DEBT MANAGEMENT

Buybacks Can 

Enhance Treasury’s 

Capacity to Manage 

under Changing 

Market Conditions 

Report to the Secretary of the Treasury

March 2012 

GAO-12-314 

United States Government Accountability Office

GAO 

Revised on March 21, 2012 to clarify information on page 17. 

The corrected section should read: Agence France Tresor 

officials told us that the flexibility of bilateral trades helps them to 

minimize borrowing costs. 
United States Government Accountability Office

Highlights of GAO-12-314, a report to the 

Secretary of the Treasury 

March 7, 2012 

DEBT MANAGEMENT

Buybacks Can Enhance Treasury’s Capacity to 

Manage under Changing Market Conditions 

Why GAO Did This Study

The U.S. Treasury market is the 

deepest and most liquid debt market in 

the world. Liquidity is important to a 

well-functioning Treasury market and 

for lowest cost borrowing over time. 

Exploring various debt management 

tools can assist Treasury in 

maintaining liquidity as budget and 

market conditions change. 

To help maintain an efficient Treasury 

market, Treasury needs the ability and 

flexibility to actively manage the mix of 

outstanding securities and respond to 

market disruptions. Debt buybacks—

the redemption of marketable 

securities prior to their maturity dates—

were used to manage declining debt

during a time of budget surpluses. 

However, other countries use 

buybacks and similar tools even during 

times of deficit. GAO assessed: (1) the 

budget and market conditions under 

which debt buybacks could help 

Treasury achieve its debt management 

goals, (2) the operational features of 

buyback programs that would support 

these goals, and (3) other debt 

management tools used by case study 

countries to achieve similar objectives. 

GAO examined both the U.S. program 

and those of Canada, France, 

Germany, and the United Kingdom and 

analyzed the costs and benefits.

What GAO Recommends

To have flexibility to respond to 

potential changes in market conditions, 

GAO recommends that Treasury build 

the capacity for buyback and switch 

auction programs as well as bilateral 

trades or debt exchanges. 

Treasury concurred with the findings

and said the report would be very 

useful in analyzing tools that increase 

their flexibility. 

What GAO Found

Debt buybacks can help advance Treasury’s goals under a variety of budget and 

market conditions. For example, Treasury currently faces rollover peaks—large 

increases in the amounts of maturing debt that must be refinanced at a given 

time (see fig.)—which expose Treasury to the risk of refinancing large amounts of 

debt when interest rates are less favorable. All four of our case study countries 

use debt buybacks to mitigate rollover risk. Buybacks can also be used to 

enhance liquidity, which can be adversely affected when the growth in borrowing 

slows rapidly and issue sizes decline significantly. GAO’s illustrative analysis of 

Treasury’s past buyback program showed that, had Treasury refinanced the debt 

by simultaneously issuing new debt, it could have captured a liquidity premium—

the additional price investors are willing to pay for securities that can be easily 

traded—which would reduce interest costs.

Treasury Notes and Bonds Maturing 

Note: Does not include future debt issuance to refinance maturing debt or finance new borrowing 

needs. 

Implementing a well-designed buyback program could help Treasury minimize 

borrowing costs over time. Other countries have used both reverse auctions—a 

process in which participants submit competitive offers to sell particular 

securities—and bilateral trades—transactions between the government and 

specific holders of a security. Of these, reverse auctions are most consistent with 

Treasury’s principles. However, if certain features of bilateral trades were 

modified, they could be useful for responding to unforeseen market disruptions. 

Participation in a buyback program would be encouraged by a regularly 

scheduled program, with a clear purpose and timely announcement of 

operations. Also, because greater participation fosters competition, broadening 

the eligibility to participate beyond primary dealers should be explored. 

Switches and debt exchanges—tools similar to buybacks that involve early 

redemption of securities in exchange for liquid benchmark securities—could also 

be used to manage rollover peaks and help maintain liquidity. They could also 

have the added advantage of broadening Treasury’s investor base by appealing 

to investors that want to maintain the average maturity of their portfolios in ways 

that minimize market risk. 

View GAO-12-314. For more information, 

contact Susan J. Irving at (202) 512-6806 or 

irvings@gao.gov. 
Page i GAO-12-314 Debt Management - Buyback 

Letter 1 

Background 3

Debt Buybacks Can Help Advance Treasury’s Goals under a Variety 

of Budget and Market Conditions 8

A Well-Designed Buyback Program Can Promote Lowest-Cost 

Financing over Time 16

Switches and Debt Exchanges Could Also Be Used to Manage 

Rollover Peaks and Help Maintain Liquidity 26

Conclusions 31

Recommendations for Executive Action 33

Agency Comments and Our Evaluation 33

Appendix I Objectives, Scope, and Methodology 35

Appendix II GAO Contact and Staff Acknowledgments 39

Tables

Table 1: Illustrative Estimate of Long-Term Cost Savings from 

Financing Treasury 2000-2002 Buybacks with New Debt 14

Table 2: Buyback Methods Used by Case Study Countries 17

Table 3: Results of Canadian Switch Auction Held on 

September 28, 2011 (amounts in CAD) 27

Figures

Figure 1: Treasury Notes and Bonds Maturing 4

Figure 2: Deficits Decline in Next Several Years under Different 

Assumptions 6

Figure 3: Impact of Buybacks on Amounts of Maturing Canadian 

Securities 9

Figure 4: November 2011 Auction Schedule 20

Contents
Page ii GAO-12-314 Debt Management - Buyback 

Abbreviations

CAD Canadian dollars 

CBO Congressional Budget Office

CRSP Center for Research in Security Prices

FRBNY Federal Reserve Bank of New York

OECD Organisation for Economic Co-operation and Development

TAAPS Treasury Automated Auction Processing System

TRAPS Trading Room Auction Processing System

Treasury U.S. Department of the Treasury 

U.K. United Kingdom

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. The published product may be reproduced and distributed in its entirety 

without further permission from GAO. However, because this work may contain 

copyrighted images or other material, permission from the copyright holder may be 

necessary if you wish to reproduce this material separately.
Page 1 GAO-12-314 Debt Management - Buyback 

United States Government Accountability Office 

Washington, DC 20548

March 7, 2012

The Honorable Timothy F. Geithner

Secretary of the Treasury

Dear Mr. Secretary:

The U.S. Treasury market is the deepest and most liquid government 

debt market in the world. This assists the U.S. Department of the 

Treasury (Treasury) as it seeks to finance the federal government’s 

borrowing needs at the lowest cost over time. Today—in part due to the 

economic slowdown and global financial crisis that brought about a flight 

to quality—interest rates on U.S. Treasury securities are at historic lows. 

Nevertheless, exploring the benefits of various debt management tools 

can assist Treasury in the continued achievement of its debt management 

goal in future years as economic and market conditions change.

As part of our ongoing work on debt management issues and under the 

Comptroller General’s authority, we examined debt buybacks—a debt 

management tool that enables debt managers to actively manage the mix 

of outstanding Treasury securities by redeeming particular marketable 

securities prior to their maturity dates using a voluntary process. The 

United States used debt buybacks from 2000 through 2002 as part of 

managing declining debt during a time of surplus; other countries use 

them to address debt management issues even during times of deficit or 

increasing debt. Specifically, we assessed (1) the budget and market 

conditions under which debt buybacks could help Treasury achieve its 

debt management goals, (2) the operational features of buyback 

programs that would support these goals, and (3) other debt management 

tools used by case study countries to achieve objectives similar to those 

of a U.S. buyback program.

To address these objectives, we examined Treasury’s 2000-2002 

buyback program as well as the buyback programs and similar debt 

management tools used in Canada, the United Kingdom (U.K.), France, 

and Germany. We selected countries that are members of the 

Organisation for Economic Co-operation and Development (OECD) and 

whose sovereign debt markets are most similar to the United States in 

terms of size and liquidity. We analyzed the cost of Treasury’s buybacks, 

including the extent to which Treasury could have reduced its interest 

costs had it “re-financed” its buybacks by simultaneously issuing new 

debt. We largely used data from Treasury and the Center for Research in 

 
 

Page 2 GAO-12-314 Debt Management - Buyback 

Security Prices (CRSP) for this analysis. To assess the reliability of CRSP 

data, we compared them to another published source of similar data and 

discussed any differences with the data providers. We determined that 

such differences were likely due to methodological differences between 

the two sources and were consistent with industry practices. To assess 

the reliability of the Treasury data, we also compared them to another 

published source of similar data and found them consistent. Based on 

these assessments, we determined that the Treasury and CRSP data 

were sufficiently reliable for our purposes. We interviewed officials from 

Treasury’s Office of Debt Management and the Bureau of the Public Debt 

and from the Board of Governors of the Federal Reserve System and the 

Federal Reserve Bank of New York (FRBNY)—one of the Federal 

Reserve Banks serving as Treasury’s fiscal agent. We also interviewed 

officials from the Canadian Department of Finance and the Bank of 

Canada, the U.K. Debt Management Office, Agence France Tresor 

(France’s debt agency), and the German Finance Agency.1

We conducted this performance audit from November 2010 to March

2012 in accordance with generally accepted government auditing 

standards. Those standards require that we plan and perform the audit to 

obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objectives. We believe 

that the evidence obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives.

The 

experiences of our case study countries are not generalizable, but they 

provide illustrative examples of the use of buybacks and other debt 

management tools. We obtained perspectives from market participants, 

including four primary dealers and two large investors, and two market 

analysts. To assess the operational features that would support 

Treasury’s borrowing goals, we analyzed the extent to which features of 

Treasury’s past buyback program and the features of other countries’ 

buyback programs are consistent with Treasury’s debt management 

goals and principles. See appendix I for more information on our scope 

and methodology. On December 13, 2011, we briefed Treasury officials 

on our findings and expected recommendations.

