FROM THE OFFICE OF PUBLIC AFFAIRS

This morning I have the great pleasure to announce the introduction of new tools for Treasurys management of the public debt to meet the needs of a new era of surplus.

As a joint Treasury-Council of Economic Advisors study to be released later today makes clear, we have seen a transformation in this nations public finances in recent years with major implications for all Americans.

In 1993, federal debt held by the public was projected to rise to $5.4 trillion by 1999 if additional fiscal discipline was not imposed. In fact, the stock of debt outstanding is now $3.6 trillion some $1.7 trillion lower than it otherwise would have been. And while future projections are always uncertain, if the Presidents fiscal framework is adopted there would be a further $1.7 trillion reduction in the stock of debt held by the public over the next ten years, and the complete elimination of such debt by 2015.

Reducing the supply of Treasury debt held by the public brings enormous benefits for our economy.

• It means that less of the savings of Americans will flow into government bonds and more will flow into equipment for American businesses and houses for American families.

• It means less reliance on borrowings from abroad to finance American investment.

• It means less pressure on interest rates and thus lower borrowing costs for businesses and for cars and homes for American families.

At the same time, the ongoing task of debt management for the Federal government will clearly be very different in the years ahead than it has been in the past when debt was rapidly increasing. With $3.6 trillion in debt outstanding, even a 3 basis point reduction in federal borrowing costs will ultimately produce savings of more than $1 billion per year. This makes it critically important to manage the debt held by the public as efficiently as we can in this new environment.

Today we are taking two new steps in support of this objective.

First, we will be reducing the frequency and scale of some of our debt auctions to reflect the reduced need for public borrowing. Under-Secretary Gensler will be describing these changes in greater detail in a moment.

Second, we are publishing for comment proposed rules for carrying out Treasury repurchases of outstanding debt securities before they mature. These prepayments in many ways analogous to a homeowner refinancing a mortgage or a company refinancing its debt would hold out the prospect for reducing federal borrowing costs over time. In effect, they would allow us to have the same kind of flexibility in managing the nations finances that families and companies enjoy: letting us refinance the debt and pay it down on the best possible terms.

Concretely, buybacks of this kind would potentially offer three advantages for federal debt management.

• First, by prepaying the debt we would be able to maintain larger auction sizes than would otherwise be possible. Enhancing the liquidity of Treasurys benchmark securities should lower the governments interest costs over time and promote overall market liquidity.

• Second, by paying off debt that has substantial remaining maturity, we would be able to prevent what would otherwise be a potentially costly and unjustified increase in the average maturity of our debt: from just over five years to more than seven years on the current trajectory.

• Third, by paying off debt, we can absorb excess cash at times of the year when tax revenues exceed immediate spending needs. This kind of absorption is an important part of sound debt management.

It has been the unanimous recommendation of Treasurys Borrowing Advisory Committee to make use of debt buybacks as a debt management tool in the future. That said, the question of how to conduct debt buy-backs raises a number of complex issues that will need to be worked out. We look forward to broad public discussion of these and other steps aimed at ensuring that Treasury manages the public debt as effectively as possible in this new and very different era when the stock of debt is at last declining rather than increasing. Thank you.