount issued

1996 0 0% $0 0%

1997 1 11 26 16

1998 1 14 15 9

1999 5 45 99 42

2000 1 10 25 11

2001 5 42 162 47

2002 0 0 0 0

2003 3 25 69 39

2004 9 60 202 82

2005 11 52 175 65

Total (1996–2001) 13 20% $327 23%

Total (2002–2005) 23 42% $446 55%
Page 17 GAO-06-269 Debt Management

cash flows, Treasury consistently issued three or more CM bills every year 

between fiscal years 1996 and 2005 that matured in the later half of April 

(on the 15th or later), when Treasury typically received large tax receipts. 

For example, in fiscal year 2005 Treasury issued three CM bills—two 

matured on April 15 and one matured on April 18—totaling $47 billion and 

received about $41 billion in corporate and nonwithheld income and 

employment tax payments on those dates.

Treasury Does Not Control 

the Timing of All Cash 

Flows

Better aligning or smoothing cash inflows and outflows could reduce or 

eliminate the frequent financing gap thereby reducing the need for some 

CM bills but Treasury does not have authority to control the timing of all 

cash flows. Treasury is a passive agent; it collects and disburses federal 

funds at agencies’ request.23 It does not determine when major benefit 

payments are made. For example, the payment dates of civil service and 

railroad retirement are set by law. Due dates for tax payments are also set 

by federal statute.24

Treasury does have some control over debt-related cash flows and has 

considered how changes in its schedule affect cash flows. For example, 

when making changes to its schedule in 2001, Treasury maintained monthly 

issuance of 2-year notes, which are issued at the end of the month and 

could help pay regular benefit payments in the beginning of the following 

month. More recently, Treasury moved 5-year note issuance from the 

middle to the end of the month. This change more closely aligns 5-year 

note issuance with the beginning of the next month’s payments and may 

reduce CM bill issuance in the early part of months. 

However, regular securities can only help fill cash financing gaps 

temporarily. No regular security that matures on the same day another is 

issued can be used to fill cash financing gaps over the long run because, in 

a steady state, most, if not all, of the cash raised at each issuance would be 

needed to pay maturing securities. As a result, Treasury would not raise 

large amounts of new cash. In addition, Treasury generally sets the issue 

amount for longer-term securities to cover long-term deficit needs, not 

23However, agencies must give Treasury 5 business days notice for disbursements of $500 

million or more and 2 business days notice for disbursements of between $50 million and 

$500 million. See Treasury Financial Manual, Vol. I, Part 6, Chapter 8500 (Washington, 

D.C.: Department of the Treasury, April 1996).

2426 U.S.C. § 6654(c) and § 6655(c).
Page 18 GAO-06-269 Debt Management

short-term cash shortfalls, and thus the new cash raised with the 5-year 

note may not cover the full amount of cash needs in the beginning of the 

month. Although Treasury will likely raise new cash at the end of the 

month with the 5-year note until 2011 when 5-year notes issued in 2006 

begin to mature, the change in the auction schedule is not likely to 

eliminate the need for CM bills. 

Treasury Also Relies on CM 

Bills When Approaching the 

Debt Ceiling

When debt is nearing the statutory limit, Treasury has to take a number of 

extraordinary steps to meet the government’s obligation to pay its bills 

while keeping debt under the ceiling.25 Treasury also issues CM bills, 

among other actions, to accomplish these goals. CM bills, like other 

Treasury securities, are subject to the debt limit. However, CM bills allow 

Treasury to borrow cash for shorter time periods than regular bills. On 

occasion, Treasury has changed scheduled auctions for its regular 

securities and instead issued CM bills so that the debt ceiling will not be 

reached. For example, because of debt limit constraints Treasury delayed 

the 4-week bill auction scheduled for Tuesday, November 16, 2004. 

Treasury then auctioned a 5-day CM bill for $7 billion on November 17, 

2004. In another example, Treasury said that inaction on the debt ceiling in 

2002 led to reduced issuance of 4-week bills and larger, more frequent CM 

bill issuance than it would have done otherwise. During the five DISPs 

within the last decade, Treasury issued 19 CM bills totaling $300 billion. As 

table 2 shows, Treasury issued most of these CM bills during the lengthy 

DISPs in fiscal years 1996 and 2003.26 

25For information on actions taken during DISPs, see GAO-04-526 and earlier GAO debt 

ceiling reports.

26Treasury also used cash management bills during the DISP that occurred in fiscal year 

2006. The DISP began on February 16, 2006 and lasted until March 20, 2006, when Congress 

increased the debt limit to $8,965 billion.
Page 19 GAO-06-269 Debt Management

Table 2: DISPs over the Last Decade (Fiscal Years 1996–2005)

Source: GAO analysis of BPD data.

CM bills will continue to be a useful tool for Treasury when it approaches 

the debt ceiling, but, as discussed on page 20 of this report, Treasury pays a 

premium for the flexibility CM bills provide. 

CM Bills Cannot Be Used in 

All Circumstances and 

Other Alternatives No 

Longer Exist or Are Limited 

Although CM bills offer a means to raise cash in as little as a day, CM bills, 

like other Treasury securities, cannot be used when financial markets are 

closed or not functioning properly. Previously, Treasury could obtain cash 

on short notice outside financial markets, but this capability ceased more 

than twenty years ago. Treasury was also able to draw on compensating 

balances when financial markets closed after September 11, 2001, but these 

balances were terminated in 2004.

In the past, Treasury had access to a cash draw authority. Intermittently 

between 1942 and 1981, Treasury was able to directly sell (and purchase) 

certain short-term obligations from the Federal Reserve in exchange for 

cash. Treasury used the cash draw authority infrequently and mostly in 

times of war or armed conflict. The Federal Reserve held special shortterm certificates purchased directly from Treasury on 228 days between 

1942 and 1981. In the years Treasury used this authority, it borrowed on 

about 11 days on average per year. The Treasury Draw Policy, as amended 

in 1979, stated that Treasury could use the cash draw authority only in

Fiscal

year DISP beginning date DISP ending date Length (days)

Number of CM 

bills issued

Amount (billions 

of dollars)

1996 November 15, 1995 March 29, 1996 135 8 $130 

2002 April 4, 2002 April 16, 2002 12 2 39 

2002 May 16, 2002 June 28, 2002 43 2 41 

2003 February 20, 2003 May 27, 2003 96 6 83 

2005 October 14, 2004 November 19, 2004 36 1 7

Total 19 $300 
Page 20 GAO-06-269 Debt Management

“unusual and exigent circumstances.”27 Congress allowed this authority to 

expire in 1981.28

Prior to March 2004 Treasury could use compensating balances—

noninterest bearing cash balances that were used to compensate banks for 

various services—as a source of short-term funding when markets were 

closed or during DISPs. Treasury officials said that compensating balances 

were not viewed as a substitute backup facility for Treasury to obtain cash 

in the short term and were only used in extraordinary circumstances. For 

example, on September 11, 2001, Treasury had to cancel the auction of 

4-week bills, which would have settled on Thursday, September 13, 2001. 

Because of the auction cancellation, Treasury lacked sufficient cash to pay 

about $11 billion of maturing 4-week bills on Thursday, September 13. 

Treasury obtained sufficient cash by drawing down compensating cash 

balances. However, in March 2004, compensating balances were replaced 

with direct payments to the banks. 

More recently, in the aftermath of Hurricane Katrina, when cash balances 

fell more than expected, Treasury obtained cash by canceling a planned 

cash investment. Treasury periodically auctions excess cash to banks 

through its Term Investment Option (TIO) program. Treasury invests cash 

through TIOs for a fixed term at a rate determined through a competitive 

auction process.29 Treasury intended to award a $5.5 billion investment 

option on Friday, November 25, 2006. However, additional spending in 

response to Hurricane Katrina caused Treasury’s cash balance to fall to an 

unexpected low level on November 23, 2005. In response, Treasury did not 

follow through on the planned investment option. 

Using these investments as a source of cash in the future requires that 

Treasury actually have excess cash to invest and that it knows it will need 

the cash before investment. Reliance on excess cash is limited since 

Treasury has placed increased emphasis on minimizing cash balances in 

order to reduce overall borrowing costs. One possible consequence of this 

27Pub. L. No. 96-18.

28In 1979 Congress also authorized a securities draw authority, which permitted Treasury to 

borrow securities from the Federal Reserve, sell them, and then repurchase the securities in 

the open market and return the securities to the Federal Reserve within a specified period, 

but it was never used. The securities draw authority also expired in 1981.

29For more information on Treasury cash investment, see pages 34–35. 
Page 21 GAO-06-269 Debt Management

practice is an increased risk that incorrect cash flow predictions or 

emergencies could lead to Treasury overdrawing its Federal Reserve Bank 

account. As a result, an important issue for future consideration is how 

Treasury might obtain funds to finance government operations should 

normal financial market operations be degraded significantly or closed 

because of a catastrophic emergency.

CM Bills Generally Had 

Higher Yields than 

Outstanding Bills of 

Similar Maturity but 

Lower Borrowing 

Costs than Currently 

Available Alternatives

CM bills provide Treasury with flexibility to obtain cash outside its regular 

borrowing schedule, but Treasury generally paid a higher yield on CM bills 

than outstanding bills of similar maturity paid in the secondary market. 

The differential between CM bill yields and similar maturing outstanding 

bills—hereafter called the “yield differential”—varied greatly from fiscal 

year 1996 through 2005.30 We found several factors, both within and 

outside Treasury’s control that affected the yield differential. Despite their 

higher yield, CM bills are generally less costly than maintaining higher cash 

balances or issuing 4-week bills as means to obtain the cash needed to 

make large payments, such as Social Security and federal retirement, at the 

beginning of the month. 

CM Bill Yields Closely Track 

Other Short-Term Rates

CM bill yields closely track the level of short-term interest rates prevailing 

at the time of auction. This is because investors see other short-term 

instruments as close substitutes for CM bills. They can either buy new bills 

or buy existing bills in the secondary market. In general, investors will not 

accept a lower yield (bid a higher price) for a new bill than that available on 

an existing bill. Conversely, investors would not offer a lower price to 

obtain a higher yield than prevailing in the market since they would likely 

be underbid. As a result, CM bill yields follow other short-term yields 

within a narrow range.

Short-term yields change over time in response to changes in economic 

activity, the demand for credit, investors’ expectations, and monetary 

policy as set by the Federal Reserve. CM bill yields declined from about 5.8 

30The yield differential is the difference between a CM bill yield and the weighted average 

yield of outstanding Treasury bills maturing before and after the CM bill. The weights on the 

Treasury bill yields were based on the relative difference in each bill’s maturity date from 

the CM bill’s maturity date, with the Treasury bill having a closer maturity date receiving a 

greater weight and the weights summing to one. For more information, see app. I, 

pages 53–54.
Page 22 GAO-06-269 Debt Management

percent in 2000 to 1.1 percent in 2004. This decline reflected the overall 

reduction in short-term rates driven largely by the Federal Reserve’s 

monetary actions and other market forces. The Federal Reserve started 

lowering the federal funds rate—the interest rate at which banks lend 

reserves to other banks overnight—in early 2001, and by 2002 the federal 

funds rate was at levels not seen since the early 1960s. Beginning in the 

summer of 2004, the Federal Reserve began to increase the federal funds 

rate. At the same time, CM bill yields increased to an average 2.5 percent in 

fiscal year 2005 (see fig. 5).

Figure 5: Annualized Federal Funds Rate and CM Bill Yields (Fiscal Years 1996–

2005)

a

Annualized number based on average of federal funds rates on days of CM bill auctions. CM bill rates 

converted to money market yields for comparability.

0

1

2

3

4

5

6

Annualized federal funds ratea

CM bill yields

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Source: GAO analysis of BPD and Federal Reserve data.

Percent

Fiscal year
Page 23 GAO-06-269 Debt Management

CM Bill Yields Were 

Generally Higher than Yields 

on Outstanding Bills of 

Similar Maturity

Treasury paid a higher yield on most CM bills issued during our study 

period than outstanding bills of similar maturity paid in the secondary 

market. The average yield differential fell from 47 basis points31 in fiscal 

year 2001 to 5 basis points in fiscal year 2004 (see fig. 6). In fiscal year 

2005, yield differentials grew and CM bill yields were about 14 basis points 

higher on average than outstanding bills of similar maturity. 

Figure 6: Yield Differential (Fiscal Years 1996–2005)

Note: The yield differential compares CM bill yields with the weighted average of yields on outstanding 

Treasury bills maturing before and after the CM bill. For more information, see app. I, pp. 53–54.

Our analysis identified two important factors behind the yield differential 

decline: lower short-term Treasury yields and reduced CM bill issuance. 

The first effect was somewhat temporary while the latter effect could last. 

The level of short-term interest rates is largely driven by Federal Reserve 

policy and market forces rather than by Treasury. Treasury bill yields have 

risen and may continue to rise and eventually reach levels that prevailed in 

the late 1990s, thereby erasing the portion of the decline in the yield 

31One basis point is equal to 1/100th of 1 percent. Thus, 47 basis points is 0.47 percentage 

points.

0

10

20

30

40

50

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Source: GAO analysis of BPD and WSJ data.

Basis points

Fiscal year

14

5

9

4

47

29 30

48

39

26
Page 24 GAO-06-269 Debt Management

differential caused by lower interest rates. However, because the 4-week 

bill is now a permanent feature of Treasury’s auction schedule and has 

reduced Treasury’s reliance on CM bills, the portion of the decline in the 

yield differential attributable to relatively lower CM bill issuance is likely to 

endure. The experience during fiscal years 2002–2005 as a whole suggests 

that the yield differential could remain about 13 basis points below pre2002 levels. These findings are discussed in more detail later in this report.

The large reduction in the yield differential has helped reduce borrowing 

costs associated with CM bills. The daily cost associated with the 47-basispoint yield differential in fiscal year 2001 was about $12,900 per $1 billion. 