 

1

We interviewed officials from Canada’s central bank because of the large role the central 

bank plays in buybacks. We did not interview central bank officials from the United 

Kingdom, France, or Germany because their buybacks role was limited. 
 

Page 3 GAO-12-314 Debt Management - Buyback 

To achieve its primary debt management objective of financing the 

federal government’s borrowing needs at the lowest cost over time, 

Treasury issues debt through a regular and predictable schedule of 

auctions across a wide range of securities. Treasury marketable 

securities consist of bills that mature in a year or less, notes with original 

maturities of more than 1 to not over 10 years, and bonds with original 

maturities of more than 10 years.2 Treasury seeks to appeal to a broad 

range of investors and to provide the market with a high degree of 

stability in the amount issued of each security, particularly for longer-term 

securities.3

The mix of outstanding Treasury securities can significantly influence both 

rollover risk and the federal government’s borrowing cost. Longer-term 

nominal securities typically carry higher interest rates, primarily due to 

investor concerns about interest rate risk, part of which is inflation for 

nominal securities. In general, risk premiums and therefore interest rates 

are higher for longer-term debt than for shorter-term debt. In contrast, 

shorter-term securities generally carry lower interest rates but add 

uncertainty to the government’s interest costs and require Treasury to 

conduct more frequent auctions to refinance maturing debt, which 

increases rollover risk—the risk that Treasury will have to refinance its 

debt at less favorable interest rates.

Financing across the yield curve (that is, issuing short-, 

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

mitigates refunding and market rate risks, and provides the market with a 

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

market liquidity and promotion of efficient capital markets. In a liquid 

market, trading can be completed at will and the offer and purchase 

prices differ only slightly. Liquidity is important to Treasury because liquid 

securities can be auctioned at lower rates and thus minimizes Treasury 

borrowing costs.

 

2

Treasury issues both nominal and inflation-adjusted notes and bonds. In addition to 

marketable securities—which can be resold by whoever owns them—Treasury issues 

nonmarketable securities, such as savings securities and special securities for state and 

local governments that cannot be resold.

3

We have previously reported on the benefits of diversifying Treasury’s investor base and 

collecting information to gauge investor demand. See GAO, Debt Management: Treasury 

Inflation Protected Securities Should Play a Heightened Role in Addressing Debt 

Management Challenges, GAO-09-932 (Washington, D.C.: Sept. 29, 2009) and Debt 

Management: Treasury Was Able to Fund Economic Stabilization and Recovery 

Expenditures in a Short Period of Time, but Debt Management Challenges Remain, 

GAO-10-498 (Washington, D.C.: May 18, 2010).

Background
 

Page 4 GAO-12-314 Debt Management - Buyback 

One of the debt management challenges that Treasury will continue to 

face in the next several years will be rollover peaks—large increases in 

the amounts of maturing debt that must be refinanced at a given time 

(see fig. 1). Such peaks expose Treasury to the risk of refinancing an 

especially large amount of maturing debt at a time when interest rates are 

less favorable. Current interest rates on U.S. Treasury securities are at 

historical lows, in part because of the global economic downturn and 

investors’ demand for liquid, risk-free assets; interest rates are, however, 

expected to increase as the economy recovers.

Figure 1: Treasury Notes and Bonds Maturing 

Note: Does not include future debt issuance to refinance maturing debt or finance new borrowing 

needs. Therefore, the amounts maturing in 2014 and 2015 do not reflect any 2- or 3-year notes that 

will be issued in 2012 and 2013. 

The rollover peaks Treasury faces are primarily the result of increased 

short-term borrowing following the onset of the economic recession in 
 

Page 5 GAO-12-314 Debt Management - Buyback 

December 2007.4

Liquidity is important to a well-functioning Treasury market. Liquidity is 

also important to Treasury because investors are willing to pay more for 

liquid securities that can be easily traded, resulting in lower borrowing 

costs for Treasury.

In 2008 and 2009, in response to the recession and the 

financial crisis, Treasury dramatically increased issuance of bills and 2-, 

3-, and 5-year notes. These actions shortened the average maturity of the 

Treasury’s debt portfolio and are now resulting in large amounts of debt 

maturing in 2012 and 2013. For example, the amount of notes and bonds 

maturing in 2011 was $866 billion and the amount in 2012 is $1,253 

billion. Treasury has taken steps to extend the average maturity of the 

portfolio and reduce rollover risk. For example, Treasury reduced bills as 

a share of its debt outstanding since 2009. Although the average maturity 

of the portfolio has lengthened from 55 months in December 2007 to 

slightly more than 62 months in December 2011, it is still shorter than that 

of other developed countries.

5 Liquidity can be adversely affected when the growth 

in borrowing slows and issue sizes decline significantly. Even at very high 

(and growing) levels of outstanding debt, there would be a decline in net 

borrowing needs when federal deficits decline. Federal deficits have been 

at record highs in recent years, reaching $1,413 billion in fiscal year 2009. 

Both a projection assuming continuation of current law and an alternative 

fiscal scenario that assumes recent policies continue show deficits 

declining below $1 trillion in the next several years; the rate of decline 

differs depending on the assumptions used (see fig. 2). Federal tax 

receipts would grow and spending on programs like unemployment 

benefits would decrease with economic growth. In addition, the waning of 

spending to support the economic recovery and the mechanisms imposed 

by the Budget Control Act of 2011,6

 

4

The economic downturn along with the federal government’s response to it and other 

actions taken to stabilize financial markets contributed to a rapid buildup in federal debt 

held by the public—increasing from roughly 36 percent of gross domestic product at the 

end of 2007 to roughly 68 percent at the end of fiscal year 2011. 

such as discretionary spending caps 

and sequestration, will also likely reduce federal spending. Nevertheless, 

we cannot “grow our way out of” the long-term fiscal challenge; the 

5

For example, we reported in 2009 on the impact of illiquidity on the cost of borrowing 

using Treasury Inflation Protected Securities. See GAO-09-932. 

6

Pub. L. No. 112-25, 125 Stat.239 (Aug. 2, 2011). 
 

Page 6 GAO-12-314 Debt Management - Buyback 

declines in the deficit are projected to be short-lived and borrowing needs 

projected to increase again.7

Figure 2: Deficits Decline in Next Several Years under Different Assumptions

Note: Data are from the Congressional Budget Office (CBO), The Budget and Economic Outlook: 

Fiscal Years 2012 to 2022 (January 2012). The current law projections reflect sharp increases in 

revenues that will occur if tax provisions expire as scheduled and sharp reductions in Medicare’s 

payment rates for physicians’ services scheduled under current law. However, those assumptions 

differ from historical policy actions. In CBO’s alternative fiscal scenario, certain tax provisions that 

have expired or are set to expire are extended, the alternative minimum tax exemption amount is 

indexed to inflation, and Medicare payment rates for physician services are held constant. 

Treasury can take several steps to respond to a decline in net borrowing 

needs, including reducing the size of new issues, reducing the frequency 

of auctions, and eliminating the offerings of certain securities. However, 

 

7

See GAO, The Federal Government’s Long-Term Fiscal Outlook: Fall 2011 Update, 

GAO-12-28SP (Washington, D.C.: October 2011). 
 

Page 7 GAO-12-314 Debt Management - Buyback 

any rapid decline presents some debt management challenges.8

Market disruptions—or illiquidity in particular maturities—can occur when 

there are supply-demand imbalances in the Treasury market. For 

example, demand may increase when investors flee other holdings in 

search for safety or fall when they rebalance their portfolios through 

purchases of riskier assets offering a higher return. While rollover peaks 

and a decline in borrowing needs pose foreseeable risks to Treasury, 

market disruptions are more difficult to anticipate. There were significant 

supply and demand imbalances in the Treasury market during the 

financial crisis in 2008.

Shrinking the size of some new issues could reduce Treasury’s flexibility 

to sustain liquid markets across the wide variety of instruments desired by 

potential investors. Further, changes in the frequency of auctions or in the 

types of securities auctioned can reduce the regularity and predictability 

of Treasury operations; this would be especially problematic if the trend in 

borrowing needs turned out to be short-lived and the changes would have 

to be reversed. Both Treasury and market participants place a high value 

on the regular and predictable nature of Treasury’s approach to financing 

the government.

9 To help maintain an efficient Treasury market 

that promotes lowest cost borrowing over time, Treasury must have tools 

that provide for sufficient flexibility to respond to any market disruptions.

 

8

We previously reported on the challenges of managing declining debt. See GAO, Federal 

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

D.C.: Sept. 29, 1999) and Federal Debt: Debt Management Actions and Future 

Challenges, GAO-01-137 (Washington, D.C.: Feb. 28, 2001).

9

Demand for Treasury securities increased because lenders became reluctant to lend 

against mortgage-related securities, demanding higher-quality collateral. At times during 

the crisis, unusually high demand for certain Treasury securities resulted in negative 

yields on those securities. 
 

Page 8 GAO-12-314 Debt Management - Buyback 

Debt buybacks can be used to mitigate rollover risk while also promoting 

liquidity. All four of the countries we studied—Canada, France, Germany, 

and the United Kingdom—use buybacks to smooth peaks in their maturity 

profile, even in times of budget deficits. The U.K. Debt Management 

Office buys back securities with 6 or fewer months remaining to maturity 

to smooth maturity peaks. France also uses buybacks to smooth maturity 

peaks. According to officials from Agence France Tresor, this practice 

helps them avoid having to issue abnormally large amounts of debt on a 

particular day to raise the funds to pay the maturing securities. Similarly, 

the German Finance Agency buys back debt to smooth maturity peaks, 

although it does not limit those trades to securities with a specific time 

remaining until maturity. The Canadian government buys back securities 

with 18 or fewer months remaining to maturity to smooth maturity peaks. 

