Treasury Secretary Lloyd Bentsen, one of the Clinton administration's most respected policymakers, is departing just as rising interest rates have revealed possible cracks in a centerpiece of his tenure.
Eighteen months ago, Bentsen changed the Treasury Department's mixture of debt issuance, which the administration estimated would save $16.4 billion over five years. At the time, private forecasters feared the figure was overly optimistic.Now several economists and financial analysts say that fear has been validated - and some suggest the plan may ultimately cost the government more.
"The interest savings are not being realized anywhere close to what they thought it might be," said Leif Olsen, president of L.H.O Investments, a money-management firm in New Canaan, Conn.
"They have pared back on the 30-year bond issues and they did it at exactly the wrong time."
The Treasury contends it's too early to judge the plan, which essentially is a broad shift to shorter-term borrowing.
"When we put that policy in place, we did not do it for short-term budgetary reasons but with a long-term view, that over time a somewhat shorter maturity mix would save money for the taxpayer," said Darcy Bradbury, deputy assistant secretary for federal finance at the Treasury.
In hindsight, though, Bentsen's debt-reshuffling designers may have been fooled by something they failed to foresee: a sharp rise in short-term interest rates.
In May 1993, the Treasury cut the supply of 30-year bonds and other long-term IOUs it sells to finance the $4 trillion-plus national debt. Instead, it began selling more short-term debt, shifting borrowing to securities of maturities of three years or less.
Since short-term interest rates historically are lower than long-term rates, the government hoped to slash financing costs.
Initially, the new mixture seemed to work. Back then, rates on 30-year bonds, the longest Treasury maturity, were about 4 percentage points steeper than the 2.87 percent yield on the Treasury's shortest term maturity, the three-month bill.
The government saved about $700 million at the plan's outset, estimated Kathleen Stephansen, a senior economist at Donaldson, Lufkin & Jenrette Securities Corp., a New York investment firm.
But those savings have rapidly eroded since February of this year, when interest rates reversed course and began rising for the first time in five years, triggered by a Federal Reserve move to curb inflation.
The rise has driven up the Treasury's financing costs. But presupposed savings from the new debt plan have failed to significantly compensate for those higher costs, analysts say, because short-term interest rates have risen twice as fast as long-term rates.
"It appears there have been some savings, but the initial savings have eroded dramatically," Stephansen said. "It supports the point these (projected) savings were overly optimistic."