In fiscal year 2001, Treasury borrowed $19.2 billion (annualized amount 

outstanding) using CM bills.32 Of the $1.06 billion in total borrowing costs 

associated with CM bills in that year, $70 million was associated with the 

yield differential. Since then, the average yield differential has declined 

and was 14 basis points, or about $3,800 a day per $1 billion borrowed, in 

fiscal year 2005. During fiscal year 2005, Treasury borrowed about $8 

billion (annualized amount outstanding) using CM bills. Total borrowing 

costs were $215 million and the borrowing cost associated with the yield 

differential was about $12.8 million. Treasury could achieve savings by 

further reductions in the yield differential.33

CM Bill Yields Were Similar 

to Yields on Overnight 

Repurchase Agreements

CM bills may have higher yields because, according to Treasury officials 

and market participants, they are bought for a different purpose than 

regular bills. According to market participants, some money market funds 

and foreign central banks purchase CM bills but for the most part they are 

not widely used as an investment tool because of their irregularity and 

short-term nature. Instead, CM bills are primarily used by primary dealers 

as collateral for repurchase agreements. A repurchase agreement is a form 

of short-term collateralized borrowing used by dealers in government 

securities. Figure 7 describes repurchase agreements in more detail. 

32The annualized amount outstanding is derived by spreading the amount of each CM bill 

across the 365-day year. So, for example, a 14-day CM bill with a face value of $25 billion is 

multiplied by 0.038 (= 14/365) resulting in an annualized amount outstanding of $959 million.

33We identified several features of CM bills within Treasury’s control that affect the yield 

differential. These are discussed on pages 26–29.
Page 25 GAO-06-269 Debt Management

Figure 7: Repurchase Agreements

a

Agency securities are financing instruments of federal government agencies, such as the Tennessee 

Valley Authority, or government-sponsored enterprises, such as the Federal National Mortgage 

Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). Agency 

securities are not considered risk free but are considered to have high credit quality in part because of 

the agencies’ government affiliation.

We found the yields of CM bills to be near the yields of overnight 

repurchase agreements. In fiscal year 2005, CM bill yields were within 2 

Source: GAO analysis.

Dealers use repurchase agreements as the primary means for financing their 

inventory of Treasury securities. For example, a dealer would borrow money 

from an investor/lender to purchase a security and provide the investor/lender 

collateral, usually in the form of a Treasury security. The dealer then pays the 

investor/lender back at an agreed-upon time, usually overnight. A large share of 

repurchase agreements takes place among dealers. Repurchase agreements

also take place between dealers and the Federal Reserve. A repurchase 

agreement is illustrated below.

Illustration of Repurchase Agreement: At Inception and Maturity

Repurchase agreements are the primary type of operation used by the Federal 

Reserve to maintain the overnight federal funds rate at or near the target rate. 

Repurchase agreements allow the Federal Reserve to temporarily increase or 

decrease the amount of reserves in the monetary system. The amount of 

Treasury securities available for collateral affects the price of repurchase 

agreements. A large amount of collateral generally results in higher repurchase 

agreement rates; conversely, reducing the amount of collateral would generally 

decrease repurchase agreement rates. Since CM bill issuance patterns affect 

the amount of Treasury collateral available in the repurchase agreement 

market, they also can affect the rates that the Federal Reserve receives when 

conducting its temporary open market operations.

At inception:

At maturity:

Owner of Treasury

or agency security/

Borrower

Owner of Treasury

or agency security/

Borrower

Customer/Lender

Customer/Lender

Collateral

(e.g., Treasury or

agency securitya)

Borrowed funds

Collateral

(e.g., Treasury or

agency securitya)

Borrowed funds +

interest
Page 26 GAO-06-269 Debt Management

basis points of overnight repurchase agreement yields.34 Although 

repurchase agreements and CM bills are both short-term investments, there 

are some differences. For example, repurchase agreements are subject to 

federal, state, and local taxes whereas CM bills are exempt from state and 

local taxation. Also, CM bills, like regular Treasury bills, are risk free 

whereas repurchase agreements issued by private borrowers involve some 

risk. The high-quality collateral in a repurchase agreement (e.g., Treasury 

securities or agency securities) reduces the credit risk faced by the lender 

and allows borrowers to obtain cash at a lower cost than they would obtain 

otherwise.35 However, the lender is still exposed to credit risk because if 

the borrower fails to repay the loan, the market value of the collateral may 

be less than the amount owed. Repurchase agreements are structured 

carefully to reduce this credit risk exposure, for example, by lending less 

than market value of the security used as collateral. Nevertheless, 

repurchase agreements have more risk than securities issued by Treasury 

and accordingly have higher yields than Treasury securities of similar 

maturity, which are risk free and are the floor for short-term rates in the 

money market.

Our Analysis Identified 

Some Features That Affect 

the Yield Differential

Our statistical analysis found that, all other things equal, the amount of CM 

bills issued was positively correlated with the yield differential, meaning 

that increases in the amount of CM bills issued relative to the amount of 

similar-maturing Treasury bills outstanding increased the yield differential, 

and decreases in the amount issued reduced the yield differential.36 We 

also found that CM bills that were part of a “multiple tranche”—

successively issued CM bills maturing on the same day—tended to have 

higher yield differentials,37 and CM bills maturing around large tax payment 

dates tended to have lower yield differentials. Changes in the general level 

34Based on overnight repurchase agreement rates on the day of CM bill auctions published in 

the WSJ.

35Repurchase agreement rates are less than federal funds rates because a federal funds 

transaction has no collateral.

36While we analyzed the yield differential for all CM bills issued during fiscal years 1996–

2005, we focused on the 55 CM bills issued during fiscal years 2002–2005 because the 

introduction of the 4-week bill in 2001 substantially reduced CM bill maturities and caused a 

structural change in the CM bill market. 

37However, this is only significant at the 10 percent level and it is sensitive to the inclusion of 

other explanatory variables—namely, the announcement day variable.
Page 27 GAO-06-269 Debt Management

of short-term yields also affected the yield differential. While the amount 

and timing of CM bills is somewhat under Treasury’s control, the general 

level of short-term yields in the economy is not.38 

Although CM bill yields are determined in auctions, we did not find a 

statistically significant relationship between the auction performance 

measures we examined—such as participation, distribution of auction 

awards, and preauction activity in the when-issued market39—and the yield 

differential. However, we found that in more concentrated auctions 

Treasury was less likely to pay more than the yield indicated in the whenissued market at the time of auction, which is a positive auction result.40 

The Amount of CM Bills Issued 

Was Positively Correlated with 

the Yield Differential

While an increase in the relative amount of CM bills might enhance liquidity 

and thereby reduce their yields, investors might require a higher yield to 

acquire relatively large amounts of CM bills. Our statistical analysis found 

that increases in the amount of CM bills issued relative to outstanding bills 

with similar maturity increased the yield differential. For example, if 

Treasury had increased its fiscal year 2005 CM bill issuance by $10 billion, 

the average yield differential would have been about 4.2 basis points higher 

according to our analysis. Conversely, reducing the amount of CM bills 

issued tended to reduce the yield differential. Earlier research by others 

had similar findings.41 

According to our analysis, the reduced use of CM bills since the 4-week bill 

was introduced contributed to the overall decline in the yield differential. 

From fiscal years 1996–2001, the amount of CM bills issued was almost 

70 percent of outstanding bills with similar maturity. In fiscal year 2002, the 

share declined to 30 percent. At the same time, the yield differential 

declined from about 35 basis points (fiscal year 1996–2001 average) to

38App. I provides more detail on our methodology for analyzing the CM bill yield differential 

and our findings. 

39Treasury auctions are preceded by forward trading in markets known as “when-issued” 

markets. The when-issued market is important because it serves as a price discovery 

mechanism that potential competitive bidders look to as they set their bids for an auction.

40App. II provides more information on our analysis of CM bill auctions.

41David P. Simon, “Segmentation in the Treasury Bill Market: Evidence from Cash 

Management Bills,” Journal of Financial and Quantitative Analysis, vol. 26, no. 1 (March 

1991), pp. 97–108; David P. Simon, “Further Evidence on Segmentation in the Treasury Bill 

Market,” Journal of Banking and Finance, vol. 18 (1994), pp. 139–51; Fleming, “Are Larger 

Treasury Issues More Liquid?” p. 707; and Seligman, “Does Urgency Affect Price at Market?”
Page 28 GAO-06-269 Debt Management

4 basis points in 2002. According to our analysis, about 35 percent of the 

yield differential decline can be attributed to Treasury’s reduced use of CM 

bills. CM bill issuance has remained low relative to outstanding bills with 

similar maturity since 2002. These results suggest that the 4-week bill 

reduced both the use and cost of CM bills as Treasury intended. 

Issuing CM Bills in Multiple 

Tranches May Increase the Yield 

Differential but Reduce Overall 

Borrowing Costs

We also found that consecutive CM bills maturing on the same day—called 

“multiple tranches”—tended to increase the yield differential. In recent 

years, Treasury has increasingly issued consecutive, small CM bills with the 

same maturity date—rather than one larger CM bill—which reduces the 

average amount outstanding and ultimately reduces borrowing costs. In 

2005, three-quarters of the CM bills issued were part of a multiple tranche. 

Our analysis suggests that issuing consecutive CM bills that mature on the 

same date might increase the yield differential by 6 basis points over a 

single CM bill. Market participants suggested if they suspect Treasury 

might reopen the CM bill later, they may bid less aggressively on a CM bill, 

which would result in lower prices and higher yields for CM bills. 

The evidence that issuing in multiple tranches increases the yield 

differential should be viewed with caution. The estimated coefficient is 

only significant at the 10 percent level and is sensitive to the inclusion of 

other explanatory variables.42 For example, with the inclusion of a variable 

representing the number of days advance notice before auction, the 

coefficient of multiple tranche CM bills is no longer significant even at the 

10 percent level. Moreover, the lower cost of multiple tranches resulting 

from smaller average issues and shorter term to maturities most likely 

offsets any increase in the yield. For more information on the cost-saving 

effects of multiple tranches, see pages 38–39.

CM Bills Maturing on Large Tax 

Payment Dates May Have Lower 

Yield Differentials

Increasingly Treasury has issued CM bills that mature on individual and 

corporate tax payment dates and, according to our analysis, this practice 

may be leading to lower yields and borrowing costs. Our statistical 

analysis shows the yield differential on CM bills maturing on or near April 

15 or on other tax payment dates (generally the 15th of March, June, 

September, and December) is 12 basis points lower than other CM bills. 

This may be explained by empirical evidence suggesting that regular 

Treasury bills whose maturity dates immediately precede corporate tax 

payment dates have special value because corporate treasurers may wish 

42The probability value for the coefficient estimate is .06. 
Page 29 GAO-06-269 Debt Management

to invest excess cash in securities whose cash flows can be used to 

liquidate cash liabilities.43 

Almost 50 percent (27 of 55) of CM bills Treasury issued over the last 4 

fiscal years matured on large tax payment dates. In the last 2 fiscal years, 

Treasury set at least one CM bill to mature on each of the large tax payment 

dates. So, to a large extent, Treasury has already captured the cost-savings 

from this feature. It is also important to note, however, that the 12-basis 

point difference is unlikely to offset even an extra day of borrowing. CM 

bills maturing on dates other than large tax payment dates with shorter 

maturities are likely to cost less than CM bills maturing on a corporate tax 

payment date with longer maturities because debt is outstanding for a 

shorter period of time. 

Yield Differential Rises and Falls 

with Short-term Yields

Our analysis showed that the yield differential rises and falls with the 

overall level of Treasury bill yields. Figure 8 shows short-term Treasury 

yields declined from an average of about 4.8 percent in fiscal year 2001 to 

1.05 percent in fiscal year 2004. At the same time, the average yield 

differential fell from 47 basis points to 5 basis points. Our analysis suggests 

the decline in short-term yields explained about 35 percent of the decline. 

Since mid-2004 when short-term rates started to increase consistent with 

Federal Reserve actions, the yield differential has started to widen again to 

about 14 basis points in fiscal year 2005. Thus, absent Treasury actions, 

further increases in short-term rates are likely to lead to higher CM bill 

yield differentials in the future. If short-term Treasury yields return to the 

1996–2001 average of approximately 5 percent, we found that the yield 

differential could exceed 20 basis points and the additional cost of CM 

bills—assuming current issuance patterns—could increase from $11 

million to about $19 million a year. 

43See Kenneth D. Garbade, “Treasury Bills with Special Value,” in Fixed Income Analytics 

(Cambridge, Mass.: MIT Press, 1996), pp. 181–197.
Page 30 GAO-06-269 Debt Management

Figure 8: Yield Differential and the Average Level of Short-term Treasury Yields 

(Fiscal Years 2001–2005)

CM Bills Are Innately Less 

Predictable than Regular Bills

The yield differential may also be attributable in part to variables that are 

hard to measure, such as predictability. According to Treasury officials, a 

regular and predictable borrowing schedule is attractive to investors and 

helps to achieve Treasury’s objective of lower borrowing costs over time. 

However, both the timing and amount of CM bill auctions are by nature less 

predictable than regular Treasury bills. Providing too much advanced 

notice of CM bill issuance would reduce Treasury’s flexibility to adjust the 

amount and timing of issuance to best meet cash needs. It could also cause 

Treasury to use conservative estimates of its cash needs and borrow more 

than it actually needs. Treasury’s challenge is to provide market 

participants enough notice to avoid paying too high a premium for 

uncertainty without reducing its flexibility. Improving cash forecasting 

could help Treasury determine the amount of CM bills to be issued sooner 

rather than later and thus provide market participants more notice of CM 

bill auctions.

Source: GAO analysis of BPD and WSJ data.