For example, in its 2010/2011 fiscal year, Canada bought back $21.9 

billion in this cash management bond buyback program. According to 

officials from the Canadian Department of Finance, buying back securities 

from key maturity dates helps reduce the high levels of cash balances 

needed for large maturity dates and helps smooth variations in their bill 

auction sizes over the year. For example, in 2010, early redemptions 

(including both buybacks and switches, discussed later in this report) 

reduced the size of Canada’s June 1, September 1, and December 1 

bond maturities by 44 percent (see fig. 3).

Debt Buybacks Can 

Help Advance 

Treasury’s Goals 

under a Variety of 

Budget and Market 

Conditions

Debt Buybacks Help 

Mitigate Rollover Risk and 

Can Enhance Liquidity 

when Net Borrowing 

Needs Decline and when 

There Are Market 

Disruptions
 

Page 9 GAO-12-314 Debt Management - Buyback 

Figure 3: Impact of Buybacks on Amounts of Maturing Canadian Securities

The challenges rollover peaks pose to U.S. Treasury debt managers 

differ from those faced by our case study countries. Because other 

countries have smaller sovereign debt markets than the United States, 

some rely more heavily on fewer key maturity dates to enhance liquidity. 

For example, until recently, Canada concentrated its securities around 

four large single-day bond maturities and coupon payment dates: March 

1, June 1, September 1, and December 1. According to Canadian 

officials, such concentration is helpful in maintaining benchmark liquidity, 

particularly in an environment of declining debt issuance, but also 

increases rollover risk. Market participants pointed out that Treasury’s 

regular and predictable schedule of auctions spread throughout the year, 

across maturities, and in different products (nominal coupons, Treasury 

Inflation Protected Securities, and bills) mitigates this risk and helps to 

keep monthly rollover peaks at a manageable size, though rollover peaks 

may still exist due to historical issuance patterns. Also, some market 

participants said that Treasury’s bill market can provide the necessary 
 

Page 10 GAO-12-314 Debt Management - Buyback 

flexibility to adjust issuance for these peaks. As discussed earlier, 

Treasury faces annual—rather than monthly or daily—rollover peaks in 

the next several years. In fiscal year 2011, Treasury funded the budget 

deficit of $1,296 billion with net marketable borrowing totaling $1,104 

billion. Because the deficit is estimated to decline to $585 billion in fiscal 

year 2013 under current law, if Treasury held net issuance constant, it 

would have excess funds that it could use to buy back debt to reduce 

maturity peaks in coming years.

Debt buybacks can help Treasury minimize changes to its regular auction 

schedule and maintain or enhance liquidity in times of declining, albeit still 

high, budget deficits. Prior to Treasury’s past buyback program, it initially 

responded to declining deficits by reducing the number of coupon 

auctions, eliminating the offerings of some securities, and reducing 

auction sizes, particularly of bills. However, this raised concerns about 

maintaining liquidity in the remaining issues and increasing the average 

maturity of Treasury’s debt portfolio. Buybacks enable debt managers to 

delay or avoid making further changes to the auction calendar and to 

maintain issuance of its benchmark securities in greater volume than 

would otherwise be possible. Over the long run, this enhanced flexibility 

should help minimize borrowing costs by increasing the predictability of 

Treasury’s debt issuance. According to Canadian debt management 

officials, Canada used bond buybacks to minimize or smooth changes to 

the auction schedule not only during years of surplus but also when net 

borrowing needs were low. Also, because Treasury could continue to 

increase new issue sizes and use the proceeds to buy back older off-therun securities that are generally less liquid,10 overall market liquidity was 

maintained or improved.11

Buybacks can also help increase liquidity during market disruptions. For 

example, Treasury officials and others told us that buybacks could have 

provided additional liquidity to the market during the 2007-2009 financial 

Enhanced liquidity promotes more efficient 

capital markets and so reduces the government’s cost of borrowing.

 

10A security is “off-the-run” when it is not the most recently auctioned security of a given 

maturity. Conversely, an “on-the-run” security is the newest issue of its maturity. On-therun securities are normally more liquid than their off-the-run counterparts because as 

securities age they find their way into buy-and-hold investor portfolios and are less actively 

traded. 

11M.J. Fleming, “Are Larger Treasury Issues More Liquid? Evidence from Bill Reopenings” 

Journal of Money, Credit, and Banking, Vol. 34, No. 3 (August 2002, Part 2), pp. 707-735.
 

Page 11 GAO-12-314 Debt Management - Buyback 

crises. During that time large banks were looking to free up balance sheet 

capacity to take on additional risk or increase lending. A buyback program 

could have enabled Treasury to repurchase off-the-run Treasury 

securities at significant discounts and simultaneously enhance secondary 

market liquidity. Several primary dealers suggested that the presence of a 

large buyer in the market can help address, or may actually help prevent, 

such market disruptions. One primary dealer said that the market now 

assumes that securities will become illiquid over time. If the market knows 

that Treasury will more actively manage liquidity, it will increase overall 

Treasury market efficiency and investors will pay more for Treasury 

securities upfront, thereby reducing Treasury’s borrowing costs. They 

noted, however, that when the Federal Reserve conducts large-scale 

asset purchases, it plays the role of a large buyer so the Treasury would 

want to avoid buying at that time.

Alternatively, buybacks can be used to build liquidity of certain benchmark 

issues. In 2011 Canada reintroduced buybacks of 10- and 30-year bonds 

to support the size of new issue auctions for those specific securities, 

which were generally less liquid than Canada’s 2-, 3-, and 5-year 

securities. An official from the Bank of Canada noted that there is high 

demand in the 10- and 30- year sectors from pension funds and 

insurance companies that want to match the time frames of their assets 

with their liabilities.

Two of our case study countries used buybacks more extensively during 

periods of budget surplus. Canada and the United Kingdom used 

buybacks to enhance liquidity during times of surplus in the early 2000s. 

By concentrating debt into fewer, larger benchmark issues, governments 

are able to capture a liquidity premium in the market that reduces their 

cost of financing.12

 

12A liquidity premium is the incremental price market participants are willing to pay for 

securities that are part of large issues that can be easily traded.

In the early 2000s the United Kingdom had a buyback 

program. At that time, the United Kingdom was in budget surplus and 

revenues were higher than the debt management office had anticipated. 

The Canadian government began its buyback program in 1999 and used 

buybacks to promote liquidity more heavily in years when net borrowing 

needs were lower. For example, in fiscal year 2009/2010, when net 

issuance was over $100 billion, the government did not buy back any 

debt for the purpose of enhancing liquidity by building benchmark 
 

Page 12 GAO-12-314 Debt Management - Buyback 

securities, but in fiscal year 2002/2003, when net issuance was about $32 

billion, the Canadian government bought back over $7 billion for liquidity 

enhancement.13

In the early 2000s, a period of budget surpluses in the United States, 

Treasury used debt buybacks to manage the maturity structure of the 

debt portfolio. From 2000-2002, Treasury held 45 reverse auctions to 

redeem securities with 10 or more years remaining to maturity.14

Treasury and FRBNY staff also examined several measures of the 

performance of Treasury’s past program. For example, coverage ratios—

the ratio of offers made to those accepted—for the reverse auctions 

ranged from a low of 2.14 to a high of 8.98; one indicator of strong market 

demand for buybacks.

Treasury 

was able to finance these buybacks by maintaining issue sizes of its 

benchmark securities. By redeeming longer-dated securities and 

maintaining issuance of its shorter-term debt securities, debt buybacks 

helped Treasury limit the lengthening of the average maturity of the debt 

portfolio. For example, Treasury reported in November 2000 that 

buybacks limited the lengthening of the average maturity of the debt 

portfolio by 2 months. Treasury manages the average maturity of the debt 

portfolio to balance risk and borrowing cost.

15 According to Treasury officials, the coverage 

ratios for buybacks in calendar year 2000 were generally larger than the 

ratio for auctions of Treasury securities. Also, Treasury’s and other’s 

studies indicated that Treasury bought the securities back at competitive 

market prices.16

 

13In fiscal year 2002/2003 Canada also bought back $12.9 billion of near maturity bonds 

for its cash management bond buyback program and redeemed $5.0 billion in bonds early 

in switch auctions. In fiscal year 2009/2010, Canada redeemed $2.1 billion in bonds early 

in switch auctions.

14A reverse auction is a process in which participants submit competitive offers to sell 

particular Treasury securities to the Treasury. 

15K.D. Garbade and M. Rutherford, Buybacks in Treasury Cash and Debt Management, 

Federal Reserve Bank of New York Staff Reports, No. 304 (October 2007).

16B. Han, F.A. Longstaff, and C. Merrill, “The U.S. Treasury Buyback Auctions: The Cost 

of Retiring Illiquid Bonds” The Journal of Finance, Vol. 62, No. 6 (December 2007), pp. 

2673-2693. 
 

Page 13 GAO-12-314 Debt Management - Buyback 

The indirect cost reduction from the impact of buybacks on overall market 

liquidity is not the only way in which buybacks may reduce the 

government’s borrowing cost over time. Buybacks also provide direct 

savings because investors are willing to sell their older, off-the-run 

securities at prices lower than the market price for otherwise comparable, 

on-the-run securities that are generally more liquid. All of the case study 

countries cited reducing overall borrowing costs as a benefit of their 

buyback programs. Although these direct savings were not a primary goal 

of Treasury’s prior buyback program, they were a secondary benefit. We 

analyzed the results of Treasury’s buybacks from 2000-2002 and 

estimate for illustrative purposes that if Treasury had financed the prior 

buyback operations by issuing additional securities of the same average 

duration as the securities bought back and at the prevailing market 

interest rates of the time,17 it would have paid $3 billion, or about 3.3 

percent, less than the value of the repurchased debt (see table 1).18

 

17Duration is a measurement of how long, in years, it takes for the price of a security to be 

repaid by its internal cash flows. Duration is affected by the time remaining to maturity, the 

schedule of coupon payments, and the coupon (i.e., interest) rate of the security. 

