FROM THE OFFICE OF PUBLIC AFFAIRS

Good afternoon Chairman Istook, Mr. Hoyer, and distinguished members of the Subcommittee. I am pleased to be here today to discuss Treasury's Debt Management approach and direction.

Simply put, the objective of Treasury debt management is to meet the financing needs of the federal government at the lowest cost over time.

However, achieving this straightforward objective is subject to multiple constraints. The dominant constraint that we confront in achieving this objective is that we see the future only imperfectly. We are always making decisions in conditions of uncertainty. As a consequence, debt management necessarily involves three judgments: first, what will be the likely size and duration of our borrowing needs, second, how should we respond if actual needs differ substantially from expectations and, third, what will be the lowest cost means of financing those needs in the future. We cannot escape these three issues. We face them in our weekly financing decisions, in our quarterly refundings, and in our strategic planning.

Further, the Treasury's continuing commitment to a schedule of regular and predictable auctions of marketable bill and note dates is a means, over time, to the end or objective of the lowest cost borrowing. In the short run, however, this commitment serves as a constraint: with regular and predictable auction dates we accept the cost of occasionally borrowing when it is inconvenient or expensive in return for the lower costs, over time, from providing greater certainty to the Treasury market.

Conceptually, there is another constraint. We believe the availability of the full faith and credit of the United States, as a savings vehicle should not be limited only to those who can afford the minimum one-thousand dollar denominations available in our auctions of marketable securities. Thus, we will continue to offer savings bonds even though they are not the most efficient form of borrowing in operational terms. But, again, we will seek to minimize the cost of this constraint on our objective by supporting the Bureau Public Debt's ongoing efforts to improve efficiency.

Successfully achieving our debt management objective requires us to strive to create the broadest possible primary market for all Treasury securities that technology and our imaginations will allow. One critical dimension of creating this broad primary market is a balanced marketing effort for all our securities. The other is the technology that is making the distinctions between wholesale and retail borrowing increasingly arbitrary. We will use technology to move as many investors large and small to directly access our securities over the Internet.

Let me illustrate how we are using balanced marketing by describing a challenge Under Secretary Fisher gave to the Bureau of the Public Debt. He recently challenged Commissioner Zeck to increase direct competitive bidding in our auctions. Currently, most of the dollars bid in our auctions come through a small number of the largest dealers. The dealers bid for their own account and for customers. We are actively seeking new institutional bidders in our auctions by marketing Public Debt's new TAAPSLink Internet site.

Public Debt is well positioned to take up the twin challenges of using technology to move as many investors in all our securities to direct Internet access and market the full range of securities to the public.

The Bureau has a solid track record of innovation in creating direct access for investors. For example, individuals and other holders in our TreasuryDirect system have had an Internet or other electronic channel available to them for several years to purchase or reinvest in marketable issues. Individual investors can now buy Series EE and Series I bonds at Public Debt's Savings Bonds Direct website at their pleasure.

At the same time, Public Debt is already shifting its marketing emphasis from a heavy focus on the savings bond component, of our financing mix, to effectively market all the securities we offer to the public.

I know the Committee is interested in the level of operational resources it takes to operate the savings bond program. I think it worthwhile to make an observation or two about the program.

First, as Treasury's debt manager I have to look at the total cost of borrowing and the total cost of borrowing from any type of security includes administrative costs and more importantly interest costs. When you take both into account, the savings bonds program, though less efficient as a borrowing tool in today's capital markets, actually is a slightly more cost-effective way to borrow, over time, than market borrowing. Savings bonds are part of our borrowing mix, and currently finance $190 billion of our debt. Commissioner Zeck will discuss in greater detail the way we evaluate the costs of the savings bond program.

I would very much like to transform our savings bond program and move it immediately into the future. However, we have the legacy of more than 60 years of issuing savings bonds, which requires a commitment of customer service. "A promise made is a promise kept" and we must honor our obligation to the more than 50 million existing savings bond holders. This commitment requires a significant administrative infrastructure.

While we may be constrained somewhat by the legacy costs associated with servicing small denomination securities issued in physical form, we are moving new savings bonds into the future. The economies of the Internet are making it not only possible but also desirable to begin offering savings securities in accounts directly with the Treasury rather than issuing millions of paper certificates. Work is now underway to make this a reality, later this year, by offering the Series I bond in a new Internet based system.

To achieve our primary objective of the lowest borrowing costs within the constraints we have, we want to maintain a pattern of regular and predictable issuance of as broad a portfolio of instruments as is consistent with (a) our best projections of likely borrowing requirements and (b) our ability to respond if those projections are not realized, and (c) our current understanding of what will provide the lowest borrowing cost over time.

We will support our primary objective with efforts to move as many investors as we can toward direct electronic access to all Treasury securities and we will continue our ongoing efforts to improve efficiency and reduce costs. Effective, balanced marketing of all our securities is critical to educating the public about the variety and benefits of Treasury securities. Finally, we will keep our promise to millions of investors who rely on the safety and security of Treasuries by continuing to offer the high-quality customer service they expect and deserve.