Yield differential

in basis points

Average level of

short-term yields

in percent

Fiscal year

0

10

20

30

40

50

60

0.00

1.00

2.00

3.00

4.00

5.00

6.00

Yields on outstanding Treasury bills with similar maturity

Yield differential between CM bill and outstanding Treasury bill with similar maturity

2001 2002 2003 2004 2005

47

4

9

5

14

4.80

1.73

1.09 1.05

2.42
Page 31 GAO-06-269 Debt Management

Treasury provides limited information on the timing and amount of CM bill 

auctions ahead of the announcement. The Quarterly Refunding process is 

Treasury’s way to provide market participants with information and get 

their feedback about changes to its auction schedule and the issues actively 

under discussion by Treasury. As part of each Quarterly Refunding, 

Treasury usually issues a statement indicating that it plans to issue CM bills 

in the coming quarter. Treasury provides general information on the timing 

of CM bills, such as “early March” or “early April” but does not provide the 

actual date it expects to issue CM bills.44 In contrast, Treasury publishes 

the auction schedule, including announcement, auction, and issue dates for 

its regular bills up to 6 months in advance. Treasury typically does not 

provide an estimated issue amount for CM bills or regular bills in its 

Quarterly Refunding statements. 

Despite the general notice given by Treasury and the somewhat regular 

pattern of CM bill issuance in recent years, market participants cannot 

always predict the timing of CM bill auctions with certainty. For example, 

in fiscal year 2005, a prominent money market analyst predicted the exact 

date of 6 (out of 21) CM bill auctions at least 1 week ahead of the auction 

announcement and was off by 1 or 2 days for 9 CM bill auctions. However, 

the analyst’s predicted dates for 2 CM bill auctions were off by 6 days, and 

the analyst did not predict the remaining four CM bill auctions. 

Not only the timing, but also the amount of CM bill issues cannot be 

predicted with certainty. Treasury uses CM bills to manage cash balance 

swings and as a result, the amount of CM bills issued varies more than 

regular and predictable securities. Thus, it is not surprising that market 

participants cannot predict with certainty the amount of CM bill issuance. 

Issuing in multiple tranches may exacerbate the issue. For example, one 

market analyst predicted Treasury would auction one CM bill in the first 

week of December 2004 for $28 billion and one CM bill the following week 

for $7 billion. Instead, Treasury auctioned three CM bills totaling 

$42 billion in the first week and none the following week. Several market 

participants we spoke with said that uncertainty surrounding the amount 

offered affects their bidding and ultimately Treasury’s borrowing terms. If 

44The Treasury Borrowing Advisory Committee recommends amounts for each Treasury 

security, including CM bills, to be issued in the upcoming 2 quarters. However, Treasury is 

not obligated to follow the committee’s recommendations and the actual timing and amount 

of CM bill issuance has varied from the committee’s recommendations. These 

recommendations are publicly available on Treasury’s website. See 

http://www.treas.gov/offices/domestic-finance/debt-management/adv-com/reports/.
Page 32 GAO-06-269 Debt Management

market participants are uncertain of the amount, they may not bid as 

aggressively, which potentially reduces the price and increases the yield 

Treasury pays on CM bills. In addition, the relative inflexibility of 

Treasury’s demand for cash to avoid a negative cash balance might explain 

the higher yields on CM bills.45

Most Measures We 

Examined Suggest CM Bill 

Auctions Perform Less Well 

Than 4-week Bill Auctions

Given that CM bill auctions are less predictable than regular Treasury bill 

auctions, it is not surprising that CM bill auctions do not perform as well as 

regular bill auctions by some measures. Better auction performance can be 

characterized by greater participation and more preauction activity in the 

when-issued market. These factors theoretically reduce Treasury’s 

borrowing costs. By most measures of participation and activity we 

examined, CM bill auctions perform less well than 4-week bill auctions. 

However, some other measures indicate that Treasury obtained a better 

price at CM bill auctions compared with 4-week bill auctions and that there 

is stronger demand for CM bills than 4-week bills. 

In order to lower borrowing costs, Treasury seeks to encourage more 

participation in auctions. In general, large, well-attended auctions improve 

competition and lead to lower borrowing costs for Treasury. We found that 

fewer bidders in total are awarded CM bills than 4-week bills. For example, 

of the 55 CM bill auctions held between 2002 and 2005, more than half had 

16 or fewer awarded bidders. In contrast, only about 4 percent of the 209 

4-week bill auctions had 16 or fewer awarded bidders while about 50 

percent had at least 22 awarded bidders. 

We also found that preauction trading activity is sparse before CM bill 

auctions. Treasury auctions are preceded by forward trading in markets 

known as “when-issued” markets. The when-issued market is important 

because it serves as a price discovery mechanism that potential 

competitive bidders look to as they set their bids for an auction. Whenissued trading reduces uncertainty about bidding levels surrounding 

auctions and also enables dealers to sell securities to their customers in 

advance of the auction so they are better able to distribute the securities 

and bid more aggressively, which results in lower costs to Treasury. We 

counted the number of preauction trades on the day of CM bill auctions and 

45See Seligman, “Does Urgency Affect Price at Market?”
Page 33 GAO-06-269 Debt Management

found that when-issued trading is lower prior to CM bill auctions than 

regular 4-week bill auctions.

A broad range of participants generally improves competition and 

theoretically maximizes the price investors pay for Treasury securities. 

Alternatively a higher concentration—a large share of the auction awarded 

to few participants—could reduce competition and restrict a security’s 

supply in the secondary market, preventing its efficient allocation among 

investors. We evaluated the share of the auction awarded to the top five 

bidders—a measure used by Treasury in its own studies of auction 

performance—and found that the share was 60 percent or higher in over 

half (34 of 55) of CM bill auctions from fiscal year 2002 through 2005. In 

contrast, the share exceeded 60 percent in only 18 percent (37 of 209) of 

4-week bill auctions in the same period. While a higher concentration 

theoretically reduces competition and the price investors pay, according to 

Treasury a high concentration ratio in CM bill auctions may imply some 

bidders really want a particular bill, which may drive the price up and yield 

down. 

Although greater participation, a broader distribution of awards, and more 

preauction activity in the when-issued market theoretically improves 

Treasury’s borrowing costs, we did not find a statistically significant 

relationship between these factors and the yield differential. However, we 

did find that concentration was negatively correlated with the auction 

spread. The auction spread is the difference between the yield Treasury 

obtains at auction and the yield in the when-issued market at the time of 

auction. A positive spread (where the auction yield is more than the 

contemporaneous when-issued yield) indicates Treasury paid a higher yield 

than expected, which is a negative auction result. Our statistical analysis 

suggests that Treasury was less likely to pay more than the expected yield 

indicated in the when-issued market in more concentrated auctions. In 

other words, higher concentration seemed to improve Treasury’s auction 

results. App. II provides more information on our CM bill auctions 

analysis.

CM Bills Are Generally Less 

Costly than Currently 

Available Alternatives

Treasury could maintain higher cash balances or issue regular Treasury 

bills (e.g., the 4-week bill) to avoid issuing a CM bill to meet short-term 

cash shortfalls. When evaluating CM bills relative to other alternatives, it is 

important to look at total borrowing costs—not just the yield. Treasury’s 

borrowing costs are based on the amount borrowed, the yield it pays to 

borrow, and the time the debt is outstanding. We found that CM bills are 
Page 34 GAO-06-269 Debt Management

generally less costly than currently available alternatives despite their 

higher yield.

CM Bills Are Generally Less 

Costly than Running Higher Cash 

Balances

To avoid issuing a CM bill, Treasury could run higher cash balances to 

bridge cash financing gaps. However, it is generally more cost-efficient to 

repay debt and then issue a CM bill than run higher cash balances because 

the interest earned on excess cash balances is generally insufficient to 

cover borrowing costs. Treasury’s current cash balance target is $5 billion, 

which represents the amount to be held at the Federal Reserve. Treasury 

invests excess cash above the $5 billion target in Treasury Tax and Loan 

(TT&L) accounts.46 TT&L accounts are held at financial institutions and 

earn interest rates equal to the federal funds rate less 25 basis points.47 The 

rate earned on TT&L accounts is generally less than the average rate 

Treasury pays on CM and regular short-term bills. As a result, Treasury 

faces a negative funding spread. The funding spread varies over time and 

depends on Treasury bill rates relative to the federal funds rate—increases 

in Treasury bill yields relative to the federal funds rate increase Treasury’s 

negative funding spread, and declines in Treasury bill yields relative to the 

federal funds rate reduce Treasury’s negative funding spread. 

As a result of the negative funding spread, Treasury strives to minimize 

cash balances in order to reduce overall borrowing costs. To do this, 

Treasury has worked toward improving cash forecasting. Treasury has 

reduced the average cash forecasting error by one-half over the last 6 years 

according to Treasury officials. They credited improvements to better 

technology and communication with their “lockbox banks” that process 

certain tax payments. For example, the Electronic Federal Tax Payment 

System provided actual cash flow information to Treasury forecasters 

through electronic notification of pending tax payments, replacing 

imperfect forecasts. 

46Established by Pub. L. No. 95-147, 913 Stat. 1227 (1977), the TT&L program helps stabilize 

the supply of reserves in the banking system. If Treasury held all its cash in its Federal 

Reserve account, increases in its cash position would drain reserves from the banking 

system, and decreases would add reserves. Thus, the Federal Reserve would have to 

conduct frequent and perhaps large open market operations to mitigate undesired 

fluctuations in bank reserves and the federal funds rate. The TT&L program also helps 

Treasury manage federal tax receipts and earn interest on public funds.

47Set in 1978, the TT&L rate was originally intended to reflect the rate paid on overnight 

repurchase agreements, a similar transaction. See fig. 9 for more information.
Page 35 GAO-06-269 Debt Management

Increasing the earnings on excess cash balances is another way to narrow 

the negative funding spread. Figure 9 below describes steps Treasury has 

taken to increase earnings on its excess cash balances.

Figure 9: Steps Taken in Recent Years to Increase the Rate Paid on Treasury’s Cash 

Balances 

a

Federal Register, vol. 64, no. 146 (July 30, 1999), pp. 41748–41749.

b

Federal Register, vol. 67, no. 51 (Mar. 15, 2002), pp. 11573–11577.

c

Kenneth D. Garbade, John C. Partlan, and Paul J. Santoro, “Recent Innovations in Treasury Cash 

Management,” Current Issues in Economics and Finance, vol. 10, no. 11, Federal Reserve Bank of 

New York (November 2004).

CM Bills Are Generally Less 

Costly than Issuing Longer-term 

Regular Securities

To make large payments when cash balances are low, Treasury can issue a 

CM or a regular Treasury bill, although as explained earlier Treasury tries 

to limit changes in the size of regular bill issuance from week to week. 

When comparing the cost of a CM bill with the cost of a 4-week bill—the 

regular bill with the shortest maturity—we see that the CM bill is generally 

less costly for shorter-term needs (i.e., less than 28 days) despite its higher 

Source: GAO analysis.

In the late 1990s, Treasury considered changing the rate paid on TT&L balances

but banks objected. The TT&L rate—the federal funds rate less 25 basis points—

was set in 1978 and originally intended to reflect the rate paid on overnight

repurchase agreements, a similar transaction. However, repurchase agreement 

rates were not widely reported in the 1970s and the average spread between the 

federal funds rate and overnight repurchase agreements declined to less than 5 

basis points from 1990 to 1999. In 1999, Treasury proposed to set the TT&L rate 

equal to the repurchase agreement rate, which would in effect increase the amount 

Treasury earned on its cash balances and reduce its negative funding spread.a 

However, banks argued that the 25 basis points were necessary and appropriate 

compensation for the operational cost of collateralizing Treasury balances and 

reflected the value of the option granted to Treasury to call its balances at any time.b

Treasury decided not to change the rate paid on TT&L accounts.

In 2002, Treasury introduced the Term Investment Option (TIO) program, which is

intended to add investment capacity to the TT&L program and to increase the rate 

that Treasury earns on invested funds. Through TIOs, Treasury places excess cash 

with TT&L depositaries for a defined term, which can vary. (In fiscal year 2005, the 

terms varied from 1 to 17 days.) The rate is determined through a competitive 

auction process and has resulted in higher interest earned than in the TT&L 

program. According to Federal Reserve researchers, Treasury earned more—an 

average of 17 basis points—on balances in TIOs than it would have in the TT&L 

accounts between April 2002 and April 2004.c
Page 36 GAO-06-269 Debt Management

yield. While the 4-week bill may have a lower yield, the amount borrowed 

is generally outstanding for a longer period. For example, Treasury issued 

a CM bill on June 3, 2005, for $16 billion. The daily cost of borrowing was 

about $1.3 million. If Treasury had borrowed $16 billion using the 4-week 

bill issued the day before, the daily borrowing cost would have been only 

$1.2 million but the amount would have been outstanding for 16 days 

longer and cost an additional $18.4 million (see table 3). However, the 

extra cost of the 4-week bill would be partially offset by the amount earned 

on cash balances. 

Table 3: Illustrative Comparison of 4-week and CM Bill Borrowing Costs

Source: GAO analysis of BPD data.

a

This refers only to interest payments and excludes earnings on any excess cash balances.

Note: The illustrative example shown above uses the actual yields paid on the 4-week bill issued on 

June 2, 2005, and the CM bill issued on June 3, 2005. However, for comparability, we assumed bills of 

equal amounts (the actual amount of the 4-week bill issued on June 2, 2005, was $20 billion). In 

reality, the yield would be affected by the amount offered.

To compare the total cost of the 4-week bill with the cost of a CM bill 

requires also looking at what happens to the cash that would have been 

used to pay the maturing CM bill. CM bills are typically issued in months 

with midmonth cash inflows. If Treasury issued a 4-week bill instead of a 

CM bill in these months, these midmonth cash flows could be held in TT&L 

accounts.48 However, since Treasury generally earns less on excess cash 

balances than it pays to borrow, the additional borrowing costs associated 

with the 4-week bill may not be completely offset.

