CM bills allow  Treasury to finance very short-term cash needs—for as little as 1 day— while providing short notice to market participants. We identified possible options to reduce the use and cost of CM bills on the  basis of our analysis of CM bill use, the yield differential, and CM bill  auction performance. Treasury  makes large regular payments (e.g., Social Security and federal retirement)  in the beginning of the month and it often receives large cash inflows in the  middle of the month from income tax payments and note issuances. Because regular bills alone are not sufficient to fill this cash financing gap,  Treasury has increasingly used CM bills since 2002. 2 describes these steps in more detail.) Treasury Has Increasingly Used CM Bills to Fill Frequent Cash Financing Gaps

The combination of low cash balances in the beginning of the month with  large cash inflows in the middle of the month has led to a general pattern of  CM bill issuance. 3). 4). CM Bills Generally Had Higher Yields than Outstanding Bills of Similar Maturity but Lower Borrowing Costs than Currently Available Alternatives

CM bills provide Treasury with flexibility to obtain cash outside its regular  borrowing schedule, but Treasury generally paid a higher yield on CM bills  than outstanding bills of similar maturity paid in the secondary market. These factors theoretically reduce Treasury’s  borrowing costs. However, borrowing costs associated with CM  bills have increased since 2003. Issuing CM Bills in Multiple Tranches Has Helped Reduce Borrowing Costs

Treasury has taken steps to borrow cash closer to the day it is needed,  which contributes to smaller average issues, shorter terms to maturity, and  lower borrowing costs. Treasury has made  progress toward reducing the cost of CM bills, but it may be possible to do  more. Our analysis indicates that the yield differential between CM bills  and outstanding bills of similar maturity has increased as short-term rates  have risen. While  Treasury does not vary its debt management strategy in response to  changing interest rates, it should be mindful that increasing rates are likely  to raise the relative cost of unscheduled CM bills. As a result, Treasury  should consider options, including better aligning cash flows and  increasing earnings on cash balances, that may reduce the frequent use of  CM bills and ultimately overall borrowing costs. Recommendation for Executive Action

We identified options that could potentially reduce the use and cost of CM  bills. While we analyzed the yield differential  for all CM bills issued during fiscal years 1996–2005, we focused on the 55  CM bills issued during fiscal years 2002–2005 because the introduction of  the 4-week bill in 2001 led to a significant reduction in the amount and term  to maturity of CM bills and caused a structural change in the CM bill  market.
Why GAO Did This Study

One result of persistent fiscal imbalance is growing debt and net interest costs. Net interest is currently the fastest-growing "program" in the budget and, if unchecked, threatens to crowd out spending for other national priorities. This report was done under the Comptroller General's authority. GAO examined the Department of the Treasury's (Treasury) growing use of unscheduled short-term cash management bills (CM bills). Specifically GAO (1) describes when Treasury uses CM bills and why, (2) describes the advantages and disadvantages of CM bills, (3) describes steps taken by Treasury to reduce the overall borrowing costs associated with CM bills, and (4) identifies possible options Treasury could consider to reduce the use and cost of CM bills further.

What GAO Found

Treasury makes large, regularly occurring payments, such as Social Security and federal retirement payments, in the beginning of each month but receives large cash inflows in the middle of each month from income tax payments and note issuances. Because regular bills alone are not sufficient to fill these intramonth cash financing gaps, since 2002 Treasury has increasingly issued CM bills to bridge this gap. CM bills allow Treasury to obtain cash outside of its regular borrowing schedule in varying amounts and maturities, but Treasury pays a premium for doing so. GAO's analysis found that Treasury paid a higher yield on CM bills than that paid on outstanding bills of similar maturity in the secondary market. Treasury has taken steps to reduce the use and cost of CM bills. Treasury added a 4-week bill to its regular auction schedule in 2001, which led to reduced CM bill issuance, shorter terms to maturity, and lower borrowing costs in 2002. Treasury has also fine-tuned CM bill issuance by borrowing closer to the time when it needs cash. However, borrowing costs associated with CM bills have increased since 2003. While Treasury has made progress towards reducing the cost of CM bills, it may be possible to do more. GAO's analysis indicates that the yield differential has increased as short-term rates have risen. If these rates rise further, as market participants expect, so will the yield differential. While Treasury does not vary its debt management strategy in response to changing interest rates, it should be mindful of their effect on the relative cost of unscheduled CM bills and explore options to reduce the frequent use of CM bills and ultimately overall borrowing costs. GAO identified options worth exploring such as any additional opportunities for closer alignment of large cash flows; possible options for increasing earnings on excess cash balances; and introduction of a shorter-term regular instrument.