Debt Management:

Treasury Has Improved Short-Term Investment Programs, but Should Broaden Investments to Reduce Risks and Increase Return

GAO-07-1105: Published: Sep 20, 2007. Publicly Released: Oct 22, 2007.

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Growing debt and net interest costs are a result of persistent fiscal imbalances, which, if left unchecked, threaten to crowd out spending for other national priorities. The return on every federal dollar that the Department of the Treasury (Treasury) is able to invest represents an opportunity to reduce interest costs. This report (1) analyzes trends in Treasury's main receipts, expenditures, and cash balances, (2) describes Treasury's current investment strategy, and (3) identifies options for Treasury to consider for improving its return on short-term investments. GAO held interviews with Treasury officials and others and reviewed related documents.

In managing the funds that flow through the federal government's account, Treasury frequently accumulates cash because of timing differences between when borrowing occurs, taxes are received, and agency payments are made. Treasury often receives large cash inflows in the middle of the month and makes large, regular payments in the beginning of the month. Treasury uses three short-term vehicles--Treasury Tax & Loan (TT&L) notes, Term Investment Option (TIO) offerings, and limited repurchase agreements (repo)--to invest operating cash. Before Treasury invests any portion of its operating cash balance, Treasury generally targets a $5 billion balance in its Treasury General Account (TGA) which is maintained across the 12 Federal Reserve Banks. The TT&L program provides Treasury with an effective system for collecting federal tax payments while assisting the Federal Reserve in executing monetary policy, but it subjects Treasury to concentration risk and earns a return well below the market rate. The TIO program earns a greater rate of return but it also subjects Treasury to concentration risk. Both programs also present capacity concerns. Treasury began testing repos through a pilot program in 2006. Repos have earned near market rates of return, but because of the pilot's scope and the current, limited legislative authority under which it operates, the repo participants, collateral, trading terms, and trading arrangements are restricted. A permanent, expanded repo program could permit Treasury to earn a higher rate of return, expand investment capacity, and reduce concentration risk. If given authority to design such a program, Treasury would need to tailor it to meet liquidity needs and to achieve a higher rate of return while minimizing risks that are associated with the selection of program participants, collateral types, terms of trade, and trading arrangements.

Matter for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: On October 7, 2008, Congress amended Section 323 of Title 31 U.S. Code to allow, as we recommended, the Secretary of the Treasury to invest U.S. operating cash in repurchase agreements with acceptable parties in additional to obligations of the U.S. Government and depositary institutions. The expanded repo authority will enable the Secretary of the Treasury to broaden investment options and improve earnings on investments while not increasing the level of risk of those investments. As we also recommended, the legislation also requires the Secretary of the Treasury to submit, each fiscal year, to the House Committee on Ways and Means and the Senate Finance Committee a report detailing the investment of operating cash. The report shall describe the Secretary's consideration of risks associated with investments and the actions taken to mitigate such risks.

    Matter: Congress may wish to consider providing the Secretary of the Treasury with broader authority in the design of an expanded program of repurchase agreements. Congress could note that it expects that in the selection of participants, decisions about acceptable collateral, and choice of other design features the Secretary will follow a process designed to mitigate various types of risks including concentration risk, credit risk, and market/interest rate risk. The decision not to legislate in detail how Treasury invests cash does not remove Congress's oversight authority or responsibility. To assist Congress with oversight, the legislation could require the Secretary to report annually on the Treasury investment program.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In October 2008 Treasury received the authority to invest U.S. operating cash in repurchase agreements with acceptable parties in addition to obligations of the U.S. Government and depositary institutions. This new authority allowed for additional counterparties and expanded collateral types. Treasury officials told us that they communicate regularly on Treasury's investment program with Federal Reserve officials. Together, the agencies decided that Treasury will conduct all of its repos through commercial banks so that it is clear that their actions have nothing to do with open market operations. They also agreed on a "bright-line-distinction." Treasury will not use the Federal Reserve as its fiscal agent for repos. Treasury also decided to move to intra-day investments to benefit the Federal Reserve in working towards their monetary policy goals. Afternoon placement also allows for a better pinpointing of the TGA, removing it as a variable from the Federal Reserve's open market decisions. Treasury officials acknowledged that this will also give up some return, but that the outcome was beneficial. The considerations made are consistent with our recommendations.