Amount borrowed 

(billions of dollars)

Term 

(days)

Yield

(percent)

Daily cost of borrowing 

(millions of dollars) 

Total cost of borrowinga 

(millions of dollars)

4-week bill $16 28 2.784 $1.2 $34.1 

CM bill 16 12 2.979 1.3 15.7 

Difference (4-week

bill - CM bill) $18.4

48Excess cash balances could also be invested in TIOs, which typically earn more than TT&L 

accounts. As discussed later in this report, increasing balances in TIOs relative to the TT&L 

accounts would help Treasury increase earnings on its cash balances and may ultimately 

reduce the use of some CM bills. Excess cash balances could also be used to reduce other 

Treasury debt, however, in general, Treasury limits week-to-week changes in the issue size 

of its regular bills.
Page 37 GAO-06-269 Debt Management

Treasury Has Refined 

Its Use of CM Bills but 

Costs Have Begun to 

Increase

Treasury has taken steps to reduce use and overall cost of CM bills. 

Lowering borrowing costs of CM bills could be achieved by combinations 

of reducing the dollar amount issued or reducing the term to maturity (i.e., 

the number of days outstanding). Recognizing that CM bills were a 

relatively costly way to absorb cash balance swings, Treasury introduced 

the 4-week bill in 2001 to help reduce the use of CM bills. Treasury has also 

increasingly issued CM bills in multiple tranches, which contributes to 

smaller average issues, shorter terms to maturity, and lower total 

borrowing costs. Borrowing costs declined in 2002 as Treasury reduced 

the use of CM bills for longer-term borrowing (i.e., 28 days or more) and 

short-term rates declined. However, borrowing costs associated with CM 

bills have increased since 2003.

Treasury Initially Reduced 

the Amount of CM Bill 

Issuance Following the 

Introduction of the 4-week 

Bill

Treasury has reduced reliance on CM bills since 2001. Initially, Treasury 

reduced the total amount of CM bills issued by more than half from $346 

billion in fiscal year 2001 to only $124 billion in fiscal year 2002 (see fig. 10). 

This was the lowest amount issued in the previous 6 years. The decline in 

CM bill issuance, however, was only temporary. Since 2002, Treasury has 

increased its use of CM bills and in fiscal year 2005, Treasury issued $268 

billion in CM bills. 
Page 38 GAO-06-269 Debt Management

Figure 10: Amount of CM Bill Issuance (Fiscal Years 1996–2005)

In 2001, Treasury said that CM bills were not the most cost-efficient means 

to absorb cash balance swings. At that time, the yield differential was 

about 47 basis points and the amount of CM bills issued was about 20 

percent of Treasury’s short-term financing. Treasury introduced the 4-week 

bill in 2001 to help reduce the need for CM bills by helping to smooth 

swings in cash balances. In general, shorter-term securities provide 

Treasury greater flexibility to adjust cash balances and outstanding debt in 

response to actual cash needs. From fiscal year 2002 through 2005, CM 

bills represented only 7 percent on average of Treasury’s short-term debt 

issuance. However, according to Treasury, the ability of the 4-week bill to 

absorb cash balance swings is limited to swings in cash balances that are 

longer than the two-week cash financing gap at the beginning of most 

months.

Issuing CM Bills in Multiple 

Tranches Has Helped 

Reduce Borrowing Costs

Treasury has taken steps to borrow cash closer to the day it is needed, 

which contributes to smaller average issues, shorter terms to maturity, and 

lower borrowing costs. Since 2003, Treasury has increasingly issued CM 

bills in multiple tranches—successive shorter-term CM bills that mature on 

the same day. For example, instead of issuing one $30 billion or $40 billion 

0

50

100

150

200

250

300

350

400

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Source: GAO analysis of BPD data.

Dollars in billions

4-week bill introduced in July 2001

Fiscal year

$268

$247

$175

$124

$346

$227 $235

$176 $164

$275
Page 39 GAO-06-269 Debt Management

CM bill on the 1st that matured on the 15th, Treasury might issue three 

smaller CM bills on the 1st, 3rd, and 7th (all matured on the 15th). As 

mentioned earlier, issuing in multiple tranches may increase the rate paid, 

but it allows Treasury to borrow closer to the time when cash is needed and 

ultimately reduces borrowing costs by reducing the average term to 

maturity and annualized amount outstanding. Table 4 shows how issuing in 

multiple tranches would have reduced borrowing costs in June 2005.

Table 4: Illustrative Effect of Issuing CM Bills in Multiple Tranches on Borrowing 

Costs

Source: GAO analysis.

Note: The illustrative example shown above assumed Treasury would pay the same discount rate on 

one CM bill as it did on the first part of the multiple tranche. In reality, the discount rate would be 

different because the rate depends on the amount auctioned, among other things. When considering 

Treasury’s total borrowing cost, the earnings on excess cash balances held from the 1st–7th would 

partially offset borrowing costs.

The move toward multiple tranches has led to smaller CM bill issues on 

average. Figure 11 shows that the average CM bill issue has declined by 

more than half since 2001. 

Amount borrowed

(billions of dollars)

Term

(days)

Borrowing cost 

(millions of dollars)

Multiple tranches

 June 1, 2005 $10 14 $11

 June 3, 2005 16 12 16

 June 7, 2005 12 8 8

Total 38 34

Single tranche

 June 1, 2005 38 14 43 

Total difference

 (Multiple-Single) -$8
Page 40 GAO-06-269 Debt Management

Figure 11: Average Size of CM Bills Issued (Fiscal Years 1996-2005)

Following introduction of the 4-week bill in 2001, Treasury reduced the use 

of CM bills for longer-term borrowing (i.e., 28 days or more). Figure 12 

shows that Treasury has reduced the average term to maturity (i.e., length 

of time outstanding) for CM bills issued by about half since 2001. Prior to 

fiscal year 2002, Treasury issued CM bills with terms as long as 83 days. 

Since 2002, the longest maturing CM bill was 19 days.

0

5

10

15

20

25

30

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Source: GAO analysis of BPD data.

Dollars in billions

Fiscal year

$13

$16 $15

$18

$29

$23

$21

$25

$18

$16
Page 41 GAO-06-269 Debt Management

Figure 12: Weighted Average Term to Maturity of CM Bills (Fiscal Years 1996–2005)

Note: Term to maturity of each CM bill is weighted by the amount issued. Because CM bill issuance 

amounts vary, the weighted average maturity of CM bills was calculated in order to reflect each CM 

bill’s relative importance in the total amount issued during the period.

Lower average issue sizes together with the reduced term to maturity 

contributed to lower borrowing on an annual basis (see fig. 13). After 

Treasury introduced the 4-week bill in 2001, the annualized amount of CM 

bills outstanding declined dramatically from $19.2 billion in fiscal year 2001 

to $3.3 billion in fiscal year 2002. However, since then the amount has 

generally increased as Treasury increased the use of CM bills to finance 

intramonth cash financing gaps. From fiscal year 2003 to fiscal year 2004, 

the annual amount outstanding more than doubled to $8.1 billion. Treasury 

issued a similar amount of CM bills in fiscal year 2005.

0

5

10

15

20

25

30

35

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Source: GAO analysis of BPD data.

Number of days

Fiscal year

11

12

8

10

20

33

29

33

28

25
Page 42 GAO-06-269 Debt Management

Figure 13: Annualized Amount Outstandinga (Fiscal Years 1996–2005)

a

The annualized amount outstanding is derived by spreading each CM bill across the 365-day year. So, 

for example, a 14-day CM bill with a face value of $25 billion is multiplied by 0.038 (= 14/365) resulting 

in an annualized amount outstanding of $959 million.

Borrowing Costs Declined 

Dramatically in 2002 but 

Have Since Increased

While Treasury’s actions from fiscal years 2001 to 2002 reduced CM bill 

borrowing costs, overall declining interest rates also helped. Borrowing 

costs began declining in 2001 and dropped dramatically in 2002 (see fig. 

14). Treasury’s smaller CM bill issuances and reduced term to maturity 

helped reduce the annual amount outstanding. According to our analysis, 

these actions taken by Treasury contributed to about $610 million of the 

reduction in borrowing costs from 2001 to 2002. We estimated that the 

remaining decline was due to reductions in the yield paid on CM bills. As 

noted earlier the yield differential varies with the overall level of short-term 

yields in the economy. As these yields declined so did the yield 

differential—by 43 basis points from fiscal year 2001 to 2002. 

0

5

10

15

20

25

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Source: GAO analysis of BPD data.

Dollars in billions

Fiscal year

$8.1 $8.0

$3.9 $3.3

$19.2

$20.3

$18.8

$15.7

$12.4

$18.5

4-week bill introduced in July 2001
Page 43 GAO-06-269 Debt Management

Figure 14: Total Borrowing Costs Associated with CM Bills (Fiscal Years 1996–2005)

However, since 2003 the borrowing costs associated with CM bills have 

increased. Our analysis indicates that almost all of the increase in CM bill 

borrowing costs is due to increasing rates. While Treasury cannot control 

the overall level of short-term interest rates in the economy, it can continue 

to take steps to reduce the use of CM bills and, according to our analysis, 

the CM bill yield differential.

Options Exist That May 

Reduce the Use and 

Cost of CM Bills

We identified a range of options that may reduce the use or cost of CM bills. 

The most promising options in our view—exploring ways to better align 

cash flows and increasing the earnings on cash balances—are discussed 

first. Other options, such as introducing a new shorter-term regular bill and 

enhancing the transparency of CM bill auctions, are discussed later. 

Better Aligning Cash Flows 

Might Reduce Cash 

Financing Gap

Given that Treasury has increasingly used CM bills to fill regular cash 

financing gaps, taking steps to better align large cash flows might help 

reduce the use of CM bills. There are three ways to do this: smoothing the 

payment of large federal expenditures, smoothing the payments of 

corporate and nonwithheld individual tax payments, and aligning increased 

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Source: GAO analysis of BPD data.

Dollars in billions

Fiscal year

$0.22

$0.09 $0.06 $0.05

$1.06

$1.17

$0.91

$0.85

$0.66

$0.99
Page 44 GAO-06-269 Debt Management

debt issuance with large payments. If cash flows had been aligned to better 

fill the frequent cash financing gaps, Treasury may not have needed the 11 

CM bills it issued on the 1st through the 3rd of the month that matured on the 

15th of the month during fiscal year 2005 and could have reduced CM bill 

borrowing cost by as much as $174 million or about 80 percent in fiscal 

year 2005.49 

Statutory and regulatory changes would be required to change the timing of 

federal benefit payments and tax collections. While implementing any 

changes is outside debt managers’ control, Treasury could start a 

discussion with other agencies and Congress to identify the costs and 

benefits of alternatives to align or more evenly distribute federal 

expenditures and tax receipts and seek any statutory authority necessary 

to better smooth them. However, changing the timing of benefits and tax 

collections, either jointly or independently, will have direct and indirect 

effects not only on borrowing costs but also on individuals, nonfederal 

entities, and federal government operations. These of course, would have 

to be considered when making decisions about whether and how to smooth 

federal cash flows. Looking at SSA’s experience with spreading the 

payments for new Social Security beneficiaries throughout the month may 

be useful. 

Treasury could also explore aligning increased borrowing capacity with 

large payments in the beginning of the month to help reduce the cash 

financing gap and reduce the use of some CM bills. Overall borrowing 

needs are projected to be significant and grow over the long term and 

Treasury will need to consider changes to its debt portfolio and auction 

schedule to increase borrowing. Cash flow considerations can be a 

tiebreaker when choosing between equally attractive alternatives. In the 

past, when making changes to the range of maturities offered, Treasury has 

considered aligning cash inflows with outflows in the beginning of the 

month. Going forward, Treasury may reduce its reliance on CM bills—at 

least temporarily—by continuing to consider adjustments that would better 

align its increased debt issuance with its largest cash payments in the 

beginning of the month. 

49This interest savings estimate does not take into account all the benefits and costs that 

should be considered including costs imposed on individuals, businesses, and other 

nonfederal entities.
Page 45 GAO-06-269 Debt Management

Increasing Earnings on Cash 

Balances Would Reduce the 

Costs Associated with 

Running Higher Cash 

Balances to Avoid Issuing 

CM Bills

Currently, Treasury faces a negative funding spread and as a result it is 

more costly to maintain high cash balances to meet upcoming payments 

than issue a CM bill. However, increasing the earnings on cash balances 

would reduce the costs associated with running higher cash balances and 

may ultimately reduce the use of some CM bills. Treasury previously 

explored increasing the rate earned on TT&L accounts; however, banks 

objected. Since then, Treasury introduced the TIO program,50 which pays 

higher rates on cash balances than the TT&L program. Increasing balances 

in TIOs relative to the TT&L accounts would help Treasury increase 

earnings on its cash balances. However, Treasury would lose some 

flexibility because TIO balances are not callable in the event cash balances 

unexpectedly fall below cash needs.

Treasury could also explore broader options to increase earnings on cash 

balances. For example, some countries’ debt management offices engage 

in reverse repurchase agreements. In a reverse repurchase agreement, 

Treasury would lend market participants cash to purchase securities in the 

secondary market. The borrower would then return the cash borrowed 

plus interest at a specified time, usually overnight. Reverse repurchase 

agreements could potentially narrow Treasury’s negative funding spread 

because repurchase agreement rates are generally higher than rates earned 

on TT&L accounts. Treasury could explore the benefits and cost of 

designing a new system to perform these transactions but implementing 

reverse repurchase agreements would require legislative authority 

according to Treasury. 

Shorter-term Regular Bills 

Might Reduce the Need for 

Some CM Bills

Another way to smooth cash flows would be to introduce a shorter-term 

instrument. The 4-week bill was partially successful in smoothing cash 

flows throughout the year and reducing the use of CM bills. However, in 

recent years, Treasury has increasingly used CM bills to fill cash financing 

gaps that frequently occur in the first two weeks of the month. Introducing 

a regular shorter-term bill might help fill the frequent cash financing gap 

and reduce the use of CM bills further. A new bill that matures on 

Thursdays like other regular bills would not give the Treasury the same 

flexibility as CM bill issuance because the beginning-of-month outflows and 

midmonth inflows often fall on different days of the week. Alternatively, a 

50Fig. 9 provides more information on Treasury’s TIO program.
Page 46 GAO-06-269 Debt Management

new short-term security with specific issue and redemption dates (rather 

than day of the week) might help the Treasury manage cash flow gaps.

