Congress has delegated to Treasury the power to borrow the money needed to operate the federal government and manage the government’s outstanding debt subject to a statutory limit. Treasury’s primary debt management goal is to finance the government’s borrowing needs at the lowest cost over time. To meet this objective, Treasury issues debt through auctions in a “regular and predictable” pattern across a wide range of securities. Treasury does not “time the market”—or take advantage of lower interest rates—when it issues securities. According to Treasury, because investors and dealers rely upon the routine availability of Treasury securities they tend to pay a slight premium, which lowers Treasury’s borrowing costs. In addition, Treasury also states that to support liquidity, it must issue “enough but not too much” at each auction. If Treasury issued too little, it could not sustain a deep and liquid secondary market for its securities. If it issued too much, Treasury creates concern among primary market participants that they may find it difficult to distribute their holdings in the secondary market. Treasury publishes a schedule with tentative announcement, auction, and settlement (issue) dates up to 6 months in advance of regular security auctions. Depending on the type of security, Treasury typically auctions and then issues a security within a week or less. Treasury generally issues short-term regular bills with 4-, 13-, and 26-week maturities every Thursday and issues 2- and 5-year notes at the end of each month. Three- and 10- year notes are issued in the middle of each quarter and Treasury reopens 10-year notes 1 month after their initial issuance. In addition, Treasury issues TIPS in 5-, 10-, and 20-year maturities in certain months according to the TIPS’ maturity. Finally, Treasury issues 30-year bonds in the middle of February and reopens the bonds in the middle of August. Figure 1 depicts Treasury’s April 2005 borrowing schedule. Treasury supplements its regular and predictable schedule with flexible securities called CM bills. Unlike other securities, Treasury does not publish information on CM bills on its auction schedule. Instead, Treasury generally announces CM bill auctions anywhere from 1 to 4 days ahead of the auction. The term to maturity—or length of time the bill is outstanding—varies according to Treasury’s cash needs. CM bills allow Treasury to finance very short-term cash needs—for as little as 1 day— while providing short notice to market participants. The United States Treasury is not alone in using CM bill-type instruments to finance short-term needs and smooth cash flows. For example, in the United Kingdom, the Debt Management Office (DMO) issues CM bills to meet temporary cash flow needs that the DMO cannot conveniently meet through its structured bill auctions and to help smooth cash flows. The Bank of Canada, which auctions securities for Canada’s debt management, issues CM bills to help it minimize the level and cost of carrying cash balances. Australia uses short-term securities with 5-, 13-, and 26-week maturities to bridge within-year cash flow mismatches, but may vary the maturities and issue shorter-term securities of 3 to 6 weeks. To understand when Treasury uses CM bills, we analyzed CM bills issued over the last 10 fiscal years—fiscal years 1996–2005. This time period provides a sufficiently large sample of CM bills—121—and allowed us to analyze and show trends in CM bill use before, during, and after the following events: 4 years of surpluses, five debt issuance suspension periods (DISP) declared by the Secretary of the Treasury, and the introduction of two new debt instruments—TIPS in 1997 and the 4-week bill in 2001. CM bill data were obtained from the Bureau of the Public Debt (BPD). BPD’s online database has 22 different features for each Treasury security, including the amount, announcement, auction and issue dates, the maturity date, and the yield. We examined these features as well as others examined in earlier studies of CM bills to identify patterns of CM bill auctions, issuance, and maturity. To understand why CM bills are issued or mature at these times, we examined Treasury’s cash flows from fiscal years 1996–2005 using publicly available data from the Financial Management Service’s (FMS) Daily Treasury Statements. We also met with Treasury officials from the Office of Debt Management and the Office of Fiscal Projections. We reviewed Treasury documents, including quarterly refunding statements and policy statements, and Treasury Borrowing Advisory Committee reports and minutes from quarterly refunding meetings. We obtained views on the perceived advantages and disadvantages of CM bills for Treasury, Federal Reserve operations, and investors in meetings with Treasury officials, Federal Reserve officials, market participants, including primary dealers and money market fund managers, and market analysts. We also reviewed financial and economic literature. We did not identify any key advantages or disadvantages of CM bills for Federal Reserve operations and as a result these operations are not a