18Although refinancing is a useful way to estimate the potential cost savings of buybacks, 

Treasury’s practice of regular and predictable debt issuance creates operational and 

timing issues that preclude Treasury’s ability to simultaneously fund buybacks with new 

issues equal to the average duration of securities repurchased.

Buybacks Can Reduce 

Long-Term Borrowing 

Costs Even if Market

Conditions Make Them 

Costly in the Short Term
 

Page 14 GAO-12-314 Debt Management - Buyback 

Table 1: Illustrative Estimate of Long-Term Cost Savings from Financing Treasury 

2000-2002 Buybacks with New Debt

Price paid & refinancing Long-term savings

Pricea paid 

for repurchased 

debt (equal to the 

dollar amount of 

hypothetical newly 

issued debtb

Estimated

present value

) 

(dollars in billions)

c

 of 

repurchased debt 

(dollars in billions)

Value of reduced 

borrowing costs

(dollars in 

billions)

Value of reduced 

borrowing costs

(as % of value of 

repurchased debt)

88 91 3 3.3%

Source: GAO analysis of data from Treasury and the Center for Research in Security Prices.

a

Includes accrued interest. 

b

For simplicity, we assume Treasury issued new debt in the same amounts as prices paid for the 

repurchased debt, with the same average duration—18.6 years on average—as repurchased debt, 

and at par values. We also assumed that Treasury’s additional issuance would not have altered 

market rates, which in all likelihood they would have done. 

c

Discounted to present values using estimated market rates for newly issued debt on the date of each 

buyback operation. 

Even when buybacks provide interest savings over the long term, under 

some market conditions they are costly in the short term. Specifically, if 

interest rates at the time of the buyback are lower than the coupon rates 

on the securities being bought back, Treasury will have to pay a premium 

over the par value of the securities. In the 2000-2002 buyback program, 

Treasury paid $87.3 billion to buy back $67.5 billion in outstanding 

securities. The $19.8 billion premium Treasury paid was a cost to 

Treasury during the buyback period. However, this premium was more 

than offset by reduced borrowing costs over the long term because 

Treasury avoided paying higher coupon rates for the remaining term of 

the bond. In contrast, if interest rates at the time of a buyback are higher 

than the coupon rates on the securities subject to buyback, Treasury 

would be able to buy back the securities at a discount from their par 

value. Such buybacks would show cost savings in the short term, but 

these savings would be offset by the payment of higher coupon rates on 

the newly issued bond over the long term. Regardless of the premium or 

discount paid during the buyback period because of relative interest rates, 

the key savings of a buyback program arise from being able to purchase 

older, off-the-run securities at a lower price because of their illiquidity 

relative to new issues.

The premium paid to buy back securities is recorded as a cost in the 

financial statements, but it does not affect the budget deficit or surplus. 

Budgetary treatment is neutral in that any premium or discount would be 
 

Page 15 GAO-12-314 Debt Management - Buyback 

recorded as a “means of financing” in the year of the buyback and does 

not affect the budget deficit or surplus. Financial accounting, however, 

records the immediate loss or gain in the year of the buyback since 

financial statements provide information on the operating cost of 

government for a single year.19

Overall, market participants we spoke with thought a U.S. buyback 

program could help Treasury maintain a more liquid and efficient market 

and address market disruptions. One explained that the announcement of 

Treasury’s ability and willingness to use a buyback program to address 

illiquidity or potential market disruptions might actually help prevent such 

disruptions. Market participants would be assured that there is a large 

and consistent buyer of illiquid securities, which increases confidence in 

the Treasury market. We heard from primary dealers that having a large 

buyer in the market helps to maintain liquidity of outstanding securities. 

For example, three primary dealers noted that the Federal Reserve’s 

large-scale purchases of Treasury securities from 2009 through 2011 

helped to enhance the liquidity of Treasury securities.

Over time both the financial statement 

and the budget would reflect lower borrowing costs, but the reduction 

would not be shown as attributable to any buyback program. Some of the 

case study countries take a different approach to accounting for buyback 

premiums and losses. For example, for its cash basis bond buybacks, 

Canada amortizes the buyback premium or discount over the remaining 

term-to-maturity of the security bought back or the related issuance, 

whichever is shorter. Such an approach would not be consistent with U.S. 

financial accounting standards.

20

 

19U.S. generally accepted accounting principles state that gains and losses shall not be 

amortized into future periods (see Federal Accounting Standard Board codification 470-

50-40-2).

20The Federal Reserve’s large-scale asset purchase program involves purchasing 

hundreds of billions of dollars of long-term Treasury securities and other financial 

instruments (e.g., mortgage-backed securities) to help bolster the economy. These 

purchases result in a reduction in interest rates, which reduces businesses’ cost of 

borrowing to finance new investments. For an analysis of the liquidity effects of the 

Federal Reserve’s earlier asset purchases, see J. Gagnon, M. Raskin, J. Remache, and 

B. Sack, “Large Scale Asset Purchases by the Federal Reserve: Did They Work” Federal 

Reserve Bank of New York Staff Reports, No. 441 (March 2010). 
 

Page 16 GAO-12-314 Debt Management - Buyback 

If and when Treasury decides to reinstitute a buyback program, it would 

again need to make decisions about operational features, which may vary 

depending on the purpose of the program. The key questions include the 

method for determining the price of repurchased securities paid by the 

government, schedule of buyback operations, communication about 

purpose and timing, eligible participants, and the securities targeted for 

early redemption.

The price paid by the government is determined in part by the method in 

which buyback operations are conducted. Our case study countries use 

two different methods to buy back outstanding debt—reverse auctions 

and bilateral trades. Reverse auctions are transactions where securities 

are bought back in a competitive bidding process that provides equal 

access to eligible participants. In contrast, bilateral trades are 

transactions between a government’s debt management office and 

specific holders of a security. In most of our case study countries, the 

price in a bilateral trade is either set up front by the debt management 

office or determined by offers in the secondary market. As conducted in 

our case study countries, bilateral trades are less transparent than 

reverse auctions. In reverse auctions, the targeted amount and eligible 

securities are announced in advance of the auction and the results are 

announced shortly after the auction. The amount purchased through 

bilateral trades in other countries is typically subjected to the debt 

management office’s discretion and the results are not typically reported.

Of these two methods, reverse auctions are more consistent with 

Treasury’s principles, which emphasize transparency and equal access in 

its transactions. Treasury used reverse auctions from 2000-2002. If, 

however, there are debt management challenges for which bilateral 

trades might be more useful than reverse auctions, certain features of 

bilateral trades could be modified to make such an approach more 

consistent with Treasury’s debt management principles. For example, 

because market disruptions are unforeseen, it could be difficult to set up a 

reverse auction in such a circumstance. Bilateral trades could be useful to 

address certain unforeseen market disruptions because they could be 

conducted on short notice. Other countries have said that bilateral trades 

are more flexible and can be used to achieve this purpose. In addition, 

Treasury could use bilateral trades to buy back the most illiquid securities.

All our case study countries except Germany use or have used reverse 

auctions to manage their outstanding debt; Germany, France, and the 

United Kingdom currently use bilateral trades (see table 2).

A Well-Designed 

Buyback Program 

Can Promote LowestCost Financing over 

Time

Reverse Auction Method 

for Determining Security 

Prices Is Most Consistent 

with Treasury’s Debt 

Management Principles, 

but Carefully Designed 

Bilateral Trades May Also 

Be Feasible under Certain 

Conditions
 

Page 17 GAO-12-314 Debt Management - Buyback 

Table 2: Buyback Methods Used by Case Study Countries

Country Reverse auction Bilateral trades

Canada X (currently) 

France X (2000-2006) X (currently)

Germany X (currently)

United Kingdom X (2000-2001) X (currently)

Source: GAO analysis.

The French government used reverse auctions from 2000-2006 to 

manage its outstanding debt but now uses bilateral trades because it 

sees them as more flexible and easier to conduct than reverse auctions. 

These are not announced in advance. Rather, the primary dealers are 

generally aware of the debt management office’s interest in buybacks and 

the debt management office purchases bonds over the counter when they 

receive offers. The current financing rate is the limit on what it would pay 

to buy back a security. Agence France Tresor officials told us that the 

flexibility of bilateral trades helps them to minimize borrowing costs.

Bilateral trades are also used by both the British and German 

governments. To smooth cash flow, the British government currently 

repurchases securities with only 6 months left to maturity. The U.K. Debt 

Management Office makes an offer in response to a request from a 

primary dealer; neither the price nor the results of individual trades is 

publicly reported. The Debt Management Office’s offer takes into account 

money market conditions and its prevailing cash position. The British 

government used reverse auctions from 2000-2001 to maintain the 

liquidity of benchmark issues during a time of budget surplus. Officials 

from the U.K. Debt Management Office told us they reserve the right to 

reintroduce reverse auctions if deficits decline. The German Finance 

Agency is an active participant in the secondary market for German 

government securities and regularly uses bilateral trades to help smooth 

maturity peaks, enhance liquidity of specific bonds, and reduce 

government borrowing costs. The German Finance Agency does not 

announce the purpose or specifics of its buybacks in advance and does 

not report results of the bilateral trades. It determines which bonds to buy 

back based on market prices and the liquidity and maturity dates of the 

bonds.