In Treasury’s view, a shorter-term security would not likely generate market 

interest in a way that would distinguish it, on a cost basis, from CM bills. 

However, our analysis of CM and similar-maturing outstanding bills in the 

secondary market shows that buyers pay higher prices (or accept a lower 

yield) for short-term bills than Treasury currently accepts (or pays) for CM 

bills. Market participants we spoke with expressed mixed views on the 

demand for another short-term Treasury security. While some said there 

may not be enough demand for a short-term instrument, others said that 

bills maturing on the 15th, for example, would have natural buyers and give 

investors more flexibility by offering another maturity date for short-term 

instruments. Our analysis shows that CM bills maturing on the 15th of 

months when tax payments are due likely have lower yields than CM bills 

maturing on other days. Treasury can examine whether it would obtain 

better prices on a shorter-term bill with issue and maturity dates on specific 

days of the month.

Enhancing Transparency of 

CM Bill Auctions May 

Reduce CM Bill Yields

Increased transparency on the potential size of CM bills might improve 

bidding in CM bill auctions and potentially reduce the yield Treasury pays 

on CM bills. While market participants might expect Treasury to issue CM 

bills in the beginning of the month, market participants told us that they do 

not always know the size of the CM bill offering. As a result, they may not 

bid as aggressively. However, there are tradeoffs to consider. In order to 

provide market participants more advanced notice on the general size and 

timing of CM bills, Treasury would have to improve its own cash 

forecasting. Also, Treasury achieves lowest-cost financing in part by 

providing the market with certainty. Trying to add certainty to CM bill 

issuance would eliminate the benefit of flexibility they provide and may 

actually increase borrowing costs.
Page 47 GAO-06-269 Debt Management

Relaxing the 35-percent Cap 

on CM Bill Auction Awards 

May Reduce CM Bill Yields

Treasury limits the maximum auction award to a single bidder to 35 percent 

of the total amount offered to the public.51 The 35-percent cap is intended, 

in part, to foster a liquid secondary market for a new issue by ensuring 

adequate and wide distribution of the supply of a security among investors 

and prevent temporary shortages or “short squeezes.” However, our 

analysis suggests that relaxing the 35-percent rule for CM bill auctions (and 

thus allowing higher concentration) might promote more aggressive 

bidding, improve auction prices for Treasury, and thus reduce the 

borrowing costs associated with CM bills. There are a number of issues to 

explore. For example, market participants may come to expect poorer 

liquidity for CM bills, which may lead to less aggressive bidding over time. 

Further, there would be a higher risk of a squeeze in the CM bills market, 

although the risk would be relatively small in our view because CM bill 

trading is sparse both before auctions and after auctions according to our 

analysis. (See app. II for more information.) Treasury could explore 

adjusting the per-bidder cap on an experimental basis and determine 

whether there are benefits of relaxing the existing 35-percent rule in CM 

bill auctions.

Exploring Other Countries’ 

Short-term Cash and Debt 

Management Practices May 

Provide Useful Insights

Lastly, exploring other countries’ practices may provide useful insights. 

For example, other countries’ debt management offices use repurchase 

agreements as a tool to support their cash management. Exploring other 

countries’ experiences may provide insights on the benefits and costs of 

repurchase agreements for a central government. Although repurchase 

agreements generally have slightly higher yields than CM bills, they provide 

an alternative way to obtain cash for short periods, usually overnight. In 

fiscal year 2005, Treasury announced that it was examining the feasibility 

of a securities lending facility, which would operate much like a repurchase 

agreement. Although this facility is still in its early proposal process, 

Treasury generally intends to lend securities that are in such short supply 

that they may threaten the settlement of Treasury market transactions in a 

timely manner. In return, Treasury would receive cash or bonds. While 

Treasury intends borrowers to use this facility at their discretion and does 

not plan to use it for Treasury’s own cash needs, it might also consider how 

51This is based on a complicated formula that takes into account the bidder’s “reportable net 

long position” in the security. For more information on this and auction mechanics, see 

Kenneth D. Garbade and Jeffrey F. Ingber, “The Treasury Auction Process: Objectives, 

Structure and Recent Adaptations,” Current Issues in Economics and Finance, Federal 

Reserve Bank of New York, vol. 11, no. 2 (February 2005). 
Page 48 GAO-06-269 Debt Management

the facility would affect its cash balances and whether the lending facility 

could be used to obtain cash for very short periods. 

Conclusion In the face of persistent federal deficits and growing net interest costs, 

reexamining debt management practices is warranted. Treasury has made 

progress toward reducing the cost of CM bills, but it may be possible to do 

more. This report presents options worth exploring that taken alone or in 

combination may further reduce federal borrowing costs by reducing either 

the use or the cost of unscheduled CM bills. CM bills will continue to be a 

necessary debt management tool to meet unexpected cash needs when 

Treasury has low cash balances or when Treasury is nearing the debt 

ceiling. However, in recent years, Treasury has increasingly used CM bills 

to fill cash financing gaps that frequently occur in the first two weeks of the 

month. Our analysis indicates that the yield differential between CM bills 

and outstanding bills of similar maturity has increased as short-term rates 

have risen. If these rates rise further, as market participants expect, and 

return to levels consistent with a longer-term historical average, the CM bill 

yield differential is likely to rise above levels seen in recent years. While 

Treasury does not vary its debt management strategy in response to 

changing interest rates, it should be mindful that increasing rates are likely 

to raise the relative cost of unscheduled CM bills. As a result, Treasury 

should consider options, including better aligning cash flows and 

increasing earnings on cash balances, that may reduce the frequent use of 

CM bills and ultimately overall borrowing costs. 

Recommendation for 

Executive Action

We identified options that could potentially reduce the use and cost of CM 

bills. We recommend that Treasury explore options such as those 

discussed in this report and any others it identifies that may help Treasury 

meet its objective of financing the government’s borrowing needs at the 

lowest cost over time. We recognize that there are a number of tradeoffs to 

consider. In its exploration, Treasury should consider the costs and 

benefits of each option and determine whether the benefits—in the form of 

lower borrowing costs—to the federal government (and so to taxpayers) 

outweigh any costs imposed on individuals, businesses, and other 

nonfederal entities. Treasury should also consider how options may be 

combined to produce more beneficial outcomes.

Implementing some of these options would require changes to statute or 

regulations. If Treasury determines that any of these changes would be 
Page 49 GAO-06-269 Debt Management

beneficial, we encourage Treasury to begin discussions with relevant 

federal agencies and the Congress about obtaining the necessary 

authorities.

Agency Comments We requested comments on a draft of this report from Treasury and the 

Federal Reserve. In oral and written comments, Treasury generally agreed 

with our findings, conclusions, and recommendations. Treasury said that it 

is committed to continuing to explore ways to further reduce financing 

costs through changes in the use of CM bills and that many of the options 

we identified are embodied in its current debt management policy. 

Treasury emphasized that statutory authority is needed for some options, 

particularly changing the timing of receipts and expenditures and 

improving earnings on excess cash balances. Treasury also suggested 

some technical changes throughout the report that we have incorporated 

as appropriate. Treasury’s comments appear in appendix IV. In addition, 

the Federal Reserve Board provided technical comments that we 

incorporated as appropriate.

As you know, 31 U.S.C. § 720 requires the head of a federal agency to 

submit a written statement on actions taken to address our 

recommendations to the Senate Committee on Homeland Security and 

Governmental Affairs and to the House Committee on Government Reform 

not later than 60 days after the date of this report. A written statement must 

also be submitted to the House and Senate Committees on Appropriations 

with the agency’s first request for appropriations made more than 60 days 

after the date of this report. Because agency personnel serve as the primary 

source of information on the status of recommendations, we request that 

the agency also provide it with a copy of your agency’s statement of action 

to serve as preliminary information on the status of open 

recommendations.

We are sending copies of this report to the Chairs and Ranking Members of 

the House Committee on Ways and Means, the Senate Committee on 

Finance, the House Committee on Financial Services, the Senate 

Committee on Banking, Housing and Urban Affairs, and other interested 

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

addition, the report will be available at no charge on GAO’s Web site at 

http://www.gao.gov. If you or your staff have any questions about this 

report please contact Susan J. Irving at (202) 512-9142 or irvings@gao.gov
Page 50 GAO-06-269 Debt Management

or Thomas J. McCool at (202) 512-2700 or mccoolt@gao.gov. Contact 

points for our Offices of Congressional Relations and Public Affairs may be 

found on the last page of this report. GAO staff making key contributions 

to this report are listed in appendix V.

Sincerely yours,

Susan J. Irving

Director, Federal Budget Analysis

Strategic Issues

Thomas J. McCool

Director, Center for Economics

Applied Research and Methods
Page 51 GAO-06-269 Debt Management

Appendix I

Detailed Methodology and Findings of Apendxies

Statistical Analysis of Cash Management Bill 

Yield Differential ApendxiI

To identify which cash management bill (CM bill) features, if any, explained 

the higher yields paid on CM bills, we performed a statistical analysis of CM 

bills issued during fiscal years 1996–2005. The dependent variable in the 

regressions was the difference between a CM bill’s investment yield at the 

time of auction and the investment yield on similar-maturity Treasury bills 

(i.e, the “yield differential”), where the latter is measured by the weighted 

average yield on Treasury securities that mature immediately before and 

after the CM bill.1

 We regressed the yield differential on key CM bill 

features including announcement period, term to maturity, issuance 

amount, and whether the CM bills were off-cycle or a reopening of a 

previous issue. We also examined the effects of CM bills with different 

issue and maturity dates, such as whether the CM bills were issued on the 

1st–3rd, matured on a large tax payment date, or were issued during a debt 

issuance suspension period (DISP). While we analyzed the yield differential 

for all CM bills issued during fiscal years 1996–2005, we focused on the 55 

CM bills issued during fiscal years 2002–2005 because the introduction of 

the 4-week bill in 2001 led to a significant reduction in the amount and term 

to maturity of CM bills and caused a structural change in the CM bill 

market. 

Our empirical results suggest that several variables affected the yield 

differential during the period studied. Lower yield differentials appeared to 

be associated with lower short-term interest rates, relatively low CM bill 

auction amounts, and maturity around large tax payment dates. There is 

also some evidence that CM bills have higher yields when issued in multiple 

tranches, which are successively issued CM bills with the same maturity 

date. Despite these findings, the opportunity for Treasury to achieve 

additional savings by further exploiting characteristics that affect CM bill 

yields appears limited. 

1

Similar measures, also called butterfly spreads, were used by Jason Seligman, “Does 

Urgency Affect Price at Market? An Analysis of U.S. Treasury Short-Term Finance,” Journal 

of Money, Credit, and Banking (forthcoming), pp. 6–8 and Michael J. Fleming, “Are Larger 

Treasury Issues More Liquid? Evidence from Bill Reopenings,” Journal of Money, Credit, 

and Banking, vol. 34, no. 3 (August 2002), p. 717.
Appendix I

Detailed Methodology and Findings of 

Statistical Analysis of Cash Management Bill 

Yield Differential

Page 52 GAO-06-269 Debt Management

Previous Research 

Based on Earlier Data 

Suggests Some CM Bill 

Features May Reduce 

Costs

The existing literature on CM bills and their costs is limited. In an early 

study of CM bills issued from 1980 through 1988, Simon found that from 1 

day before to 1 day after announcement, the average interest rate 

differential between CM bills and adjacent-maturity Treasury bills 

increased by 20 basis points to a statistically significant 28 basis points.2

 

An analysis of variance demonstrated that the increase in the differential 

was greater for CM bills that had shorter maturities, were part of larger 

issues, or had shorter when-issued periods.3

 In a later study, Simon found 

that from January 1985 through October 1991 CM bills cost about 6 basis 

points more than regular bills.4 There have been many fundamental 

changes in the way Treasury raises short-term cash since the article’s 

publication that may make its findings less applicable now. These changes 

include the move from multiple-price to single-price auctions, the growth 

of the repurchase agreement market and the prevalence of off-cycle CM 

bills. Most important was the addition of the 4-week Treasury bill to 

Treasury’s regular borrowing schedule in 2001, which led to a significant 

reduction in the amount and term to maturity of CM bills. 

In a study of the effect of reopenings on the liquidity of Treasury bills, 

Fleming included a binary variable identifying CM bill reopenings.5

 

Fleming studied Treasury bills issued from 1996 to 2000 and found that 

reopenings of any kind had a positive and significant effect on yields. 

Moreover, the CM bill variable was significantly positive for 13-week bills, 

demonstrating that regular bills reopened as CM bills tend to have higher 

yields. Fleming interpreted the results as showing that the yield-reducing 

effect of enhanced liquidity is more than offset by the yield-increasing 

effect of an increase in supply. 

In a recent paper, Seligman evaluated the differential between CM bill 

yields and the yields on Treasury bills with similar maturity dates.6

 

2

David P. Simon, “Segmentation in the Treasury Bill Market: Evidence from Cash 

Management Bills,” Journal of Financial and Quantitative Analysis, vol. 26, no. 1 (March 

1991), pp. 97–108.

3

The when-issued period runs from the CM bill’s announcement to its issuance.

4

David P. Simon, “Further Evidence on Segmentation in the Treasury Bill Market,” Journal 

of Banking and Finance, vol. 18 (1994), pp. 139–51.

5

Fleming, “Are Larger Treasury Issues More Liquid?” pp. 707–35.

6

Seligman, “Does Urgency Affect Price at Market?”
Appendix I

Detailed Methodology and Findings of 

Statistical Analysis of Cash Management Bill 

Yield Differential

Page 53 GAO-06-269 Debt Management

Seligman found that CM bills that were issued off-cycle or were large 

(relative to outstanding Treasury bills of similar maturity) had higher yields 

than other CM bills. In contrast, CM bills with longer durations or that had 

2-day notices before auction had lower yields than other CM bills. This 

study suggested that Treasury could reduce the yields of CM bills by 

avoiding off-cycle issuances, reducing their relative size, issuing CM bills 

with longer terms, and giving 2 days notice in advance of auctions. 

