What is the Treasury's goal for federal debt management?
Treasury's overarching debt management goal is to ensure the federal government's financing needs are met at the lowest cost to taxpayers over time. To achieve this goal, Treasury issues a variety of marketable Treasury securities in sufficient amounts to ensure the liquidity of each, and maintains a regular and predictable auction schedule. This schedule provides investors with greater certainty and better information with which to plan their investments.
What challenges does the Treasury face in achieving its debt management goal?
Treasury deals with the challenges of constantly changing financial markets, uncertainties surrounding the government's future borrowing needs, and at times uncertainty about the debt limit.A legal ceiling on the amount of outstanding total federal debt (excluding some minor adjustments), which has been raised or suspended periodically to accommodate additional federal borrowing.
Treasury must consider the volume of securities to be issued at a given maturity in relation to changing market demands for Treasury securities. Treasury market participants purchase Treasury securities for a variety of purposes, including securing stable sources of income, trading to take advantage of their anticipations of interest rate movements, or reducing risk (also known as "hedging"). If the Treasury offers too much of any given security, it may have to pay a higher yield to attract investors. If the Treasury offers too little of a given security, it may reduce the security's liquidity in the secondary market, which, in the long run, may also increase the yield Treasury has to pay.
The Treasury must also make current debt management decisions with uncertain information about the future of government borrowing needs. Policy changes and national economic performance are difficult to project and can quickly and substantially affect federal cash flow.
Finally, delays in raising the debt limit can create debt and cash management challenges for the Treasury that have been exacerbated in recent years by the large growth in federal debt. Treasury has often used extraordinary actions, such as suspending investments or temporarily disinvesting securities held in federal employee retirement funds, to remain under the statutory debt limit (see Debt Limit: Analysis of 2011-2012 Actions Taken and Effect of Delayed Increase on Borrowing Costs).
How does the composition of outstanding debt affect federal borrowing costs?
The mix of outstanding Treasury securities can have a significant influence on the federal government's interest payments. Longer term nominal (i.e., not inflation indexed or variable) securities typically carry higher interest rates, primarily due to investor concerns about the uncertainty of future inflation. While this translates to higher borrowing costs for the government, longer term securities offer the government the certainty of fixed interest payments over their maturity and reduce the amount of debt that Treasury needs to refinance in the short term. In contrast, shorter term securities generally carry lower interest rates but add uncertainty to the government's longer term interest costs. They also require Treasury to conduct more frequent auctions to refinance them as they mature, which poses rollover risk.The risk that Treasury will have to refinance its debt at less favorable rates.
As of September 30, 2016, 58 percent of marketable Treasury securities held by the public were scheduled to mature and needed to be refinanced in the next 4 years—potentially at higher interest rates. (See Financial Audit: Bureau of the Fiscal Service's Fiscal Years 2016 and 2015 Schedules of Federal Debt.)
- THE NATION'S FISCAL HEALTH: Action is Needed to Address the Federal Government's Fiscal Future
- FINANCIAL AUDIT: Bureau of the Fiscal Service's Fiscal Years 2016 and 2015 Schedules of Federal Debt
- Market Response to Recent Impasses Underscores Need to Consider Alternative Approaches
- DEBT MANAGEMENT: Floating Rate Notes Can Help Treasury Meet Borrowing Goals, but Additional Actions Are Needed to Help Manage Risk
- Debt Limit: Delays Create Debt Management Challenges and Increase Uncertainly in the Treasury Market
- Debt Ceiling: Analysis of Actions Taken during the 2003 Debt Issuance Suspension Period