Treasury has not conducted bilateral trades for its debt management 

operations in recent history, but this year it used them for the more limited 

purpose of selling certain assets. In March 2011 Treasury began selling 
 

Page 18 GAO-12-314 Debt Management - Buyback 

its portfolio of mortgage-backed securities worth $142 billion, at a rate of 

up to $10 billion per month, as market conditions permit. These 

transactions are conducted on Treasury’s behalf by a third party vendor. 

Eligible buyers can make offers for specific securities and the third party 

that manages the program has the option of accepting or declining their 

bids with a goal of maximizing value for the taxpayer. Treasury sees this 

method as appropriate for obtaining the best return for the taxpayer in 

selling the mortgage-backed securities.

It may not be feasible to provide the same amount of transparency, 

regularity, and predictability for bilateral trades as is done for reverse 

auctions in part because of the different nature of the debt management 

challenges for which bilateral trades are most likely to be useful in the 

United States. However, certain features of bilateral trades used by other 

countries could be modified to make bilateral trades more consistent with 

Treasury’s debt management principles. First, the creation of a bilateral 

trade capability or facility could be announced in advance; the advance 

announcement could include the purposes of such a program and 

information on the circumstances in which it might be used. The 

announcement would need to be clear on how prices would be set in the 

absence of a competitive bidding process. For example, prices could be 

tied to the secondary market. Second, the results of the bilateral trades—

including the amount bought back and the average price paid—could be 

publicly reported, similar to what is reported for regular and reverse 

auctions.

Just as regular and predictable auctions provide investors with greater 

certainty and better information with which to plan their investments, 

participation in any buyback program would be encouraged by a regular 

schedule and advance communication. During 2000-2002, Treasury used 

buybacks in part to limit the accumulation of large cash balances. 

Treasury generally held two reverse auctions in the second half of the 

month when cash balances were generally higher, with a few 

exceptions.21

 

21Of the 45 reverse auctions, 7 auctions were held in the first half of the month. In 7 of the 

26 months that the buyback program was active, Treasury held more or fewer than 2 

auctions per month.

Regularly Scheduled 

Buybacks Promote 

Predictability
 

Page 19 GAO-12-314 Debt Management - Buyback 

Adding regularly scheduled buyback auctions to Treasury’s auction 

schedule might seem to present a challenge. The frequency of Treasury 

auctions has increased in recent years along with borrowing needs. 

Treasury conducted 269 public auctions in 2011, up from 220 auctions in 

2007. In November 2011, for example, an auction was held most 

business days of the month (see fig. 4). Both Treasury and primary 

dealers noted that it is best to avoid days when the Treasury market could 

be volatile, such as days when key economic data are released. 

Additionally, Treasury should consider when the FRBNY conducts open 

market operations to sell or purchase Treasury securities from primary 

dealers. Treasury also prefers not to conduct auctions on Fridays or 

around holidays because of low trading volume.22

 

22FRBNY has the responsibility of conducting open market operations on behalf of the 

Federal Reserve. 
 

Page 20 GAO-12-314 Debt Management - Buyback 

Figure 4: November 2011 Auction Schedule
 

Page 21 GAO-12-314 Debt Management - Buyback 

Most of the primary dealers with whom we spoke emphasized the need 

for predictability of reverse auctions. This is especially important because, 

as some market participants noted, if they were sufficiently convinced that 

a buyback program marked a change in Treasury’s regular and 

predictable framework, it could actually result in higher borrowing costs. 

Some market participants suggested that Treasury hold reverse auctions 

on the same day as regular auctions. This is similar to a practice used in 

Canada. The Canadian government conducts its cash basis bond 

buyback auction, which is used to maintain auction sizes and thereby 

enhance liquidity of securities, on the same day as its standard auctions. 

The bidding deadline for the buyback program is 20 minutes after the 

deadline of its standard auction. The Canadian debt management officials 

said the close timing reduces market risk for the participants.23

While bilateral trades conducted in other countries were not done on a 

regular schedule, they could be implemented in a manner that is 

consistent with Treasury regular and predictable principles. For example, 

Treasury could communicate with the market the rules for bilateral trades, 

including explicit criteria for the purpose of the program, how securities 

would be selected, and how prices would be determined. Such a format 

would allow participants to anticipate when such an operation might be 

used and plan accordingly.

Treasury 

officials said that while this would be possible it would require 

coordination with the market and the FRBNY so that auctions are 

conducted at a time when they would get complete dealer participation as 

well as not interfere with scheduled open market operations.

Most of the market participants we spoke with said that transparency 

about the purpose would be important for any buyback program. They 

suggested that Treasury officials clearly announce the purpose of the 

buyback program well in advance to promote broad participation and 

more competitive bidding. By understanding the purpose of the program, 

especially in times of budget deficit, market participants could better 

predict when the buyback program would be used and the type of 

securities that might be targeted.

 

23Market risk arises, in part, from changes in the level of interest rates.

Participation Is Promoted 

by Clarity of Program 

Purpose and Timely 

Announcements of 

Buybacks
 

Page 22 GAO-12-314 Debt Management - Buyback 

As with regular auctions, market participants said the specific details of an 

auction such as the securities eligible for buyback should be announced 

in advance, similar to Treasury’s past practice and the FRBNY’s largescale asset purchase program from 2009 through 2011. Treasury used a 

phased announcement for its previous buyback program. In January 

2000, Treasury announced that it would conduct a buyback program to 

maintain benchmark issue sizes and limit the lengthening of its portfolio. It 

said it would purchase as much as $30 billion of securities with 

substantial remaining maturity through reverse auctions in calendar year 

2000. As part of each quarterly refunding statement Treasury then 

announced both its expected funding requirement and the amount it 

would buy back for that quarter or year. For example, on November 1, 

2000, Treasury announced that it would buy back $9 billion in securities 

during the January to March, 2001 quarter. Treasury then announced 

more specific details—on the maximum amount and the specific 

securities eligible for repurchase—1 or 2 days before each auction.

Literature suggests that the length of time between the announcement 

and the actual auction can affect the prices that Treasury pays to 

repurchase the security.24 Some market analysts suggest that the market 

prices of the securities increase between the time of the announcement 

and the morning of the buyback operation—the so called “announcement 

effect” which would suggest that a shorter announcement period would be 

beneficial. However, market participants said that a longer period 

between the announcement and the buyback operation is beneficial to the 

market because it gives the market time to find holders of the securities 

and determine prices and is consistent with Treasury’s standard auction 

practices. One primary dealer said that the longer announcement period 

might reduce a run-up in the prices of the securities because it would 

allow more time for price discovery.

Treasury officials have said that greater participation in its debt auctions 

fosters competition, thereby helping achieve its goal of lowest cost 

borrowing over time. Regular Treasury auctions are open to all market 

participants consistent with Treasury’s principle of providing equal access 

for transactions. However, participation in reverse auctions could be 

 

24See K.D. Garbade and M. Rutherford, Buybacks in Treasury Cash and Debt 

Management, Federal Reserve Bank of New York Staff Reports, No. 304 (October 2007). 

Broadening the Eligibility 

for Bidding in Reverse 

Auctions Is Consistent 

with Treasury’s Principle 

of Equal Access
 

Page 23 GAO-12-314 Debt Management - Buyback 

limited because of current operational constraints. Direct participation in 

the 2000-2002 reverse auctions was limited to primary dealers largely 

due to system limitations. Because the buyback program was 

implemented quickly, Treasury used an existing Federal Reserve system, 

Trading Room Auction Processing System (TRAPS), which was capable 

of doing reverse auctions; it, however, could only accept bids submitted 

by primary dealers. Other investors could make offers to sell their 

Treasury securities in the reverse auctions through the primary dealers. 

Treasury officials said that the period of time between the announcement 

and the auction was sufficient for these other investors to participate 

through the primary dealers.

The more recently developed Treasury Automated Auction Processing 

System (TAAPS) used for standard auctions can accept bids from both 

primary dealers and direct bidders,25

Expanding eligibility and allowing for broader participation in any future 

buyback auctions could reduce prices Treasury would have to pay. 

Furthermore, large investors with whom we spoke said it would be 

important for them to have the option of bidding directly. However, there 

are countervailing issues. The first is operational; auction resources and 

staffing would likely increase when Treasury sends people offsite to 

monitor auction operations, which was necessary during the previous 

buyback auctions. Also, because Treasury would have less control over 

but it cannot currently conduct 

reverse auctions. Treasury officials told us it would take a year and a half 

to add this new functionality to TAAPS. Since the time of the prior 

buybacks, the Federal Reserve has replaced TRAPS with FedTrade, 

which has the capacity to conduct transactions, including reverse 

auctions, with a limited number of direct bidders; its capacity is greater 

than the number of primary dealers but not large enough to open up to all 

market participants. A decision by Treasury to expand eligibility for 

bidding in reverse auctions would require either TAAPS or FedTrade to 

be modified or Treasury to develop a process for determining which 

institutions beyond the 21 primary dealers would be allowed to participate 

in buyback auctions.

 

25Direct bidders are financial institutions that, like primary dealers, can bid for and buy 

Treasury securities competitively at auction directly from Treasury instead of in the 

secondary market. Unlike primary dealers, direct bidders are not required to participate in 

all Treasury auctions. Most Treasury securities are bought at auction by primary dealers. 

A much smaller, but growing volume of securities is purchased by direct bidders.
 

Page 24 GAO-12-314 Debt Management - Buyback 

the delivery of securities than in a regular auction, Treasury would have to 

determine its likely response if successful bidders delay delivery or fail to 

deliver the agreed upon security on the agreed upon date. Another 

consideration has to do with market behavior. The majority of the primary 

dealers with whom we spoke said that expanding the auction to all 

participants could increase uncertainty about market demand and lead 

them to bid less aggressively, which could result in lower prices for the 

securities auctioned. In previous work, we have noted primary dealers’ 

concerns about the volume of direct bidding in auctions.26 In contrast, 

investors we spoke with supported broader participation, noting the 

benefits to Treasury of competition among holders. These disparate 

views suggest that the effects of broader participation need further 

exploration.