However, the data in Seligman’s study covered auctions held between 1990 

and 1999. Seligman’s sample did not cover more recent CM bill auctions 

that occurred since 2001 when the 4-week bill was introduced and only 

very short-term CM bills were issued. Hence, the findings of his study may 

not apply to the current environment.

In another recent study based predominantly on auctions held before the 

introduction of the 4-week Treasury bill, Christopher found that the cost of 

CM bills, as measured by the spread between CM bill and repurchase 

agreement yields, is negatively influenced by the time between the sale of a 

security and the settlement date.7

 The rationale offered for this finding is 

that the delay allows administrative efficiencies. Christopher, like 

Seligman, found that longer-maturity CM bills have lower yields than 

shorter maturities. She suggests that the optimum maturity of a CM bill is 

nearly 93 days. This finding highlights the inapplicability of earlier 

research to the current environment when 4-week Treasury bills are 

available to help meet short-term financing needs.8

Comparing CM Bill 

Yields with Secondary 

Market Yields on 

Similar-maturing 

Treasury Bills

Choosing the appropriate reference point for CM bill yields is important, 

and differed in earlier studies. Christopher focused on the difference 

between CM bill and repurchase agreement yields instead of the difference 

between yields on CM bills and Treasury bills with similar maturities, 

which was the focus of Simon’s earlier research, Seligman’s, and our own 

research. Although repurchase agreements and CM bills are both means to 

obtain cash in the short-term, they have a major difference—CM bills, like 

7

Jan E. Christopher, “Determinants of the Spread between Repo and Cash Management Bill 

Yields: Technical Report,” unpublished manuscript (2005).

8

Christopher (ibid., p. 21) uses principal components analysis to estimate the share of the 

variation in the yield differential explained by different factors from 2001 through 2004, but 

does not show the effect on the yield differential in terms of basis points or whether the 

effect is positive or negative.
Appendix I

Detailed Methodology and Findings of 

Statistical Analysis of Cash Management Bill 

Yield Differential

Page 54 GAO-06-269 Debt Management

regular Treasury bills, are risk free whereas repurchase agreements issued 

by private borrowers involve some risk. As a result, we focus on the 

difference between CM bill and outstanding Treasury yields because it 

provides a more direct indicator of the higher yield that Treasury pays 

when issuing CM bills. Financial market analysts we spoke with agreed 

that this yield differential measure was an appropriate focus for our 

research.

Specifically, our estimate of the yield differential is the difference between 

a CM bill’s yield and the average secondary-market yield on other Treasury 

bills that are most similar (in terms of maturity) to the CM bill on the day of 

auction. That is, we compare CM bill yields with yields on the two nearestmaturing—one before and one after—Treasury bills.9

 CM bill yields were 

obtained from the Bureau of the Public Debt (BPD) while rates on similarmaturity outstanding Treasury bills were obtained from the Wall Street 

Journal (WSJ). For each Treasury bill, the bid and ask rates were 

converted to yields and averaged. Next, the weighted average yield for the 

two bills nearest in maturity to the CM bill was derived. The weights were 

based on the relative difference in each bill’s maturity date from that of the 

CM bill, with the Treasury bill having a closer maturity date receiving a 

greater weight and the weights summing to one. In the final step, the 

weighted average Treasury bill yield was subtracted from the CM bill 

auction yield to obtain the yield differential.

There are limitations of our yield differential estimate. For example, any 

effect from the announcement of CM bills on yields for similar-maturing 

bills is not captured. If the announcement of a CM bill increased the yield 

on similar-maturing bills, then our estimate may be understated. Also, in 

some cases, the surrounding Treasury bills we used could include CM bills 

that were reopenings of regular Treasury bills. This would also lead to an 

understatement of the yield differential because the yield on the 

outstanding securities including CM bills would be higher than outstanding 

securities that did not include CM bills. However, few CM bills issued in 

fiscal years 2002–2005 were reopenings. Alternatively, if the yield curve 

were upward sloping and concave, the curvature of the yield curve would 

9

In some cases the surrounding Treasury bills we used could include CM bills. In this sense, 

our methodology differs from Seligman’s, which always compared CM bills with the two 

nearest-maturity regular bills that did not include CM bills. By including some CM bills, the 

yield differential may be slightly understated because the yield on the outstanding securities 

including CM bills would likely be higher than outstanding securities that did not include 

CM bills. 
Appendix I

Detailed Methodology and Findings of 

Statistical Analysis of Cash Management Bill 

Yield Differential

Page 55 GAO-06-269 Debt Management

result in a positive estimate of the spread even before considering the 

effects of other factors and create a positive bias in our calculation of the 

yield differential.

The Introduction of the 

4-week Treasury Bill 

Reduced CM Bill 

Maturities and Their 

Relative Importance in 

Short-term Financing

Table 5 provides data on key attributes of CM bills, many of which we used 

in an attempt to explain the yield differential. The table divides the data 

into two subperiods. The first subperiod covers auctions held from fiscal 

year 1996 through fiscal year 2001 before the introduction of the 4-week 

Treasury bill, while the second subperiod includes auctions held from fiscal 

year 2002 through fiscal year 2005 after the 4-week bill’s introduction. 

Table 5: Key Features of CM Bills before and after the 4-week Treasury Bill’s Introduction

Pre-4-week Treasury Bill

 (Fiscal years 1996–2001)

Post-4-week Treasury Bill

 (Fiscal years 2002–2005)

Number of CM bill auctions: 66 Number of CM bill auctions: 55

Mean Maximum Minimum Mean Maximum Minimum

CM bill yield (percent) 5.36 6.56 3.82 1.76 3.52 0.91

Yield on outstanding bills with similar maturity 

(percent) 5.01 6.38 3.34 1.67 3.47 0.79

CM bill yield less yield on outstanding bills with 

similar maturity (percent) 0.350 1.086 -0.038 0.091 0.553 -0.035

Percent difference between CM bill yield and 

yield on outstanding bills with similar maturity 7.3 21.2 -0.7 6.0 35.3 -3.7

Repurchase agreement yield (percent) 5.39 6.57 3.99 1.76 3.53 0.94

CM bill term to maturity (days) 27.4 83 1 9.6 19 2

Amount of CM bills issued (dollars in billions) 21.6 42 6 14.8 32 4

Ratio of bids tendered to the amount of CM bills 

issued (i.e., the bid-to-cover ratio) 2.9 5.3 1.5 3.2 5.9 1.7

Average amount of outstanding bills with similar 

maturity (dollars in billions) 33.1 66.8 21.1 65.9 86.6 52.9

CM bill issued as a percent of outstanding bills 

with similar maturity 68.7 136.7 17.2 23.0 50.4 5.6

Number of days from announcement to auction 2.4 9 1 1.5 4 0

Portion of CM bills auctioned during DISPa 

(percent) 12.1 n.a. n.a. 20.0 n.a. n.a.
Appendix I

Detailed Methodology and Findings of 

Statistical Analysis of Cash Management Bill 

Yield Differential

Page 56 GAO-06-269 Debt Management

Source: GAO analysis of data from BPD and WSJ.

Note: n.a. = not applicable.

a

Binary variable.

Table 5 highlights the significant difference in CM bill maturities between 

the two subperiods. For the 66 CM bills auctioned in fiscal years 1996 

through 2001, the average maturity exceeded 27 days while the longestmaturity CM bill had a term of 83 days. In contrast, in the 55 CM bill 

auctions held from fiscal year 2002 through 2005 the average maturity of 

the CM bills was only 9.6 days while the longest-maturity CM bill had a term 

of 19 days. In the more recent period even the maximum maturity of 19 

days was much shorter than the average maturity of 27.4 days during the 6 

years before 4-week Treasury bills were introduced. 

Treasury also reduced its reliance on CM bills for short-term financing after 

2001. The average dollar amount of CM bills issued at each auction 

declined from $21.6 billion in fiscal years 1996 through 2001 to only $14.8 

billion in fiscal years 2002 through 2005. In contrast, Treasury increased 

issuance of regular short-term Treasury bills. Before fiscal year 2002 the 

average amount of outstanding Treasury bills with similar maturities to 

Portion of CM bills issued on 1st–3rd days of 

montha (percent) 63.6 n.a. n.a. 49.1 n.a. n.a.

Portion of CM bills maturing on tax due datea

(percent) 21.2 n.a. n.a. 49.1 n.a. n.a.

Portion of CM bills issued on 1st–3rd days of 

month that mature on tax due datea

 (percent) 18.2 n.a. n.a. 30.9 n.a. n.a.

Portion of CM bills maturing April 15–30a 

(percent) 33.3 n.a. n.a. 20.0 n.a. n.a.

Portion of CM bills maturing on tax days other 

than April 15a

 (percent) 18.2 n.a. n.a. 38.2 n.a. n.a.

Portion of CM bills issued off-cyclea (percent) 39.4 n.a. n.a. 85.5 n.a. n.a.

Number of days from CM bill maturity to end of 

month 8.2 14 1 10.3 17 3

Days from auction to settlement 1.6 5 0 1.3 3 1

Portion of CM bills in a multiple tranchea (percent) 30.3 n.a. n.a. 49.1 n.a. n.a.

Tail: high minus median discount rate (percent) .022 .100 .000 .013 .040 .000

Portion of CM bills auctioned on Wednesday and 

maturing after end of montha (percent) 12.1 n.a. n.a. 7.3 n.a. n.a.

(Continued From Previous Page)

Pre-4-week Treasury Bill

 (Fiscal years 1996–2001)

Post-4-week Treasury Bill

 (Fiscal years 2002–2005)

Number of CM bill auctions: 66 Number of CM bill auctions: 55

Mean Maximum Minimum Mean Maximum Minimum
Appendix I

Detailed Methodology and Findings of 

Statistical Analysis of Cash Management Bill 

Yield Differential

Page 57 GAO-06-269 Debt Management

newly auctioned CM bills was $33.1 billion. The average rose to 

$65.9 billion in the more recent period. As a result, newly auctioned CM 

bills averaged less than one-fourth of the average amount of outstanding 

Treasury bills with similar maturities during the more recent subperiod 

compared with three-fourths during the earlier subperiod. This reflects the 

importance of 4-week Treasury bills during the later period. 

Many of the features listed in table 5 were represented by binary variables 

set equal to 1 if a CM bill had the characteristic and 0 if it did not. Binary 

variables include: auction during a DISP, issuance on the 1st–3rd days of the 

month, maturation on a tax due date and a combination of issuance on the 

1st–3rd days and maturation on a large tax due date. Additional binary 

variables capture whether or not a CM bill matured between April 15 and 

the end of the month and whether or not a CM bill was part of a multiple 

tranche. For each binary variable, table 5 shows the percentage of CM bills 

that had a particular feature. Among the most notable change in these 

characteristics between the two subperiods was the more than twofold 

increase in the share of CM bills issued off-cycle from 39 percent to 

86 percent. 

Our Study Focused on 

CM Bills Issued during 

Fiscal Years 2002–2005

Because of the dramatic decrease in CM bill maturities and reduced 

reliance on CM bills for short-term financing after the introduction of the 

4-week bill, our effort to identify characteristics that might affect the yield 

differential focused on CM bill auctions held from fiscal years 2002 through 

2005. Column A of table 6 provides the estimated coefficients and 

summary statistics for an equation that includes attributes that have a 

significant effect on the yield differential. Using the same specification for 

the 66 CM bill auctions for the earlier period that extended from fiscal 

years 1996 through 2001 produced results that differ significantly from the 

estimates for the more recent period. Testing this specification for 

structural change using a Chow test resulted in an F-statistic of 5.18, which 

permitted us to reject the hypothesis that the relationship remained stable 

between the two periods at the .01 level of confidence. This test result 

provided support for our decision to focus on auctions held after the

4-week Treasury bill was introduced.
Appendix I

Detailed Methodology and Findings of 

Statistical Analysis of Cash Management Bill 

Yield Differential

Page 58 GAO-06-269 Debt Management

Table 6: Regressions Explaining the Yield Differential (Fiscal Years 2002–2005)

Source: GAO analysis.

Notes: Estimated using White heteroskedasticity-consistent standard errors and covariance. 

a

Significant at the 1 percent level. 

b

Significant at the 5 percent level.

c

Significant at the 10 percent level.

A B C D E

Variable Coefficient t-stat Coefficient t-stat Coefficient t-stat Coefficient t-stat Coefficient t-stat

C 0.001 0.04 -0.009 -0.24 -0.005 -0.13 0.019 0.37 -0.040 -1.21

CM bill issued as a 

percent of the 

average amount of 

similar-maturity 

Treasury bills 

outstanding 0.282a 3.30 0.253a 3.50 0.281a 3.31 0.268a 2.59 0.250b 3.14

CM bills maturing 

April 15–30 -0.118a -3.99 -0.122a -3.72 -0.116a -4.20 -0.115a -3.54 -0.125a -4.29

CM bills maturing on 

large tax due dates 

other than April 15 -0.117a -3.28 -0.119a -3.15 -0.115a -3.52 -0.113a -2.80 -0.125a -3.55

Treasury yield 0.038b 2.28 0.038b 2.30 0.037b 2.12 0.038b 2.20 0.044b 3.05

Multiple-tranche CM 

bills 0.060c 1.91 0.055b 2.00 0.059c 1.92 0.058c 1.77 0.042 1.48

Term to maturity 0.002 0.66

Days from auction to 

settlement 0.005 0.25

Off-cycle -0.018 -0.54

Number of days from 

announcement to 

auction 0.034b 2.56

Included 

observations: 55 55 55 55 55

R-squared 0.379 0.386 0.380 0.383 0.448

Adjusted 

R-squared 0.316 0.309 0.303 0.306 0.379

S.E. of regression 0.081 0.082 0.082 0.082 0.078

DW-Stat 1.793 1.794 1.810 1.792 1.808

Mean dependent var. 0.091 0.091 0.091 0.091 0.091

S.D. dependent var. 0.099 0.099 0.099 0.099 0.099
Appendix I

Detailed Methodology and Findings of 

Statistical Analysis of Cash Management Bill 

Yield Differential

Page 59 GAO-06-269 Debt Management

Yield Differential Is 

Positively Correlated 

with Level of Treasury 

Bill Yields

Our analysis suggests that investors may require a proportionate rather 

than an absolute differential as compensation for unscheduled CM bills. 

