Comparing the plan to refinancing a mortgage, the government says the move will enable it to pay it down its debt on the best possible terms.
The Treasury Department revealed plans Wednesday to trim the federal government's $3.6-trillion public debt _ moves that could mean lower interest rates, more capital for private investment and a dramatically different world financial market in years to come.
With two years of budget surpluses in hand and more projected as far as they can see, officials said they would cut back the amount of new federal borrowing, and might begin buying back old debt as soon as next year.
It would be the first such reduction since 1972, when the full national debt totaled less than half a trillion dollars.
Most other government and corporate borrowers already have refinanced older, high-interest debt, but the Treasury could not because the bonds cannot be called for redemption before their maturity dates.
The Treasury is proposing to handle buybacks through "reverse auctions." The big bond dealers that now buy Treasury securities by submitting bids at auction would instead offer to sell Treasury securities by submitting the prices they would be willing to accept. The Treasury would announce which bond issues it was interested in buying, then decide which particular offers, if any, it wanted to accept.
Individuals would not be permitted to participate directly in the reverse auctions, but could indirectly through brokerage firms. Investors who own bonds already can sell them through a broker on the secondary market, where older high-interest bonds bring more than face value. Selling means giving up future income in exchange for a capital gain right now.
President Clinton hailed the latest plan, calling debt reduction a "stealth tax cut" that would cut the cost of owning a home or car by hundreds or thousands of dollars a year. Financial analysts also hailed it as a positive sign for the U.S. economy, now in its ninth year of expansion, the longest ever in peacetime.
That growth, which has created millions of new jobs and pushed stock prices to record levels, also has produced a windfall for the federal government. Tax receipts have overtaken spending during the 1990s, reversing the pattern of annual budget deficits that dogged administrations from Lyndon Johnson to George Bush.
The deficits peaked in 1992, when the government spent about $280-billion more than it collected. The Treasury borrowed the difference each year, selling IOUs to investors at home and abroad. All those IOUs, which range from three-month Treasury bills to bonds lasting up to 30 years, require the government to pay interest. And as the debt has piled up, so have annual interest payments. Last year, they totaled $363-billion _ payments that added to the annual deficits and thus to the debt itself.
Last year, however, the federal government ran a surplus of $69-billion, and it expects to end the current fiscal year about $120-billion in the black. It will be the first back-to-back surplus since 1957, when Dwight Eisenhower was president.
Treasury Secretary Lawrence Summers said Wednesday that the surpluses make it possible to retire some old debt, in some cases by simply paying off Treasury bills and notes as they come due. The Treasury will not stop issuing new debt, but will use it to replace older notes, some of which it will buy back before they mature.
It will, he said, be like "a homeowner refinancing a mortgage or a company refinancing its debt." Buybacks will allow the government to "refinance the debt and pay it down on the best possible terms."
Gary Gensler, the Treasury's undersecretary for domestic finance, said the Treasury also will cut back the frequency of sale for its 30-year bonds to twice a year _ February and August _ from three times a year because of its reduced need to borrow in financial markets. The Treasury also may curtail its sale of one-year bills and two-year notes, Gensler said.
The Treasury will likely target securities due in 15 to 25 years in any buyback to reduce the average maturity of the debt, said Lou Crandall, chief economist at Wrightson Associates in New York.
About $142-billion of the surplus already has been put toward cutting the national debt, officials said. But until Wednesday, it was not clear just how the Treasury would manage the process of debt reduction _ a major question for the dealers and investors who make up the market for government securities.
U.S. Treasury bills, notes and bonds constitute one of the backbones of world finance; investors use them as both a price-setting benchmark and as a haven in turbulent times. Not only are they considered safe from default, but Treasury securities are easy to buy and sell quickly.
Paying down the national debt also means cutting the supply of Treasury securities available to investors, which, in a classic economic equation, means higher prices for those that remain on the market. When prices for debt securities rise, their effective interest rates fall. And because U.S. government debt is a bellwether in the market, a decline in Treasury rates will likely push down rates for nearly everything else, including home mortgages, business loans and credit cards.
The process already is working, according to bond-market analyst Ward McCarthy, managing director of Stone & McCarthy Research in Princeton, N.J. "Interest rates are lower than they would have been had the Treasury not been reducing the size of the market," he said.
Of course, rates will continue to bounce around as investors react to factors ranging from the strength of the dollar to guesses about the Federal Reserve. But the Treasury statement Wednesday brought an immediate reaction on Wall Street, where bond rates fell and stock prices rose. The yield on the benchmark 30-year Treasury bond fell to 6.09 percent from late Tuesday's 6.16 percent.
_ Times staff writer Helen Huntley, Associated Press and Bloomberg News contributed to this report.
How it would work
The Treasury would buy back bonds through "reverse auctions," letting dealers submit prices they would accept to sell the securities. Individuals could participate indirectly through brokerage firms.