The number of securities eligible for buybacks can affect the 

competitiveness of dealers’ bidding and consequently the cost of the 

buyback operation. For example, the Canadian government found it 

beneficial to limit buybacks to a predetermined size because when the 

announced size is too large relative to demand, dealers bid less 

aggressively. For the cash management bond buyback auctions the 

Canadian government made illiquid bonds ineligible in an effort to control 

the size of the auction and found that having 10-12 bonds eligible in each 

operation is a good number. Treasury made 51 bonds eligible for 

buybacks over the course of the previous program. However, Treasury 

officials found it more cost effective to limit the size of an operation to not 

more than $2 billion and the set of eligible bonds to about 10-12 issues. 

When determining the size of the buyback operations, Treasury also 

considered the tradable supply of the eligible securities to encourage 

participation. One primary dealer said that having too many eligible 

securities available complicates the bidding process and creates more 

manual work. An analysis of previous Treasury buyback auctions shows 

that Treasury’s buyback costs could increase with a large number of 

bonds included in the auction.27

 

26

Treasury’s analysis of the buybacks in 

2000 found that Treasury generally paid market prices for the securities it 

GAO-10-498. 

27B. Han, F.A. Longstaff, and C. Merrill, “The U.S. Treasury Buyback Auctions: The Cost 

of Retiring Illiquid Bonds” The Journal of Finance, Vol. 62, No. 6 (December 2007), pp. 

2673-2693.

Targeting Fewer Securities 

and a Narrower Maturity 

Band Is Important
 

Page 25 GAO-12-314 Debt Management - Buyback 

bought back except for the auction in which 26 securities were eligible for 

repurchase. This auction was relatively expensive, but Treasury said it 

provided valuable information on the ability of market participants to make 

many simultaneous bids.

The competitiveness of dealers’ bidding and consequently the cost of the 

buyback operation can also be affected by the type of securities eligible 

for buybacks. The primary dealers with whom we talked suggested that 

Treasury narrow the eligible securities to a specific sector or specific 

maturity at each auction. One suggested the bands of eligible securities 

be narrower for longer-term securities. Another primary dealer said that a 

wide range of maturities at the long end of the curve complicates the 

bidding process and could reduce the competitiveness of bids. Because 

the prices of longer-term securities are more sensitive to changes in the 

yield, changes in market yields during the bidding period require larger 

and wider ranging changes to the prices they would offer for a security. In 

the 2000-2002 buyback program, Treasury generally narrowed the range 

of eligible securities for each auction to securities maturing within 6 years 

or less of one another.

The securities selected for any buyback in the United States and other 

countries were based on the goal of the program. For example, the goals 

of the 2000-2002 buyback program were to limit the increase of the 

average maturity of the portfolio, which could result in unnecessarily high 

interest costs, and to enhance the liquidity of Treasury’s benchmark 

securities, which market participants value. Treasury generally targeted 

off-the-run 30-year bonds with over 10 years remaining to maturity so that 

it could maintain issuance of its benchmark securities while maintaining 

the average maturity of its portfolio. The Canadian government also 

selects the securities eligible for repurchase based on the purpose of its 

buyback program. For example, the purpose of Canada’s cash 

management bond buyback program is to smooth maturity peaks; 

therefore, Canada targets bonds with 18 or fewer months remaining to 

maturity. Canada reintroduced cash basis bond buybacks to support 

auction sizes and enhance liquidity for the 10- and 30-year bond as they 

were generally less liquid than the 2-, 3- and 5-year sectors. For this 

program, Canada targets illiquid high-coupon bonds and specifically 

excludes current issues being built as benchmarks.

The market participants we spoke with said that the securities targeted for 

any buyback should be clearly aligned with Treasury’s goals for the 

program. While they understood that Treasury needed to adjust issuance 
 

Page 26 GAO-12-314 Debt Management - Buyback 

in order to manage its long-term debt, they said that sporadic purchases 

of securities could confuse the market and would not be well received.

Our case study countries have used a debt management tool called a 

switch for purposes similar to those of buybacks, including managing the 

maturity profile and helping to enhance liquidity of benchmark issues.28 In 

a switch, the government buys back an outstanding security prior to 

maturity and delivers a reopened29 liquid benchmark security via a 

competitive switch auction.30 Bidders submit offers based on how much of 

the outstanding security they are willing to sell for the reopened 

benchmark security.31

 

28The U.S. Treasury used similar tools called exchange offerings and advance refundings 

in the 1950s and 60s. For more information, see K.G. Garbade, The Emergence of 

“Regular and Predictable” As a Treasury Debt Management Strategy, FRBNY Economic 

Policy Review (March 2007). 

The government uses the bids to determine the 

29In a security reopening, the government issues additional amounts of a previously 

issued security. The reopened security has the same maturity date and coupon interest 

rate as the original security, but with a different issue date and usually a different purchase 

price.

30In Canada, a small cash transaction adjusts for the premium or discount. The cash may 

be paid by the Canadian government or the successful bidder, depending on whether the 

outstanding or reopened security was more valuable. 

31Bids for switches in the United Kingdom were for the amount of the outstanding security 

offered and the price for the reopened security. In France, bids were submitted as an 

exchange ratio. For example, the mean exchange ratio for its auction in 2008 was 82.57 

securities bought back for 100 securities issued. In Canada, bids included the amount of 

outstanding securities offered and the difference in yields between the outstanding and 

reopened securities. 

Switches and Debt 

Exchanges Could 

Also Be Used to 

Manage Rollover 

Peaks and Help 

Maintain Liquidity

Switches Can Help Manage 

Maturity Peaks and 

Address Future Liquidity 

Issues
 

Page 27 GAO-12-314 Debt Management - Buyback 

exchange ratio and thus the amount of the benchmark security each 

successful bidder receives.

The Canadian government has conducted switches as part of its regular 

auction schedule since 2002. Canada first used switches to maintain new 

issuance sizes during a budget surplus but has since focused more on 

enhancing liquidity and managing the maturity profile. For example, when 

cash-based buybacks were scaled back due to higher financing 

requirements in 2008-2010, the government continued to use switches to 

maintain liquidity in longer-term maturities. Canadian switches provide 

market participants with more frequent access to benchmark bonds. 

France and the United Kingdom have used switches on a more limited 

basis. France used a switch in 2008 to promote liquidity of 30-year bonds 

in response to a strong demand from investors. The United Kingdom 

conducted switch auctions of securities with similar terms to maturity from 

1999 to 2001, during a period of budget surplus to maintain the supply of 

current benchmark securities in a low issuance environment and to 

manage maturity peaks. U.K. officials told us that switches remain 

available as a debt management tool, though there are no current plans 

to use them.

Table 3 shows the results of a switch in Canada (in Canadian dollars or 

CAD). In September 2011, the government repurchased and retired 

portions of two securities with less than 2 years remaining to maturity and 

delivered a reopened 2-year note.

Table 3: Results of Canadian Switch Auction Held on September 28, 2011 (amounts 

in CAD)

Securities repurchased

Coupon rate Maturity date Amount repurchased

3.5% June 1, 2013 $1.17 billion

5.25% June 1, 2013 $0.05 billion

Security reopened

Coupon rate Maturity date Amount issued

1.5% November 1, 2013 $1.0 billion

Source: Bank of Canada announcement of switch operation results.

Note: The amount of new bonds issued through switches does not necessarily equal the amount of 

old bonds bought back through those operations because the exchange is not based on par value, 

but rather is on a duration-neutral basis.
 

Page 28 GAO-12-314 Debt Management - Buyback 

In Canada, switch issuances are a small amount of total gross issuance. 

For example, in 2009-2010, the Canadian government used switches to 

issue $2.3 billion CAD of its total gross issuance of $102.2 billion CAD. 

The Canadian government tends to buy back a smaller amount through 

switches than it does through its regular buyback programs. For example, 

in 2009-2010, the Canadian government bought back $2.1 billion CAD 

using switches and $10.3 billion CAD using buybacks.

Switches can help maintain a liquid Treasury market. Some market 

participants we spoke with said that the current Treasury market was 

liquid and did not need an additional tool such as a switch to address 

liquidity. Nevertheless, both Treasury officials and most market 

participants we spoke with said that switches could help address future 

liquidity problems in individual securities or types of securities. For 

example, switches could help avoid disruptions in the Treasury market, 

which occur when any security is difficult to trade (i.e., illiquid), by 

targeting those securities for early redemption. One primary dealer we 

spoke with said switches that target specific securities could also increase 

liquidity across the entire Treasury securities market—a benefit to 

Treasury and investors—because participants would know that Treasury 

would be willing to make an exchange for their securities if they became 

highly illiquid. However, most market participants we spoke with said 

Treasury should limit the amount of the outstanding supply bought back 

to help ensure the security remains liquid enough to trade. The United 

Kingdom limits the repurchase quantity such that the amount repurchased 

does not reduce the amount outstanding to less than £4.5 billion.

Switches have been successful at enhancing liquidity in Canada. 

Participants in the Canadian debt market who were consulted by the debt 

management office reported that, as of 2009-2010, the liquidity of long 

off-the-run bonds had improved significantly due to switches of longerterm maturities.32

 

32The Canadian government securities market is smaller and has had more of a challenge 

maintaining liquidity than the U.S. market. 

Switches aimed at enhancing liquidity may achieve a 

secondary benefit of maintaining or reducing debt financing costs over 

time because bidders tend to pay higher prices for more liquid securities.
 