While previous research has not examined whether the yield differential is 

correlated with the overall level of Treasury bill yields, figure 8 in the main 

text indicates that the differential may tend to move in the same general 

direction as the level of secondary-market yields on Treasury bills with 

similar maturity. The estimated coefficient of the Treasury bill yield shown 

in column A of table 6 is 0.038, which suggests that a 1-percentage-point 

increase in the Treasury bill yield is associated with a 3.8-basis-point 

increase in the yield differential. During fiscal year 2005, for example, the 

average yield on Treasury bills with maturities comparable to newly 

auctioned CM bills was 2.42 percent and the yield differential averaged 13.5 

basis points. If the yields on comparable-maturity Treasury bills had been 5 

percent10 instead of 2.42, the results imply that yield differentials would 

have been about 10 basis points higher in fiscal year 2005 than they actually 

were. A continuation in the rise in Treasury bill yields that began in 2004 is 

therefore likely to result in an increase in the yield differential. 

Yield Differential Is 

Positively Correlated 

with Auction Amounts

Our results show that as the supply of a CM bill rises relative to the supply 

of similar investment alternatives, the relative price of the CM bill declines 

and the yield differential increases. The results for the 55 auctions held 

from fiscal years 2002 through 2005 suggest that the yield differential rises 

with an increase in the ratio of the amount of CM bills auctioned to the 

average amount of similar-maturity Treasury bills outstanding, as shown by 

the positive and significant coefficient of 0.282 for this variable. The 

variable’s significant positive coefficient is consistent with the results of 

Simon, Fleming, and Seligman. In studying the relationship between 

auction size and yields, Seligman noted that an increase in the relative 

amount of CM bills auctioned could have two opposite effects on their 

relative yields. On the one hand, a higher relative amount could increase 

liquidity and therefore reduce the yield differential. On the other hand, a 

higher yield differential might be necessary to attract sufficient investor 

interest when the amount of CM bills being auctioned is large relative to 

outstanding Treasury bills with similar maturities. Our results suggest the 

supply effect dominates.

10The yield on comparable-maturity Treasury bills averaged 5.01 from fiscal years 1996 

through 2001.
Appendix I

Detailed Methodology and Findings of 

Statistical Analysis of Cash Management Bill 

Yield Differential

Page 60 GAO-06-269 Debt Management

The estimated coefficient—0.282—of the average amount of similarmaturity Treasury bills outstanding implies that a $1 billion increase in the 

amount of CM bills auctioned would raise the yield differential 0.43 basis 

points in 2005, other things constant.11 This coefficient can also be used to 

indicate how much higher the yield differential might have been if CM bills 

had remained as important a source of short-term Treasury financing in 

fiscal year 2005 as they were in the years before the 4-week Treasury bill 

was introduced. Multiplying the coefficient of 0.282 by 0.687, which was 

the average ratio of the amount of CM bills to the average amount of 

similar-maturity Treasury bills from 1996 through 2001, rather than the 

actual 2005 ratio of 0.190 raises the yield differential 14 basis points. In 

other words, if CM bills were used as intensively in fiscal year 2005 as they 

were during earlier years before the 4-week Treasury bill’s introduction, the 

yield differential might have been 28 basis points in 2005 instead of the 

actual differential of 14 basis points.12 

Maturity on or around 

Large Tax Payment 

Dates Reduces Yield 

Differential

Our work suggests that maturity on or around a tax due date, which is a 

feature not studied in previous research, reduces the yield differential. 

Table 6 shows that there is a 12 basis point reduction for CM bills that 

mature from the 15th to the end of April. Similarly, CM bills that mature on 

tax due dates other than April 15 (i.e., the 15th of March, June, September, 

or December) tend to have lower yield differentials by nearly 12 basis 

points.13 This may be explained by empirical evidence suggesting that 

regular Treasury bills whose maturity dates immediately precede corporate 

tax payment dates have special value because corporate treasurers may 

wish to invest excess cash in securities whose cash flows can be used to 

liquidate cash liabilities.14

11This is the product of the coefficient and the inverse of $67.5 billion (average amount of 

similar-maturing Treasury bills for fiscal year 2005). 

12Because of the structural change in the relationship determining the yield differential, 

similar calculations cannot be applied to the period before the introduction of the 4-week 

Treasury bill.

13If the 15th fell on a holiday or weekend, the tax due date was the following business day.

14See Kenneth D. Garbade, “Treasury Bills with Special Value,” in Fixed Income Analytics

(Cambridge, Mass.: MIT Press, 1996).
Appendix I

Detailed Methodology and Findings of 

Statistical Analysis of Cash Management Bill 

Yield Differential

Page 61 GAO-06-269 Debt Management

CM Bills Issued in 

Multiple Tranches May 

Require Higher Yield 

Differentials 

Financial market participants informed us that CM bills issued in several 

tranches may lead to cautious bidding and therefore require higher yields 

to attract investors. Multiple-tranche CM bills are CM bills that are issued 

on different days within a short period that have the same maturity date. 

Previous research has not studied this feature of CM bills. Reliance on 

multiple-tranche CM bills increased from slightly less than one-third of 

issues in the earlier subperiod to approximately one-half of CM bills issued 

during fiscal years 2002–2005. To test whether multiple-tranche issues 

affect CM bill yields, we included a variable identifying this type of CM bills 

in the equation shown in table 6, column A. 

The results suggest that CM bills that are part of a multiple tranche might 

have yields that are 6.0 basis points higher than other CM bills. However, 

while the coefficient is significant at the 10 percent level, it is not 

significant at the 5 percent level.15 Moreover, the estimated multipletranche coefficient is not as robust as other coefficient estimates. For 

example, with the inclusion of a variable representing the number of days 

advance notice before auction in column E, the coefficient of multipletranche CM bills is no longer significant even at the 10 percent level. 

Accordingly, the evidence that multiple-tranche issues increase the yield 

differential should be viewed with caution. 

Yield Differential Is 

Not Affected by Timing 

of Issuance 

We also tested whether the issuance of CM bills on the 1st–3rd days of the 

month or during DISPs affected the yield differential. Because one-half of 

all CM bills were issued on the 1st–3rd days of the month in recent years, 

these issues might in some sense be considered more regular and thus 

require lower yields than CM bills issued at other times. However, the 

estimated coefficient of a variable identifying CM bills issued on the 1st–3rd

days of the month was insignificant.16 

CM bills have been a useful tool for Treasury when approaching the debt 

ceiling. From fiscal years 2002 through 2005, 20 percent of CM bills were 

issued during DISPs—a period for which the Secretary of the Treasury has 

determined that obligations of the United States may not be issued without 

15The probability value for the coefficient estimate is .06. 

16The probability value of the coefficient for CM bills issued on the 1st–3rd days of the month 

was .42.
Appendix I

Detailed Methodology and Findings of 

Statistical Analysis of Cash Management Bill 

Yield Differential

Page 62 GAO-06-269 Debt Management

exceeding the debt ceiling. While the coefficient of a variable identifying 

CM bills issued during DISPs had a negative sign, it was not significantly 

different from zero.17

Several Findings from 

Earlier Studies Are No 

Longer Supported 

Studies by Seligman and Christopher identified several other variables that 

had significant effects on the differential between yields on CM bills and 

either the yield on regular bills with similar maturity or the yield on 

repurchase agreements.18 As noted earlier, however, these studies 

employed samples consisting either entirely or mainly of observations from 

CM bill auctions held before the introduction of the Treasury bill in fiscal 

year 2001. The only finding from earlier studies that appears to remain 

valid in this new environment of shorter-maturity CM bills is that an 

increase in the ratio of CM bills auctioned to the outstanding amount of 

similar-maturing bills tends to increase the yield differential. 

Both Seligman and Christopher found that CM bills with longer terms to 

maturity were relatively less costly. The equation in Column B of table 6 

includes a variable for a CM bill’s term to maturity. In contrast to earlier 

findings, we found that the coefficient for term to maturity is positive and 

insignificant. This may be because CM bills are now concentrated at the 

very short end of the maturity spectrum leaving little room for increases in 

maturity to affect the yield differential.

Christopher found that the number of days between the auction of a CM bill 

and the settlement date reduced the differential between the CM bill yield 

and the yield on repurchase agreements. The explanation for this 

relationship is that the delay allows administrative efficiencies. However, 

the estimated coefficient of the number of days between auction and 

settlement (in column C of table 6) is insignificant.

In the sample of CM bill auctions that Christopher studied, CM bills that 

were auctioned on a Wednesday and had a maturity date beyond the end of 

the month tended to have lower yields. Since the inception of the 4-week 

Treasury bill and the truncation of CM bill maturities, only 4 of 55 issues 

were in this category. In an equation that also included the other variables 

17The probability value for the coefficient of the DISP variable was .292.

18See Seligman, “Does Urgency Affect Price at Market” and Christopher, “Determinants of 

the Spread between Repo and Cash Management Bill Yields.”
Appendix I

Detailed Methodology and Findings of 

Statistical Analysis of Cash Management Bill 

Yield Differential

Page 63 GAO-06-269 Debt Management

in column A of table 6, the coefficient for a binary variable designating such 

issues had a t-statistic of only 0.161 which led to the rejection of the 

hypothesis that CM bills auctioned on Wednesdays and maturing after the 

end of the month have lower yields. 

Instead of issuing a new security, Treasury may add to, or reopen, an 

existing issue, increasing the amount outstanding of the issue. CM bill 

reopenings are fungible with previously issued regular bills and may enjoy 

their liquidity. Seligman found that CM bills issued off-cycle were 

significantly more costly than those that reopened a previous issue. 

However, contrary to Seligman’s results, our analysis indicates that offcycle CM bills are not more costly than reopenings. Column D of table 6 

shows the sign of the coefficient of the off-cycle variable is negative rather 

than positive although, more relevantly, the coefficient is not significantly 

different from zero. The descriptive statistics in table 5 show that 86 

percent of CM bills issued during the more recent period were issued offcycle compared with about 40 percent in the earlier period. Off-cycle 

issuance has become a regular feature of CM bills and does not command 

an extra return.

Seligman also hypothesized that an increase in the number of business days 

between CM bill announcement and auction would reduce the yield 

differential. While his estimates suggest that 2 business days advanced 

notice reduces the yield differential, he found that increasing the 

announcement period beyond 2 days did not further reduce the differential. 

In contrast, we found that the sign for the coefficient of the number of days 

of advance notice was positive and significant, as shown in column E of 

table 6. This has the unexpected implication that increasing the number of 

business days notice before auction increases rather than reduces the yield 

differential. Because markets usually penalize uncertainty, this result 

appears counterintuitive and should be studied further to determine 

whether it arose because of a statistical problem such as the correlation 

between the advanced notice variable and an omitted variable that may be 

unobservable. 
Appendix I

Detailed Methodology and Findings of 

Statistical Analysis of Cash Management Bill 

Yield Differential

Page 64 GAO-06-269 Debt Management

Selected CM Bill 

Features Reduce Yields 

but Opportunities for 

Additional Exploitation 

of These Features May 

Be Limited

Our analysis of CM bill yield differentials from fiscal year 2002 through 

2005 revealed several features of CM bills that affect the yield differential; 

however, Treasury’s ability to achieve additional savings by further 

exploiting these features may be limited. The average yield differential was 

substantially lower during the period from fiscal years 2002 through 2005 

than it was in the preceding several years. The two most important factors 

behind the yield differential decline between the pre- and post-2002 period 

were (1) the substantial decline in the general level of short-term rates and 

(2) the major reduction in the ratio of CM bills issued to the average 

amount of Treasury bills outstanding. The level of short-term interest rates 

is largely determined by Federal Reserve policy and market forces rather 

than Treasury. Treasury bill yields may continue to rise and reach levels 

that prevailed in the early period, thereby erasing the portion of the decline 

in the yield differential caused by lower interest rates. However, because 

the 4-week bill is now a permanent feature of Treasury’s auction schedule 

and has reduced Treasury’s reliance on CM bills, the portion of the decline 

in the yield differential attributable to the reduced ratio of CM bills to 

similar-maturity Treasury bills is likely to endure. The experience from 

fiscal year 2002 through 2005 as a whole suggests that the yield differential 

could remain about 13 basis points below pre-2002 levels.

While Treasury may have some ability to change the relative amount of CM 

and regular bills issued, the mix is affected by cash flow patterns largely 

beyond its control. Aligning cash outflows and inflows could reduce the 

amount of CM bills issued, but Treasury does not have authority over the 

timing of all cash flows. However, Treasury does have control over debtrelated cash flows. Efforts to better align the timing of net increases in 

debt with its largest cash payments could reduce both the size of CM bills 

and the yield differential. 

To the extent that Treasury can increase the share of CM bills that mature 

on dates when taxes are due, additional savings might be achieved. 

Already more than 60 percent of CM bills met this criterion in fiscal year 

2005, so the possibility of achieving further savings through this feature 

may be minimal. Moreover, Treasury’s short-term borrowing needs do not 

uniformly occur shortly before large tax due dates. 

Nearly one-half of CM bills issued since fiscal year 2002 have been issued in 

multiple tranches. Our results provide somewhat limited evidence that 

multiple tranche issues may be more costly. Even if such issues were to 

require higher yields, however, multiple tranche issues have the advantage 
Appendix I

Detailed Methodology and Findings of 

Statistical Analysis of Cash Management Bill 

Yield Differential

Page 65 GAO-06-269 Debt Management

of reducing borrowing costs by minimizing the duration of the amounts 

borrowed in later tranches. For example, instead of borrowing $20 billion 

for 10 days, Treasury might use two tranches to borrow $10 billion for 10 

days and $10 billion for 9 days, thereby saving 1 day’s interest on the 

second tranche. Accordingly, the savings that multiple tranche CM bills 

provide by reducing the number of days that interest is paid on later 

tranches is likely to more than offset the higher yields such issues might 

entail. 

