WASHINGTON -- Wall Street analysts are keeping an eye on the Treasury Department's new debt management strategy that steps up reliance on short-term maturities to finance the budget deficit.
With today's record-low interest rates, the strategy seems to be paying gains to the government and taxpayers for now by lowering the cost of Treasury debt. Debt financed using Treasury bills with yields of 3% seems like a good deal compared to longer-dated maturities such as 10-year notes yielding 5.30% or 30-year bonds yielding 6%.
The Treasury has already signaled its new course by stepping up the size of the government's weekly auctions of three-month and six-month bills. Bill offerings totaling $22.4 billion during September have been boosted twice this month, first to $23.6 billion and again to $25.6 billion.
Still larger bill offerings are on the way. Kathleen Stephansen, senior economist for Donaldson, Lufkin & Jenrette Securities Corp., estimates that by the end of the year the Treasury will be auctioning $29 billion a week in bills.
The increase in short-term borrowings reflects the Treasury's decision to stop issuing seven-year notes altogether and to cut 30-year bond sales in half
End-of-year seasonal cash requirements because of a slow-down in tax receipts add to government needs, says Stephansen. She does not anticipate any relief until after Jan. 1, when the higher tax rates for corporations and individuals under President Bill Clinton's deficit reduction program kick in.
Darwin Beck, managing director for First Boston Corp., estimates that the government will have to raise $97 billion in new cash from Treasury bills in fiscal 1994, which began Oct. 1. That would be a marked change from last year, when the government raised an estimated $25 billion in bills.
Beck calculates that Treasury bill offerings will comprise roughly 40% of the $245 billion in new cash raised by the government, roughly double the usual share of new debt raised each year in short-term government paper.
Another chunk of debt will be covered by modest increases in the regular government offerings of two-year, three-year, five-year, and 10-year notes totaling $126 billion. The rest, $22 billion, comes from the semiannual auctions of 30-year bonds in February and August.
Government borrowing estimates are always subject to some guesswork. But Beck says as long as the economy stays soft and rates do not change much, it appears as if the Treasury's strategy is achieving initial success in "twisting the yield curve," or easing long-term rates by cutting the supply of bonds.
The additional supply of debt at the shorter end of the yield curve may tend to push rates "slightly higher," but should not create any immediate problems for the Federal Reserve, Beck says.
The Treasury has estimated that the new debt management policy will save taxpayers $10.8 billion through the five fiscal years ending in 1998. But that estimate assumes the economy does not boom, inflation stays in check, and the Fed does not have to jack up short-term rates.
It's a bet on interest rates that remains to be played out. If short rates do rise substantially, the Treasury will be rolling over a large share of government debt in the bill sector at progressively higher costs to taxpayers.
Stephansen warns that there is considerable risk to the government's policy over time.
"It's fine to borrow everything now at the short end of the yield curve when rates are low, but as the expansion picks up momentum and you get into the business cycle where the Fed has to tighten, then it's a very different story altogether," she says. "Immediately, what you have is an increase in borrowing costs, and given the size of the bill market, you really don't need much to wipe out all the savings."