Page 29 GAO-12-314 Debt Management - Buyback 

Switches that are duration-neutral could have the added advantage of 

broadening Treasury’s investor base.33

Most market participants we spoke with said that any new Treasury 

program should be designed consistent with Treasury’s principles of 

regularity and predictability. Treasury has been successful with and the 

market is accustomed to this approach. Implementing a switch program 

would also require consideration of the operational features below:

Duration-neutral switches 

minimize market risk because interest rate changes affect both securities 

similarly. They are also attractive to investors because duration-neutral 

switches allow them to maintain portfolio duration. Canadian switches are 

duration-neutral and therefore reduce participants’ market risk at 

repurchase operations. There is broad interest in maintaining portfolio 

duration among investors in the Canadian government securities market, 

according to a Canadian government official. There are also such 

investors in the U.S. Treasury securities market. For example, one 

primary dealer we spoke with said that some investors have essentially 

asked them to broker duration-neutral exchanges involving the securities 

they offered to the Federal Reserve during its large-scale asset purchase 

program from 2009 through 2011.

• Operating system: Neither Treasury’s nor the Federal Reserve’s 

auction systems support switch auctions. According to a Treasury 

official, Treasury could develop its own system to include switch 

auction capability or use the FedTrade system operated by the 

Federal Reserve, if the Federal Reserve modified that system. 

FRBNY officials told us that they would need to modify FedTrade to 

support switch auctions or develop or procure a new system that 

supports switch auctions.

• Scope of eligible bidders: As in their conventional auctions, the 

Canadian and U.K. governments limit direct participation in switch 

auctions to certain government-registered traders. The U.S. primary 

dealers with whom we spoke generally preferred limiting auction 

participation to primary dealers. However, the U.S. Treasury has a 

broader scope of direct bidders in its conventional auctions, consistent 

with its principle of equal access and objective to appeal to a broad 

 

33Because duration indicates how long, in years, it takes for the price of a security to be 

repaid by its internal cash flows, it measures the price sensitivity of a security to interest 

rate changes. 
 

Page 30 GAO-12-314 Debt Management - Buyback 

investor base. (The earlier discussion about participation in buybacks 

is also applicable here.)

• Auction schedule: A switch auction would need to fit into Treasury’s 

regular auction schedule. Market participants we spoke with 

suggested following Treasury’s practice of regular auctions. The 

Canadian government holds switches of 30-year bonds during 

quarters in which there are no conventional 30-year bond auctions. 

(The earlier discussion about buybacks via reverse auction is also 

applicable here.)

• Announcements: Most market participants stated that Treasury could 

maintain its transparency by clearly communicating the purpose of a 

switch program. Consistent with Treasury’s practice of announcing its 

auction schedule on a quarterly basis and announcing the specific 

securities it will auction several days in advance of the auction, the 

Canadian and U.K. governments publicly announce the details of their 

switch auctions. For example, the U.K. Debt Management Office 

announces the date of and securities involved in a switch auction in its 

quarterly auction announcement and, approximately 1 week prior to 

the auction date, announces the maximum amount of the outstanding 

security it is willing to buy.

• Targeted securities: Program goals and expected participation both 

influence the selection of securities for a switch. For example, Canada 

currently reopens 30-year bonds in exchange for buying back more 

illiquid longer-end bonds in line with its goal to promote liquidity in the 

long end of the maturity profile. One primary dealer we spoke with 

said that investors must be interested in purchasing the security being 

reopened, as well as hold the eligible outstanding security. Another 

primary dealer noted that participation may be limited if buy-and-hold 

investors hold a large portion of the eligible outstanding security, since

they would be less likely to trade their securities.

• Rules for switch operations: Treasury’s rule for buyback operations 

covers exchanging a security for cash but does not cover exchanging 

two securities. According to a Treasury official, Treasury would need 

to modify the existing buybacks rule or issue a new rule.

A debt exchange is an exchange of securities whereby the government 

buys a certain amount of outstanding securities in exchange for the 

delivery of a certain amount of reopened benchmark securities at an 

exchange ratio set by the government. The U.K. government used debt 

exchanges from 1998 to 2002 to retire illiquid securities and build the size 

A Variation on Debt 

Exchanges Could Help 

Address Sudden Illiquidity 

Issues
 

Page 31 GAO-12-314 Debt Management - Buyback 

of new benchmarks.34

Debt exchanges as conducted in the United Kingdom carry market risk to 

the government. Because the exchange ratio was fixed at the start of the 

exchange, the government was exposed to changes in the market value 

of the eligible securities that occurred during the length of time the 

securities were eligible for exchange. Market participants we interviewed 

agreed that debt exchanges would increase the government’s risk 

exposure. A variable—rather than fixed—exchange ratio tied to 

movement in secondary market prices would reduce the risk associated 

with changing market prices and maintain transparency by having a 

government-announced exchange ratio.

The debt exchanges began upon initial 

announcement and continued for 3 weeks. Results were announced on 

the following business day, including the total amount of the outstanding 

security repurchased by the government, the total amount outstanding in 

the market, and the coupon rate and total amount of the reopened 

security issued.

In the United States, debt exchanges could be used to maintain or 

enhance liquidity on an ongoing or as-needed basis to address sudden 

illiquidity issues that a preannounced auction could not. We have 

previously reported that a wide-scale financial market disruption may 

require Treasury to take actions outside of its regular and predictable 

schedule.35 However, they would need to be modified to fit Treasury’s 

regular and predictable principles, including informing the market in 

advance of its plans to buy or sell debt. For example, the government 

could operate a regular or ongoing debt exchange via an open window 

with the market provided the Treasury publicly announces the purpose of 

the program and the securities it will exchange.

The U.S. Treasury market is the deepest and most liquid sovereign debt 

market in the world. Nevertheless, Treasury faces a number of debt 

management challenges, including some that may not be foreseeable at 

 

34The securities the U.K. government selected for buyback had an amount outstanding 

below a set threshold. 

35See GAO, Debt Management: Backup Funding Options Would Enhance Treasury’s 

Resilience to a Financial Market Disruption, GAO-06-1007 (Washington, D.C.: Sept. 26, 

2006). 

Conclusions
 

Page 32 GAO-12-314 Debt Management - Buyback 

this time. Given the market uncertainties and the federal government’s 

fiscal challenges, increasing Treasury’s capabilities to respond to 

changing market conditions or potential disruptions in ways that minimize 

costs would be prudent. Buybacks are one such capability. Other 

countries have ongoing buyback programs—even in times of deficit—to 

address challenges, including rollover peaks, which the U.S. Treasury 

faces in the next several years. A buyback program would allow Treasury 

to maintain current issuance levels even as net borrowing needs decline. 

This would permit more gradual changes to the auction schedule and 

reduce rollover peaks. A buyback program could also help enhance 

liquidity, address market disruptions, and, as Treasury’s previous 

experience shows, reduce borrowing costs over the long term. Building 

the capability to use switches and debt exchanges would provide 

Treasury additional flexibility to respond to changing market conditions, 

as well as the potential to broaden its investor base by appealing to 

investors that want to maintain the average maturity of their portfolios in 

ways that minimize market risk.

The design and implementation of any of these debt management tools 

has implications both for Treasury’s ability to minimize borrowing costs 

over time and for the Treasury market in general. Several features of 

Treasury’s previous buyback program were driven by the sudden need for 

a buyback program and Treasury’s lack of experience at the time with 

such a program. Building the capacity to conduct a buyback program now 

can help ensure that Treasury is prepared to respond with a welldesigned program using features similar to its regular auctions and 

consistent with its debt management principles. While the competitive 

bidding process of reverse and switch auctions is beneficial when the 

Treasury has sufficient advance notice to plan an auction and notify the 

market, bilateral trades or debt exchanges may provide Treasury with 

greater ability to respond to sudden illiquidity issues that would benefit 

from Treasury acting quickly. Treasury could examine ways to modify 

certain features of bilateral trades and debt exchanges to better align with 

Treasury’s long-standing principle of transparency. A regular schedule of 

buyback or switch operations would help Treasury maintain its reputation 

of predictability, which the market values. Also important to predictability 

would be a clear communication about the purpose of the program, so 

that the market could anticipate the timing and securities targeted for 

early redemption. While the benefits of expanding eligibility for direct 

bidding in reverse and switch auctions to all auction participants need 

further exploration, it would be prudent to build in the capacity up front 

because allowing all market participants to directly participate would be 

consistent with Treasury’s principle of equal access. Finally, while the 
 

Page 33 GAO-12-314 Debt Management - Buyback 

securities selected for any buyback program would be tied to the purpose 

of the program, both past experience and market participants suggest 

that Treasury would benefit from targeting a limited number of securities 

at each auction and targeting a narrower band of maturities, particularly 

for longer-term maturities.

Treasury should build the capacity for a buyback program that could be 

used to respond to potential changes in market conditions during times of 

deficit. Such a program should allow for broader direct participation 

beyond the primary dealers. In conducting any buyback operations 

Treasury should

• clearly articulate the purpose of the buyback program,

• conduct the buyback reverse auctions on a regular and predictable 

schedule consistent with the purpose of the buyback program, and

• target a few securities in narrow maturity bands at each reverse 

auction.

To further increase Treasury’s flexibility to respond to potential changes in 

market conditions and improve its ability to continuously maintain liquidity 

among outstanding securities, Treasury should build the capacity for a 

switch auction program. In building this capacity, Treasury should allow 

for direct participation beyond the primary dealers. If Treasury chooses to 

implement a switch auction program, it should

• clearly articulate the purpose of the switch auction program and

• conduct the switch auctions on a regular and predictable schedule 

consistent with the purpose of the program.

