FROM THE OFFICE OF PUBLIC AFFAIRS

I am here today as a salesman. I want you to buy Treasury securities to help finance the federal government.

Our product has unique credit characteristics and we could just rely on those as the basis of our marketing effort. But there is a problem I had better admit to you. While I want you to buy my product, as the debt manager I cannot control the quantity that is available for sale - in fact, I can't even make a very good forecast of how much I will have to sell in any given year. Our financing needs are actually just the by-product of decisions Congress and the President make about spending and taxes and the growth rate of the economy.

Because of the variance in our financing needs from year-to-year, and even month-to-month, we work hard to be regular and predictable in our issuance pattern to make it easier for you to keep a little space in your portfolios for Treasury securities. But we want our product to be more than just another good credit that is available on a regular schedule.

We spend a fair amount of time trying to gauge how to sustain the liquidity of secondary market trading, principally by ensuring an adequate supply at each maturity. Going forward, we will be spending more of our time trying to gauge how to improve our auctions in order to encourage you to participate directly. We want the primary market for Treasury securities to be as broad and as deep as possible. We want more asset managers bidding directly in our auctions because we are confident that, over the long term, broader participation will help lower our costs.

We need your advice on how we can make direct auction participation more attractive to institutional investors. We also need your help to see if we can make our newest product - inflation-indexed securities - more successful, both for investors and for Treasury.

First, let me clarify the objective of federal debt management and the constraints within which we operate.

Our objective is to meet the financing needs of the federal government at the lowest cost over time.

Our most significant constraint is that we see the future only imperfectly. As a consequence, we constantly work to forecast our likely borrowing needs, to anticipate how we should alter our borrowing pattern when the future does not fit our forecast, and to anticipate what will prove to be the lowest cost means of financing in the future.

For the debt manager, promoting efficient capital markets is not an independent objective but, rather, a means to the end of lowest cost financing over time. In the short run, the need to sustain efficient capital markets can appear to act as a constraint on our objective of lowest cost financing. But we permit this short-run tradeoff only if we think it is in the service of achieving the lowest cost in the long run - "over time".

For this reason, the Treasury's continuing commitment to a schedule of regular and predictable auction dates is a means, over time, to the end 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.

Similarly, we limit awards in our auction to 35 percent of the publicly-available total, even though at times this means we issue debt at slightly higher yield than would be the case without the limit. The long term benefit to the Treasury of maintaining a broad distribution of our securities through the auction process outweighs the short term costs.

There is a separate discussion we could have about the optimal level of government debt for the efficient functioning of our capital markets and our economy. But in our system of government, this is a political debate about the proper amount of borrowing needed to operate the federal government and to sustain our economy. This policy debate needs to take place away from the explanation of the debt manager's activities, away from the effort to explain how we manage the variance in the federal government's borrowing needs as we receive them, day by day.

Given our commitment to auctions as the means of selling Treasury securities, one of the most direct ways we can try to lower our costs, in the long run, is to increase the number of bidders, to try to make our primary market as broad and as deep as possible.

Since 1992, the Treasury has worked to open up the primary market for Treasury securities in order to serve the needs of end-users such as yourselves. The move to single-price auctions, which began in 1992 and was completed in 1998, was intended to make direct bidding more attractive to a wider number of potential bidders. By reducing the risk of awards at sub-market yields (the "winners curse"), single-price auctions have allowed a broader range of investors to participate in our auctions with confidence.

Earlier this year, we announced our objective to reduce auction turnaround times in order to reduce the risks for auction participants and to reduce our borrowing costs. We are now on a mission to complete auction processing and release results consistently within two minutes. Achieving this will take some time and some changes for all of us, but our objective is clear.

Processing bids and disseminating results more quickly will be a win-win situation for both investors and the Treasury. Shorter release times will reduce the period of time bidders are exposed to uncertainty as to whether and at what price they purchased Treasury securities. Reducing uncertainty will reduce risk for both investors and dealers. By reducing this risk, the Treasury will no longer need to compensate bidders for the implicit option premium associated with the extended period of uncertainty. This will lower the government's borrowing costs.

We have made considerable progress. In 1995 the average release time was 45 minutes. By 2000 average release times had been reduced to 27 minutes. Over recent months we released several auction results in less than 5 minutes. But we can do better.

To achieve the lowest borrowing costs and make direct participation in our auctions attractive to you, we must make the period of time between the auction close and the public release of results consistently brief. So our ultimate objective is a two-minute release with a variance of no more than 30 seconds on either side. At present, we are aiming to release auction results in six minutes, plus or minus 60 seconds.

Over the coming months, we will be introducing an updated version of our automated auction system, which will streamline the process of submitting bids and lead to faster processing and dissemination of auction results. Looking somewhat farther ahead, we are planning additional improvements that will make it easier for institutions to bid directly in our auctions. Our intention is to achieve what I call "point and click" eligibility.

We see a time when a bidder can come to our web site, give us identifying information, get the concurrence of the financial institution which will guarantee payment, and receive access to our auction system all within a day or so. No paper, no embossed seals, no fuss, just a few simple steps all handled securely and electronically.

We also need your help on how we can improve upon our efforts to sell our 10-year inflation-indexed note. Both we at the Treasury and you in the investment community may need to work a little harder to make these instruments live up to their potential.

So far, against our objective of lowest cost financing over time, inflation-indexed securities appear to be "challenged". Over the five years we have been issuing inflation indexed securities, some estimates suggest that it has been a more expensive form of borrowing than the comparable nominal security and the prospective inflation-rate at which we would "break-even" is below most forecasts.

But we need to be careful not to judge these instruments in the short-run. Recent demand for both short-dated inflation-indexed notes and for new issues has been stronger. This supports my view that we should only pass judgment on the cost-effectiveness of these instruments after they have at least worked their way through an entire interest rate cycle. Ten years of data, perhaps more, may provide the right vantage point from which to assess their performance.

We also may need to take a broader view of how we should judge their performance. Nothing can be as important to risk management as diversification. Indexed-notes represent a completely different asset class which helps diversify our portfolio of liabilities. Perhaps portfolio strategists and asset managers could give a little more thought to the benefits of the inflation and the deflation protection afforded by our 10-year indexed note. Unlike our nominal rate offerings, these instruments provide a symmetric protection that may be worth paying a little something for.

Both dealers and the Treasury's Borrowing Advisory Committee have suggested that there may be ways for us to enhance the attractiveness of our indexed notes, including more frequent auctions, a shorter when-issued trading period, and different issue sizes. We also want to hear from you. Your portfolio managers will determine whether the inflation-indexed securities succeed as a separate asset class.

We also want to hear from you about any ideas that you may have about how we should structure or market our debt. Assistant Secretary for Financial Markets Brian Roseboro, Deputy Assistant Secretary Tim Bitsberger, and staff from the Bureau of the Public Debt have been spending time meeting with many of you in the investment community, in particular to promote direct auction participation, but also to get your feedback.

I hope that you will reach out to them. We have also established an email address at Treasury for your suggestions and comments. The address is debt.management@do.treas.gov.

Secretary O'Neill likes to remind us that our real goal is to make excellence a habit. To do this, we need to strive for continuous improvement in how we manage the government's debt. You can help us. Over the next five years our focus will be on encouraging direct investor participation in our auctions and on developing the market for inflation indexed notes. Every gain that we make will serve both investors and taxpayers. Thank you - in advance - for your help.