US Government Debt Different - Finance Department - University of ...

10 U.S. Government Debt Has Always Been Different!the 1930s when budget surpluses were replaced by a need tofinance deficits and manage a growing debt. In the 1920s and1930s, the Treasury also learned to tailor its offerings to a widespectrum of market participants.c) Auction offerings. Before 1914, the Treasury sold bonds byauction to finance projects such as the Spanish AmericanWar and the Panama Canal. But the national debt was smallthen, and banks—professional investors—were the main purchasers.In World War I, auctions were abandoned in favorof fixed-price offerings because the goal was to attract a widerange of buyers to a much larger Treasury market, and someof these buyers were afraid to purchase Treasury debt at auctions.Auctions came back beginning in 1929, when Treasurybills were first issued. By the late 1930s, Treasury bills wereauctioned weekly, leading to a highly liquid short-term moneymarket. By the 1970s, regular and predictable auctions wereextended to Treasury notes and bonds.The fourth pillar of the modern Treasury debt market, the bookentrysystem, arrived in the late 1960s. It took advantage of moderncomputer and information technologies to reduce much of the paperand paperwork of earlier systems of debt management.Since the 1960s, the Treasury has taken or is considering more movesto tailor its offerings to the needs of a variety of potential purchasersof U.S. debt. TIPS (Treasury Inflation Protected Securities) arrivedin the late 1990s. TIPS offer inflation protection by increasing thepar value of securities by the annual rate of inflation. They have theadditional advantage of providing a market-based estimate of investorexpectations of inflation, which is the difference between theyields of non-inflation-protected and inflation-protected Treasurysecurities of the same maturity. This is useful because, as some haveargued, the modern equivalent of the old gold standard is the carefulmanagement of inflation expectations by the central bank, the Fed.In 2012, the Treasury has considered, but has not yet implemented,issuance of floating rate debt. The advantage for the Treasury of sucha debt instrument is that it would lengthen the maturity of the na-