Debt Management:

Treasury Has Refined Its Use of Cash Management Bills but Should Explore Options That May Reduce Cost Further

GAO-06-269: Published: Mar 30, 2006. Publicly Released: Mar 30, 2006.

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One result of persistent fiscal imbalance is growing debt and net interest costs. Net interest is currently the fastest-growing "program" in the budget and, if unchecked, threatens to crowd out spending for other national priorities. This report was done under the Comptroller General's authority. GAO examined the Department of the Treasury's (Treasury) growing use of unscheduled short-term cash management bills (CM bills). Specifically GAO (1) describes when Treasury uses CM bills and why, (2) describes the advantages and disadvantages of CM bills, (3) describes steps taken by Treasury to reduce the overall borrowing costs associated with CM bills, and (4) identifies possible options Treasury could consider to reduce the use and cost of CM bills further.

Treasury makes large, regularly occurring payments, such as Social Security and federal retirement payments, in the beginning of each month but receives large cash inflows in the middle of each month from income tax payments and note issuances. Because regular bills alone are not sufficient to fill these intramonth cash financing gaps, since 2002 Treasury has increasingly issued CM bills to bridge this gap. CM bills allow Treasury to obtain cash outside of its regular borrowing schedule in varying amounts and maturities, but Treasury pays a premium for doing so. GAO's analysis found that Treasury paid a higher yield on CM bills than that paid on outstanding bills of similar maturity in the secondary market. Treasury has taken steps to reduce the use and cost of CM bills. Treasury added a 4-week bill to its regular auction schedule in 2001, which led to reduced CM bill issuance, shorter terms to maturity, and lower borrowing costs in 2002. Treasury has also fine-tuned CM bill issuance by borrowing closer to the time when it needs cash. However, borrowing costs associated with CM bills have increased since 2003. While Treasury has made progress towards reducing the cost of CM bills, it may be possible to do more. GAO's analysis indicates that the yield differential has increased as short-term rates have risen. If these rates rise further, as market participants expect, so will the yield differential. While Treasury does not vary its debt management strategy in response to changing interest rates, it should be mindful of their effect on the relative cost of unscheduled CM bills and explore options to reduce the frequent use of CM bills and ultimately overall borrowing costs. GAO identified options worth exploring such as any additional opportunities for closer alignment of large cash flows; possible options for increasing earnings on excess cash balances; and introduction of a shorter-term regular instrument.

Recommendation for Executive Action

  1. Status: Closed - Implemented

    Comments: In August 2006, Treasury told us it is exploring three specific options mentioned in our report: (1) possible changes to borrowing programs; (2) ways to manage the timing of cash flows; and (3) ways to increase earnings on its cash balances. Specifically, we identified reverse repurchase agreements as a potential way to increase earnings on excess cash balances, thereby reducing the costs associated with running higher cash balances and ultimately reducing the use of some CM bills. Since March 2006, Treasury has been running a Repurchase Agreement Pilot Program and assessing the impact of investing funds through repurchase transactions on Treasury's and the Federal Reserve System's operations, processes and systems. Treasury requested expanded investment authority in the President's FY 2008 budget.

    Recommendation: We identified options that could potentially reduce the use and cost of CM bills. Treasury should explore options such as those discussed in this report and any others it identifies that may help Treasury meet its objective of financing the government's borrowing needs at the lowest cost over time. We recognize that there are a number of tradeoffs to consider. In its exploration, Treasury should consider the costs and benefits of each option and determine whether the benefits--in the form of lower borrowing costs--to the federal government (and so to taxpayers) outweigh any costs imposed on individuals, businesses, and other nonfederal entities. Treasury should also consider how options may be combined to produce more beneficial outcomes. Implementing some of these options would require changes to statute or regulations. If Treasury determines that any of these changes would be beneficial, we encourage Treasury to begin discussions with relevant federal agencies and the Congress about obtaining the necessary authorities.

    Agency Affected: Department of the Treasury

 

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