To ensure that Treasury has the flexibility to respond to sudden and widescale market disruptions, Treasury should develop the capacity to use 

bilateral trades or debt exchanges. It would be especially important to 

carefully consider the design of such a program to ensure that the 

features of the program are consistent with our recommendations related 

to buybacks and switch auctions and consistent with Treasury’s longstanding debt management principles. For example, the price-setting 

principle should be transparent and results of any activities should be 

reported to the market.

We provided a draft of this report to the Secretary of the Treasury and 

Federal Reserve officials for comment. In oral comments from the 

Treasury Deputy Assistant Secretary for Federal Finance, Treasury 

Recommendations for 

Executive Action

Agency Comments 

and Our Evaluation
 

Page 34 GAO-12-314 Debt Management - Buyback 

concurred with our analysis and findings and said the report would be 

very helpful in analyzing tools that increase their flexibility for responding 

to changes in market conditions. Treasury and Federal Reserve officials 

also provided technical comments that were incorporated, as appropriate.

We are sending copies of this report to interested congressional 

committees, the Secretary of the Treasury, and other interested parties. 

In addition, the report is available at no charge on the GAO website at 

http://www.gao.gov. 

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

contact Susan J. Irving at (202) 512-6806 or irvings@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 II.

Sincerely yours,

Susan J. Irving

Director for Federal Budget Analysis

Strategic Issues
Appendix I: Objectives, Scope, and 

Methodology

Page 35 GAO-12-314 Debt Management - Buyback 

As part of our ongoing work on debt management issues and under the 

Comptroller General’s authority, we examined debt buybacks—a debt 

management tool that enables debt managers to actively manage the mix 

of outstanding Treasury securities by redeeming particular marketable 

securities prior to their maturity dates using a voluntary process. They are 

used in other countries to address debt management challenges but are

not currently used in the United States. Specifically, we assessed (1) the 

budget and market conditions under which debt buybacks could help 

Treasury achieve its debt management goals, (2) the operational features 

of buyback programs that would support these goals, and (3) other debt 

management tools used by case study countries to achieve objectives 

similar to those of a U.S. buyback program.

To address these objectives, we examined Treasury’s 2000-2002 

buyback program as well as the buyback programs and similar debt 

management tools used in Canada, the United Kingdom (U.K.), France, 

and Germany. We selected case study countries whose practices and 

experiences with debt buybacks and other debt management tools used 

for similar purposes could provide useful insights about the potential 

benefits and risks of a debt buyback program for the United States. We 

selected countries that are members of the Organisation for Economic 

Co-operation and Development (OECD) and whose sovereign debt 

markets are most similar to the United States in terms of size and 

liquidity. We determined that, for our purposes and considering resource 

constraints, four is a sufficient number of case study countries.

We determined that a nongeneralizable sample is sufficient for our 

purposes because we will use the case study information to describe 

aspects and understand the context of the use of buybacks and other 

debt management tools, as well as to provide illustrative examples of our 

findings. The experiences of any one country are not necessarily 

generalizable to other countries. In analyzing other countries’ experiences 

and identifying useful insights for the United States, it is important to 

consider the differences between the countries. For example, the public 

sector debt within the purview of the national debt management office 

varies among countries depending on the nature of their political and 

institutional frameworks. Furthermore, the United States has the world’s 

largest economy, flexible markets, and stable economic and political 

systems. Some officials and market participants we interviewed noted 

that the Canadian sovereign debt market is much smaller than the 

Treasury market and has had more of a challenge maintaining liquidity. 

We previously reported that some debt management tools used abroad 

may be difficult to implement in a way consistent with U.S. values of 

Appendix I: Objectives, Scope, and 

Methodology 
Appendix I: Objectives, Scope, and 

Methodology

Page 36 GAO-12-314 Debt Management - Buyback 

transparency, predictability, and equal access or may require the 

government to assume credit risk.1

To examine Treasury’s past buyback program, we reviewed literature

evaluating the program and related aspects of the Treasury market, 

analyzed the cost of the buybacks, and interviewed agency officials and 

others. We analyzed the cost of Treasury’s past buybacks, including the 

extent to which Treasury could have reduced its interest costs over the 

long term had it financed its buybacks by simultaneously issuing new 

debt. To illustrate how much Treasury could theoretically have reduced its 

interest costs through such actions, we compared published auction 

results of the buyback operations Treasury conducted from March 2000 

through April 2002 against Treasury note and bond secondary market 

price data from the Center for Research in Security Prices (CRSP) U.S. 

Treasury Database for the same periods.2 Specifically, we calculated the 

invoice prices paid by Treasury for each auction.3 We then simulated 

market rates that Treasury could theoretically have attained on the dates 

of the buybacks by extracting yield curves from forward rates based on 

the secondary market prices of on-the-run 2-year notes, 5-year notes, 10-

year notes, and 30-year bonds, as well as market rates for 4-week bills.4

 

1

We assumed that on the date of each buyback auction Treasury could 

have issued new debt with various terms to maturities subject to these 

simulated rates (1) in total face value amounts equal to the total invoice 

prices paid per buyback auction, and (2) in combinations such that the 

average duration (weighted by amount issued) matched that of the 

GAO-02-14. 

2 We obtained the secondary market price data from the CRSP U.S. Treasury Database 

through Wharton Research Data Services in April 2011.

3

The invoice price is the actual price paid for a security and consists of the published price 

(known as the clean price) plus any interest accrued from the last coupon payment. We 

use the invoice price because this reflects the actual amount Treasury paid and would 

need to be covered with new debt issues in order for the transactions to be cash-neutral 

on net.

4

A forward rate is the expected interest rate for some future period implied by current 

interest rates. We formed yield curves extending from 4 weeks to 30 years. Because onthe-run 30-year bonds in our analysis periods generally had terms to maturity several days 

short of a full 30-year term, we assumed that the yield curves would be flat after the knot 

points based on the on-the-run 30-year-bonds in our data.
Appendix I: Objectives, Scope, and 

Methodology

Page 37 GAO-12-314 Debt Management - Buyback 

repurchased securities.5 Using yields to maturity based on the prices of 

the on-the-run securities, we calculated for each auction the present 

value of the cash flows of the off-the-run bonds repurchased.6 We then 

calculated the value of the reduced interest costs for each auction by 

taking the difference between the present value of the cash flows 

associated with the off-the-run bonds repurchased and the present value 

of the cash flows of the hypothetical new issues (represented by the 

invoice prices Treasury paid for the repurchased securities).7

We interviewed officials from Treasury’s Office of Debt Management and 

the Bureau of the Public Debt and the Board of Governors of the Federal 

Reserve System and the Federal Reserve Bank of New York (FRBNY)—

one of the Federal Reserve Banks serving as Treasury’s fiscal agent. We 

also interviewed officials from the Canadian Department of Finance and 

the Bank of Canada, the U.K. Debt Management Office, Agence France 

Our 

illustrative estimate of the value of reduced interest costs for the buyback 

auctions as a whole is the sum of these per-auction differences. To 

assess the reliability of CRSP data, we compared them to another 

published source of similar data and discussed any differences with the 

data providers. We determined that such differences were likely due to 

methodological differences between the two sources and were consistent 

with industry practices. To assess the reliability of the Treasury data, we 

also compared them to another published source of similar data and 

found them consistent. Based on these assessments, we determined that 

the Treasury data and the CRSP data were sufficiently reliable for our 

purposes.

 

5

We selected the coupons of the hypothetical newly issued securities such that, based 

upon the yield curve implied by the prices of the on-the-run securities, the valuations of 

the newly issued securities would be equal to par values.

6

Consistent with market convention, we used the first callable date as the effective 

maturity date for callable bonds and yield-to-call in lieu of yield-to-maturity for those 

callable bonds bought back by Treasury where the bonds’ coupon rates were higher than 

market yields. All the callable off-the-run bonds that Treasury purchased in its buyback 

operations met this criterion.

7

The value of the hypothetical new issuances is equal to the invoice price of the debt 

repurchases paid by Treasury because of the assumptions described earlier about how 

Treasury would have constructed the portfolios of new issues and because the yield curve 

we use to discount the cash flows of the hypothetical newly issued securities is the same 

as the market rates we expect the new issues to attain. 
Appendix I: Objectives, Scope, and 

Methodology

Page 38 GAO-12-314 Debt Management - Buyback 

Tresor (France’s debt agency), and the German Finance Agency.8

We conducted this performance audit from November 2010 to March

2012 in accordance with generally accepted government auditing 

standards. Those standards require that we plan and perform the audit to 

obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objectives. We believe 

that the evidence obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives.

We 

obtained perspectives from market participants, including primary dealers 

and large investors, and market analysts. To assess the operational 

features that would support Treasury’s borrowing goals, we analyzed the 

extent to which features of Treasury’s past buyback program and the 

features of other countries’ buyback programs are consistent with 

Treasury’s debt management goals and principles. On December 13, 

2011, we briefed Treasury officials on our findings and expected 

recommendations.

 

8

We interviewed officials from Canada’s central bank because of the large role the central 

bank plays in buybacks. We did not interview central bank officials from the United 

Kingdom, France, or Germany because their buybacks role was limited. 
Appendix II: GAO Contact and Staff 

Acknowledgments

Page 39 GAO-12-314 Debt Management - Buyback 

Susan J. Irving, (202) 512-6806, or irvings@gao.gov

In addition to the contact named above, Melissa Wolf (Assistant Director), 

Susan Etzel (AIC), Serena Agoro-Menyang, Richard Krashevski, Nicole 

McGuire, Lindsay Read, Cynthia Saunders, Albert Sim, Dawn Simpson, 

and Stacy Ann Spence all made contributions to this report.

Appendix II: GAO Contact and Staff 

Acknowledgments 

GAO Contact

Staff 

Acknowledgments

(450863)
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