    Recommendation: Treasury should also consider how its investment programs might be combined to produce outcomes that are more beneficial, and should consider the effect of its investments on similar Federal Reserve open market operations.

    Agency Affected: Department of the Treasury

  2. Status: Closed - Not Implemented

    Comments: In October 2008 Treasury received the authority to allow additional counterparties and expanded collateral types in its investment program. Treasury officials told us they had begun to think about the costs and benefits of their investment program at a very high level before the financial market crisis hit in 2008. Once the financial market crisis hit, the short term investment program was suspended as there was little to no cash to invest. We spoke with Treasury again in 2011. Treasury said that the investment program was still suspended and no further discussion of cost and benefits had occurred. They agreed to provide us documentation of any cost benefit considerations that they give to the program prior to when it starts up again.

    Recommendation: Treasury should consider the costs and benefits of each alternative and determine whether the benefits to the federal government outweigh any costs.

    Agency Affected: Department of the Treasury

  3. Status: Closed - Implemented

    Comments: In October 2008 Treasury received the authority to invest U.S. operating cash in repurchase agreements with acceptable parties in addition to obligations of the U.S. Government and depositary institutions. This new authority allowed for additional counterparties and expanded collateral types. Treasury officials told us that Treasury staff have been conducting research with participants on counterparty risk and credit risk to inform Treasury's risk management decisions. Research has also been done on diversification of underlying capacity, credit ratings, capital minimums or exposure minimums, leverage limits and counterparty diversification.

    Recommendation: When making decisions about short-term investment programs, Treasury should follow a systematic process to identify and mitigate various types of risks including concentration risk, credit risk, and market/interest rate risk.

    Agency Affected: Department of the Treasury

  4. Status: Closed - Implemented

    Comments: In October 2008 Treasury received the authority to invest U.S. operating cash in repurchase agreements in addition to obligations of the U.S. Government and depositary institutions. This new authority allowed for additional counterparties and expanded collateral types. Consistent with our recommendation, Treasury has since then conducted research on electronic trading platforms, including coverage, risk, pricing, and how the systems work. They also told us that research has begun with market participants on counterparty risk, credit risk, the diversification of underlying capacity, credit ratings, capital minimums or exposure minimums, leverage limits, and counterparty diversification.

    Recommendation: If provided the authority for a permanent, expanded repo program, Treasury should consider allowing broker dealers as counterparties and expanding acceptable collateral types to alleviate capacity concerns and increase rates of return. The effects on rates of return and operational efficiencies of an electronic trading platform and a triparty clearing and settlement system should also be considered.

    Agency Affected: Department of the Treasury

  5. Status: Closed - Implemented

    Comments: On July 25, 2007 we briefed Treasury officials on our preliminary report recommendations, including a permanent, expanded repo program. In the fall of 2007, Treasury changed the status of its repo pilot program to a permanent program. On October 7, 2008, Congress amended Section 323 of Title 31 U.S. Code to allow, as we recommended, the Secretary of the Treasury to invest U.S. operating cash in repurchase agreements with acceptable parties in additional to obligations of the U.S. Government and depositary institutions. The expanded repo authority will enable the Secretary of the Treasury to broaden investment options and improve earnings on investments while not increasing the level of risk of those investments. As we also recommended, the legislation also requires the Secretary of the Treasury to submit, each fiscal year, to the House Committee on Ways and Means and the Senate Finance Committee a report detailing the investment of operating cash. The report shall describe the Secretary's consideration of risks associated with investments and the actions taken to mitigate such risks.

    Recommendation: The Secretary of the Treasury (Treasury) should explore the reallocation of its short-term investments as discussed in this report and, if provided the authority to do so, implement a permanent, expanded repo program that would help Treasury meet its short-term investment objectives while maintaining current minimal risk investment policies.

    Agency Affected: Department of the Treasury

 

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