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Treasury to buy back bonds
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August 4, 1999: 2:28 p.m. ET
Summers proposes rare repurchase of debt held by public; markets applaud
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NEW YORK (CNNfn) - Top U.S. Treasury officials Wednesday announced plans to buy back a portion of the $3.6 trillion national debt held by the public, a move that could mean lower interest rates and less reliance on foreign borrowing.
While no final decision on the historically rare step has been made yet, government officials hope to have the proper rules in place to conduct the buyback by Jan. 1.
Treasury Secretary Lawrence Summers, making the announcement at a Washington news conference, said the process would play a significant role in prolonging what is already one of the U.S. economy's longest-running expansions.
"The ongoing task of debt management for the federal government will clearly be very different in the years ahead than it has been in the past, when debt was rapidly increasing," Summers said. "With $3.6 trillion in debt outstanding, even a 3 basis point (0.03 percentage point) reduction in federal borrowing costs will ultimately produce savings of more than $1 billion per year."
"This makes it critically important to manage the debt held by the public as efficiently as we can in this new environment," he added.
U.S. financial markets responded enthusiastically to the news. Up only marginally before the announcement, the 30-year Treasury bond jumped 9/16 of a point, reducing the yield to 6.11 percent. The Dow Jones industrial average, bolstered by both the Treasury news and the acquisition of Union Carbide by Dow Chemical, was up 115.24 to 10792.55 in early afternoon trading.
The debt buybacks would be conducted through "reverse auctions" in which primary dealers would turn in existing U.S. Treasury securities in response to a Treasury announcement. Dealers would then propose a price at which they were willing to sell and the Treasury could accept it or reject it.
The nation's current debt currently stands at about $5.5 trillion. Roughly $3.6 trillion is in public hands while the rest is held by government trust funds, including the Social Security trust fund.
Summers said the economy would benefit from the buyback in several ways.
"It means less reliance on borrowings from abroad to finance American investment," he said. "It means less pressure on interest rates and thus lower borrowing costs for businesses, and for cars and homes for American families."
If approved, it will mark the first time the Treasury has conducted a program of this kind since 1972. In that case, the Treasury exchanged existing bonds for new securities with shorter maturities, a common practice throughout the 1960s. But no experts could recall when the last time the government actually repurchased securities.
The proposal comes as the United States closes in on its second straight annual budget surplus -- the first time since 1956-1957 such a prospect has been in sight.
With government officials projecting the surplus to continue for several years, thereby reducing the need for borrowing, Treasury officials also announced Wednesday they were scrapping the department's annual sale of 30-year bonds in November.
The agency expects to keep selling bonds in February and August, but is considering cutting the frequency of 1-year bills and 2-year notes as well.
Summers said "the question of how to conduct debt buybacks raises a number of complex issues that will need to be worked out." But he was looking forward to a "very different era when the stock of debt is at last declining rather than increasing."
-- from staff and wire reports
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Treasury Department
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