How a US bond for overseas investors may reduce the cost of borrowing at home
Hey, buddy, can you spare a couple of billion? That is what the US Treasury is saying to foreign investors. Uncle Sam needs to sell billions of dollars' worth of IOUs every year to cover the gap between what the government spends and what it collects from taxes.
Starting as early as next month, the Treasury will offer a special four-year note aimed solely at foreign financial institutions for resale to investors outside the United States. To avoid tax cheating by US citizens, the financial institutions abroad must certify to the Treasury that the owners are neither citizens nor residents of the US.
The move is designed to expand the market for Treasury debt, and thus ''reduce the cost of borrowing,'' says Treasury Secretary Donald T. Regan. In theory, the more bidders for a given bond, the lower the rate of interest the government must pay. The Treasury also announced several more technical steps designed to trim interest costs.
This seems to be an opportune time to try to lure foreign investors: Congress , in the tax bill signed into law July 18, repealed a requirement that 30 percent of the interest income due foreigners be withheld. That fee was a key reason that foreign citizens' ownership of US debt dropped from 17 percent of the debt in 1978 to 11 percent in May 1984, Mr. Regan said.
Eliminating the 30 percent withholding requirement is roughly the same as boosting the effective interest rate by 30 percent. Given high US rates, the change ''will make it more attractive to hold'' goverment debt issues and thus help drive down interest costs, Mr. Regan said.
Interest on the federal debt is a major item in the federal budget. The federal debt is expected to be $1.587 trillion by the end of the current fiscal year. And the cost of paying interest to holders of that debt will be $109.4 billion in fiscal 1984, rising to $160 billion by 1987, according to revised administration estimates released earlier this week.
Many economists say the Reagan budget and interest cost figures are based on a too-optimistic interest rate forecast. But even the upward adjustment in interest projections that the administration made this week added $55 bilion to the total deficit for budget years 1984-86.
In another bid to reduce interest costs, the Treasury will test-market a 20 -year bond with five years of call protection. That means that after five years, the government could pay off the bond. Until now, government bonds have not been paid off before they reach maturity.
The government would pay off a bond in advance if the current cost of borrowing falls below the rate the bondholder is being paid.
The Treasury also announced it was taking certain technical steps which move it closer to offering so-called ''zero coupon'' bonds. Such bonds are sold at a deep discount from their face value but pay no interest until maturity.
Zero-coupon bonds could save the government large amounts of current interest payments. But later on, there is a piper to be paid: Due to the lack of current interest payments, raising $1 billion in cash today could require selling bonds redeemable in 30 years for $33 billion.