US says it may buy back its own debt

The US said yesterday it might buy back billions of dollars of its own debt in a move that could mean lower interest rates and less reliance on foreign borrowing. While no final decision on the historically rare step has been taken yet, the Treasury Secretary, Mr Larry Summers, said the government aimed to have rules in place by January 1st, 2000, for conducting such buybacks.

Mr Summers said it would be a good way for the government to use excess cash in a way that would sustain economic growth and help individual Americans by making it cheaper to borrow.

"Reducing the supply of Treasury debt held by the public brings enormous benefits for our economy," Mr Summers said at a news conference.

"It means less reliance on borrowings from abroad to finance American investment," he said. "It means less pressure on interest rates and thus lower borrowing costs for businesses and for cars and homes for American families."

The debt buybacks would be done through "reverse auctions" in which primary dealers would turn in existing US Treasury securities in response to a Treasury announcement. Dealers would propose a price at which they were willing to sell and the Treasury could accept it or reject it.

The buyback proposal comes as the US closes in on its second straight annual budget surplus, the first time since 1956 and 1957 such a prospect has been in sight.

In fiscal 1998 ended last September 30th, the government had a surplus of $69.2 billion. So far in the first nine months of fiscal 1999, the surplus is running at $94.3 billion.

With borrowing needs fast fading, the Treasury also announced it was scrapping its traditional sale of 30-year bonds in November but would keep selling bonds in February and August. In addition, the Treasury is considering cutting the frequency of sales of 1-year bills and 2-year notes.

Financial markets responded enthusiastically, with the 30-year US Treasury bond shooting up 25/32 of a point, or $7.8125 per $1,000 of face value, and its yield dropping to 6.10 per cent from 6.17 per cent in late trading on Tuesday. Share prices on the New York Stock Exchange jumped after the announcement, with the Dow Jones Industrial Average up 150 points at mid-morning before easing slightly.

The announcement of debt buyback plans came as the Treasury unveiled plans for selling $15 billion of five-year notes, $12 billion 10-year notes and $10 bil lion of 30-year bonds next week. The sales will refund $28.89 billion of publicly held securities that mature on August 15th and raise $8.11 billion of new cash for the Treasury.

The Treasury Under-Secretary, Mr Gary Gensler, said there was no precedent in recent US history for debt buybacks. He said the closest thing to it were debt "exchanges" conducted in the 1960s and early 1970s when the Treasury gave investors new securities with shorter maturities after they turned in old securities.