Uncle Sam To Buy Back Debt

Moving to cut the $3.6 trillion in outstanding debt, the Treasury announced a plan Wednesday to sharply reduce the supply of government notes on the bond market, its first such move since Richard Nixon was president.

Treasury Secretary Lawrence Summers said the government is proposing to buy back bonds and notes before they mature as a way of managing the growing federal budget surplus.

The Treasury will also reduce the frequency of its 30-year bond auctions from three times a year to twice yearly and may also reduce the frequency of its 1-year bill and 2-year note auctions.

In the third quarter, the government will pay down $11 billion in debt by issuing fewer new securities to replace the old debt that matures.

Summers said buying back debt could have many benefits for the U.S. economy and for the government, including lowering interest costs and enhancing liquidity.

"Enhancing the liquidity to Treasury's benchmark securities should lower the government's interest costs over time and promote overall market liquidity," Summers said at a news conference.

The buy backs are proposed in a new rule to be published in the Federal Register on Thursday. Treasury hopes to have the "new tool of debt management" available by the first of the year following a 60-day public comment period.

The Treasury hasn't bought back debt since 1972, when it swapped new debt for old.

As proposed, the government will announce which issues it intends to buy back in a "reverse auction" where bidders would get the price they asked. Treasury would be under no obligation to accept any offers.

For the third-quarter refunding, Treasury will auction $15 billion in 5-year notes on Tuesday, $12 billion in 10-year notes on Wednesday and $10 billion in 30-year bonds on Thursday.

The Treasury also proposed to have $80 billion in cash on hand at the end of the year, just in case the government or credit unions need extra cash. "We do not anticipate any problems, but we believe it is appropriate to be prepared," said Treasury Undersecretary Gary Gensler.

Written by Rex Nutting, CBS MarketWatch