The federal budget being swiftly transformed from deficit to surplus will cause complications for debt managers at the U.S. Treasury, the General Accounting Office warns.

• The GAO notes that the Congressional Budget Office projects that debt held by the public will drop from $3.6 trillion in fiscal 1999 to $865 billion in 2009.

• GAO says that "as debt held by the public continues to shrink there will be greater pressure on Treasury to further concentrate debt in fewer issues to maintain deep and liquid markets."

• The GAO continues by saying that "Treasury will need to reassess its issuance of nonmarketable securities such as state and local government series and savings bonds."

• In order to maintain the lowest financing cost while also maintaining a market for U.S. securities, the department might consider reopening current debt issues and redeeming certain securities before their maturity dates.

Treasury already is considering a debt buy-back program whereby it would repurchase securities from the market in reverse auction operations -- but no decision has yet been made on that.

To reduce the amount of debt held by the public and reduce government interest costs, Treasury could call in $87.6 billion in high interest bonds that it issued prior to the end of 1984. These bonds could be called between May 2000 and November 2009.

Even paying down the debt, as welcome as that is, involves some tricky strategies, experts point out.

Source: John Connor, "Budget Surpluses May Cause Problems for the U.S. Treasury's Debt Managers," Wall Street Journal, October 4, 1999.