focus in this report. To describe the key disadvantage of CM bills for Treasury—higher yields— we estimated the differential between CM bill yields and the yields on outstanding Treasury bills of similar maturity at the time of auction using data from BPD and the Wall Street Journal (WSJ). To determine whether certain features might reduce the yield paid on CM bills, we regressed the yield differential on key features. We determined which features to examine on the basis of previous studies of CM bills and Treasury auctions, our interviews with Treasury and market participants, and our own analysis. While we analyzed the yield differential for all CM bills issued during fiscal years 1996–2005, we focused on the 55 CM bills issued during fiscal years 2002–2005 because the introduction of the 4-week bill in 2001 substantially reduced CM bill maturities and caused a structural change in the CM bill market. For more information on our statistical analysis, see appendix I. Because CM bill rates are determined in auctions, we examined auction performance to determine whether there is any relationship between selected performance measures and the yield differential. We also examined whether CM bill auctions perform as well as regular 4-week bill auctions because the 4-week bill is more similar to a CM bill—in terms of issuance amount variance and its term to maturity—than other Treasury securities. We evaluated each of the 284 CM and 4-week bill auctions in fiscal years 2001–2005 (years since the introduction of the 4-week bill) using proprietary data from the Treasury Auction Database (TAD) and GovPX—an interdealer broker database with information on primary dealer transactions for all U.S. Treasury securities. We analyzed auction performance measures mentioned in Treasury interviews, Treasury studies of auctions, Borrowing Advisory Committee minutes, and economic and financial literature/textbooks describing or evaluating Treasury auction performance. See appendix II for more information on our analysis of CM bill auctions. We identified possible options to reduce the use and cost of CM bills on the basis of our analysis of CM bill use, the yield differential, and CM bill auction performance. We discussed these options with Treasury, market participants, and others and we include their comments as appropriate. In order to assess the reliability of data used in this study, including proprietary data from TAD and GovPX, and the publicly available data from FMS, BPD, and WSJ, we examined the data to look for outliers and anomalies and addressed such issues as appropriate. In general, we chose databases that were used by Treasury and researchers to examine Treasury markets and auction performance. Where possible and appropriate, we corroborated the results of our data analysis with other sources. On the basis of our assessment we believe the data are reliable for the purposes of this review. We conducted our review in Washington, D.C., from February 2005 through March 2006 in accordance with generally accepted government auditing standards. Treasury frequently faces a cash financing gap of about 2-weeks duration because of timing differences of large cash inflows and outflows. Treasury makes large regular payments (e.g., Social Security and federal retirement) in the beginning of the month and it often receives large cash inflows in the middle of the month from income tax payments and note issuances. Because regular bills alone are not sufficient to fill this cash financing gap, Treasury has increasingly used CM bills since 2002. Treasury has also relied on CM bills when nearing the debt ceiling to help pay its bills while keeping debt under the statutory limit. Treasury’s largest cash outflows generally occur in the beginning of the month. For example, in fiscal year 2005, almost one-quarter of the government’s annual fiscal cash outlays (withdrawals excluding debt redemption) were paid in the first 3 days of each month. On or around the 1st of every month Treasury paid about $14 billion to active duty military personnel, military and civilian retirees, and others. In the beginning of some months, Treasury also paid up to $6 billion for Medicare. On or around the 3rd of every month it paid about $21 billion in Social Security benefits. In total, Treasury made $718 billion cash payments in the first 3 days of months in fiscal year 2005. These large payments in the beginning of the month are not anticipated to decline soon. A Treasury official explained that Social Security benefits paid on the 3rd of the month are anticipated to remain relatively steady for a number of years and then decline because of steps taken by the Social Security Administration (SSA) in 1997 that have helped smooth cash payments out of Treasury. (Fig. 2 describes these steps in more detail.) However, because beneficiaries receiving benefits before 1997 continue to receive their benefits at the beginning of the month, we estimate the large payments could last another 10 years. Other federal benefit programs continue to pay all or most of their benefits at the beginning of the month.