Finally, the positive correlation found between the number of days of 

advanced notice and the yield differential appears counterintuitive and 

probably should not be used as a basis for reducing the notification period.
Page 66 GAO-06-269 Debt Management

Appendix II

Analysis of CM Bill Auctions ApendxiI

Given that CM bill auctions are innately less predictable than regular 

Treasury bill auctions, it is not surprising that, by some measures, CM bill 

auctions are less successful than regular auctions. Better auction 

performance can be characterized by greater participation, a broader 

distribution of awards, and more preauction activity in the when-issued 

market. These factors theoretically improve Treasury’s borrowing costs. 

By most measures of participation and activity we examined, CM bill 

auctions perform less well than 4-week bill auctions. However, some other 

measures indicate that Treasury obtained a better price at CM bill auctions 

compared with 4-week bill auctions and that there is stronger demand for 

CM bills than 4-week bills. However, we did not find a statistically 

significant relationship between any auction performance measures and 

yield differentials.1

 We did find that in more concentrated auctions, 

Treasury was less likely to pay more than the yield indicated in the whenissued market at the time of auction. 

Trading Activity Was 

Lower Prior to CM Bill 

Auctions than 4-week 

Bill Auctions

Treasury auctions are preceded by forward trading in markets known as 

“when-issued” markets. The when-issued market is important because it 

serves as a price discovery mechanism that potential competitive bidders 

look to as they set their bids for an auction. When-issued trading reduces 

uncertainty about bidding levels surrounding auctions and also enables 

dealers to sell securities to their customers in advance of the auction so 

they are better able to distribute the securities and bid more aggressively, 

which results in lower costs to Treasury. 

However, we found that trading activity is sparse before CM bill auctions. 

We counted the number of preauction trades on the day of CM bill auctions 

and found that when-issued trading is lower prior to CM bill auctions 

compared with regular 4-week bill auctions (see table 7). There is 

generally more activity after CM bill auctions than before the auction. 

1

The yield differential is measured as the difference between CM bill yields and the weighted 

average of yields on outstanding Treasury bills maturing before and after the CM bill.
Appendix II

Analysis of CM Bill Auctions

Page 67 GAO-06-269 Debt Management

Table 7: Pre- and Postauction Trading Activity in CM Bills and 4-week Bills (Fiscal 

Years 2002–2005)

Source: GAO analysis of GovPX data.

Note: GovPX data provide information on primary dealer transactions through the interdealer brokers 

for all U.S. Treasury securities. 

Yield Treasury Paid on 

CM Bills Generally 

Reflected Market 

Information at the 

Time of the Auction

To evaluate the yield obtained at auction, Treasury’s auction studies used 

the difference between yields at auction and the contemporaneous whenissued yield at time of an auction, usually 1:00 p.m. We refer to this 

measure as the contemporaneous auction spread. According to Treasury, 

this is a good benchmark to measure auction yields because potential 

bidders have a choice between purchasing securities at auctions or 

purchasing securities in the when-issued market. A negative spread (where 

the auction yield is less than the contemporaneous when-issued yield) 

indicates Treasury paid a lower yield than expected, which is a positive 

auction result. Alternatively, a positive spread (the auction yield is greater 

than the contemporaneous when-issued yield) indicates Treasury paid a 

higher yield than expected from information in the market at the time of 

auction. This would indicate a poor auction result. By this measure, CM 

bill auctions performed better than 4-week bill auctions. The 

contemporaneous auction spread of CM bill auctions from fiscal year 2002 

through 2005 was approximately zero (see table 8), which implies that the 

yield Treasury paid on CM bills generally reflected market information at 

the time of the auction. In contrast, the auction spread for 4-week bill 

auctions averaged a positive 0.3 basis points for fiscal years 2002 through 

2005. The information derived from the auction spread depends in part on

Average number of trades 

CM bills 4-week bills

Preauction Postauction Preauction Postauction

2002 250 283 419 315

2003 63 144 271 218

2004 94 154 226 220

2005 97 149 322 290

Average 2002–2005 112 173 309 261
Appendix II

Analysis of CM Bill Auctions

Page 68 GAO-06-269 Debt Management

whether the when-issued market is liquid around the time of the auction.2 

Because the level of trading activity is relatively sparse before CM bill 

auctions, the information provided by the contemporaneous auction 

spread may be limited.

Table 8: Average Spread between Auction and When-issued Yields at Time of 

Auction (Fiscal Years 2002–2005)

Source: GAO analysis of GovPX data.

CM Bill Auctions Are 

More Concentrated 

and Have Fewer 

Awarded Bidders than 

4-week Bill Auctions

In order to lower borrowing costs, Treasury seeks to encourage more 

participation in auctions. In general, large, well-attended auctions improve 

competition and lead to lower borrowing costs for Treasury. For example, 

in the 1990s Treasury switched its auctions from multiple-price to uniformprice format in order to encourage more aggressive bids and a broader 

distribution of auction awards. Treasury found that the share of the 

auction awarded to the top five competitive bidders declined under the 

new auction format to about 35 percent for 2-year notes and 36 percent for 

5-year notes. Using similar estimates of bidder participation in CM bill 

auctions, we found that the share of the auction awarded to the top five 

bidders was 60 percent or higher in over half of CM bill auctions held 

during fiscal years 2002–2005. The share exceeded 60 percent in only 18 

percent (37 of 209) of 4-week bill auctions held during fiscal years 2002–

2005.

2

Kjell G. Nyborg and Suresh Sundaresan, “Discriminatory versus Uniform Treasury 

Auctions: Evidence from When-issued Transactions,” Journal of Financial Economics, vol. 

42 (1996), pp. 63–104.

Basis points

CM bills 4-week bills

2002 0.3 0.4

2003 -0.5 0.3

2004 -0.3 0.6

2005 0.4 0.1

Average 2002–2005 0.0 0.3
Appendix II

Analysis of CM Bill Auctions

Page 69 GAO-06-269 Debt Management

Treasury limits the maximum auction award to a single bidder to 35 percent 

of the offering in part to foster a liquid secondary market for a new issue.3

 

A higher concentration could reduce competition and restrict a security’s 

supply in the secondary market preventing its efficient allocation among 

investors and possibly generating a “short squeeze.” The term “short 

squeeze” is used by market participants to refer to a shortage of a security 

relative to willing buyers for the same security. These squeezes arise 

because Treasury allows dealers to sell the security short to its customers 

(or other dealers) in the when-issued market before securities are 

auctioned. Lack of competition could also result in lower prices (higher 

yields) at auction. In contrast, we found generally negative correlations 

between concentration measures and auction spreads for CM bill auctions. 

In other words, in more concentrated auctions, Treasury was less likely to 

pay more than the yield indicated in the when-issued market at the time of 

auction. According to Treasury, a high concentration ratio in CM bill 

auctions may imply some bidders really want a particular bill, which drives 

the price up and yield down.

Not only are CM bill auctions more concentrated, but fewer bidders in total 

are awarded CM bills than 4-week bills. According to Treasury officials, 

short-term securities have a more limited audience. From fiscal year 2002 

through 2005, about 17 bidders on average were awarded CM bills in each 

auction compared with 22 bidders in 4-week bill auctions. More than half 

of the CM bill auctions had 16 or fewer awarded bidders. In contrast, only 

about 4 percent of 4-week bill auctions had 16 or fewer awarded bidders. 

Although greater participation, a broader distribution of awards, and more 

preauction activity in the when-issued market theoretically improves 

Treasury’s borrowing costs, we did not find a statistically significant 

relationship between these factors and the yield differential. 

3

This is based on a complicated formula that also takes into account the bidder’s “reportable 

net long position” in the security. For more information on this and auction mechanics, see 

Kenneth D. Garbade and Jeffrey F. Ingber, “The Treasury Auction Process: Objectives, 

Structure and Recent Adaptations,” Current Issues in Economics and Finance, vol. 11,

no. 2, Federal Reserve Bank of New York, (February 2005). 
Appendix II

Analysis of CM Bill Auctions

Page 70 GAO-06-269 Debt Management

More Common 

Performance Measures 

Indicate High Demand 

for CM Bills but 

Greater Uncertainty in 

CM Bill Auctions 

Compared with 4-week 

Bill Auctions

More commonly cited measures of auction performance, such as bid-tocover ratios and auction tails (difference between the high and average 

discount rates) provide information on the demand for Treasury securities 

and the dispersion of bids, but these measures are limited.4

 The bid-tocover ratio is the ratio of the amount of bids received in a Treasury security 

auction compared with the amount of accepted bids. In general, higher 

ratios signal higher demand for the security being auctioned. From fiscal 

year 2002 to 2005, the bid-to-cover ratio for CM bill auctions averaged 3.17 

(see table 9). In contrast, the bid-to-cover ratio for 4-week bills averaged 

only 2.30. This suggests a stronger demand for CM bills than regular 4-

week bills; however, these results should be interpreted with caution. 

Some market participants suggested that a high bid-to-cover ratio may arise 

because many dealers participate in CM bill auctions to fulfill auction 

requirements that are less costly to meet by participating in short-term CM 

bills auctions than in auctions of longer-term securities. 

Table 9: Bid-to-cover Ratios for CM and 4-week Bills (Fiscal Years 2002–2005)

Source: GAO analysis of BPD data.

Auction tails—the number of basis points between the high and average 

discount rates—are a measure of the dispersion of the bids. Auction theory 

suggests that the more diverse the beliefs of the bidders and the more 

uncertain they are about the demand for the bills, the more dispersed the 

bids submitted. In contrast, narrower tails indicate strong bidding and 

therefore lower costs to Treasury. When evaluating the auction tails of CM 

4

The difference between the highest and lowest winning tender is also used. For example, 

see Sushil Bikhchandani, Patrik L. Edsparr, and Chif-fu Huang, “The Treasury Bill Auction 

and the When-Issued Market: Some Evidence,” draft (Aug. 30, 2000).

Average ratio of amount tendered to amount accepted

CM bills 4-week bills

2002 3.12 2.34

2003 3.45 2.32

2004 3.18 2.23

2005 3.02 2.32

Average 2002–2005 3.17 2.30
Appendix II

Analysis of CM Bill Auctions

Page 71 GAO-06-269 Debt Management

bills compared with regular Treasury securities, we found that CM bill tails 

were slightly larger than 4-week bill auctions (see table 10). 

Table 10: Auction Tails for CM and 4-week Bill Auctions (Fiscal Years 2002–2005)

Source: GAO analysis of BPD data.

Note: Auction tails are measured as the difference between high and average discount rates.

In summary, most measures suggest CM bill auctions perform less well 

than 4-week bill auctions. However, the low participation and high 

concentration of CM bill auctions do not explain why Treasury paid higher 

yields on CM bills than investors paid for similar-maturing bills in the 

secondary market. 

Basis points

CM bills 4-week bills

2002 1.71 1.66

2003 1.33 1.00

2004 1.00 0.80

2005 1.29 1.21

Average 2002–2005 1.27 1.17
Page 72 GAO-06-269 Debt Management

Appendix III

Selected Bibliography ApendxiI

Bikhchandani, Sushil, Patrik L. Edsparr, and Chif-fu Huang. “The Treasury 

Bill Auction and the When-Issued Market: Some Evidence.” Draft (Aug. 30, 

2000).

Christopher, Jan E. “Determinants of the Spread between Repo and Cash 

Management Bill Yields: Technical Report.” Unpublished manuscript 

(2005).

Fleming, Michael J. “Are Larger Treasury Issues More Liquid? Evidence 

from Bill Reopenings.” Journal of Money, Credit, and Banking, vol. 34, no. 

3 (August 2002): 707–35.

Garbade, Kenneth D. “Treasury Bills with Special Value.” Fixed Income 

Analytics (Cambridge, Mass.: MIT Press, 1996): 181–197.

Garbade, Kenneth D., and Jeffrey F. Ingber, “The Treasury Auction Process: 

Objectives, Structure and Recent Adaptations.” Current Issues in 

Economics and Finance, vol. 11, no. 2, Federal Reserve Bank of New York 

(February 2005). 

Garbade, Kenneth D., John C. Partlan, and Paul J. Santoro. “Recent 

Innovations in Treasury Cash Management.” Current Issues in Economic 

and Finance, vol. 10, no. 11, Federal Reserve Bank of New York 

(November 2004).

Malvey, Paul F. and Christine M. Archibald. Uniform-Price Auctions: 

Update of the Treasury Experiences. Department of the Treasury, Office of 

Market Finance (Oct. 26, 1998). 

Nyborg, Kjell G. and Suresh Sundaresan. “Discriminatory versus Uniform 

Treasury Auctions: Evidence from When-issued Transactions.” Journal of 

Financial Economics, vol. 42 (1996): 63–104. 

Seligman, Jason. “Does Urgency Affect Price at Market? An Analysis of 

U.S. Treasury Short-Term Finance.” Journal of Money, Credit, and 

Banking (forthcoming). 

Simon, David P. “Segmentation in the Treasury Bill Market: Evidence from 

Cash Management Bills.” Journal of Financial and Quantitative Analysis, 

vol. 26, no. 1 (March 1991): 97–108.
Appendix III

Selected Bibliography

Page 73 GAO-06-269 Debt Management

Simon, David P. “Further Evidence on Segmentation in the Treasury Bill 

Market.” Journal of Banking and Finance, vol. 18 (1994): 139–51.
Page 74 GAO-06-269 Debt Management

Appendix IV

Comments from the Department of the 

Treasury ApendxiIV
Page 75 GAO-06-269 Debt Management

Appendix V

GAO Contacts and Staff Acknowledgments ApendxiV

GAO Contacts Susan J. Irving (202) 512-9142

Thomas J. McCool (202) 512-2700

Acknowledgments In addition to the contacts named above, Jose Oyola (Assistant Director), 

Richard Krashevski, Naved Qureshi, and Melissa Wolf made significant 

contributions to this report. Jennifer Ashford also provided key assistance.

(450390)
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