The U.S. Treasury Department plans to sell $72 billion in its quarterly sales of long-term debt next week, as lower projected budget deficits have allowed the government to reduce borrowing.
The Treasury said it will auction $32 billion in three-year notes on Nov. 8, $24 billion in 10-year notes Nov. 9 and $16 bilion in 30-year bonds Nov. 10. The total amount was in line with the median forecast in a Bloomberg News survey of bond dealers.
The Treasury also said it will add more frequent auctions of Treasury Inflation-Protected Securities, also known as TIPS, to improve liquidity in the market. The extra auctions are for five-year and 30-year TIPS and will be second reopenings of those securities.
The Treasury has been scaling back auction sizes, after expanding debt sales to finance annual budget deficits exceeding $1 trillion for the past two years. Bond dealers predict deficits of $1.214 trillion in fiscal 2011, $1.023 trillion in 2012 and $906 billion in 2013, according to a survey provided to the Treasury before this week’s announcements.
“Based on current fiscal forecasts, coupon auction sizes are likely to remain steady over the coming quarter,” said Mary Miller, the Treasury’s assistant secretary for financial markets. Looking ahead, Treasury officials are considering further reductions in 2011, according to the minutes of the department’s meeting with its borrowing advisory committee.
Federal Reserve purchases of Treasury securities, which may be announced later today, could pose a dilemma for debt managers, advisory panel members told the committee, according to the minutes. The members said the Fed’s behavior was “probably transitory” and that Treasury shouldn’t change its issuance patterns to accommodate the Fed as a single large investor.
“The question arose whether the Fed and the Treasury were working at cross-purposes,” the minutes said. One member said that “from an economic perspective, the Fed’s purchase of longer-dated coupons via increasing reserves was economically equivalent to Treasury reducing longer-dated coupons and issuing more bills.”
In a presentation to the Treasury, one of the committee members said that Fed easing “would force Treasury yields lower and would likely lead the curve to flatten in the five- to 10- year sector” over the next one to two years. The presenter said 30-year interest rates would likely command a higher risk premium because of concerns about inflation and the value of the U.S. dollar.
A Fed easing campaign could affect liquidity in the Treasury market, pushing investors out of medium-term securities and into bills, 30-year Treasuries or riskier assets. A presenting member of the advisory panel “suggested that Treasury could address potential illiquidity issues through additional issuance” in affected sectors of the market.
The Fed also could hurt markets when it is ready to sell Treasury securities in its portfolio, the presenter said. This risk could be mitigated if the Fed sold its holdings “gradually and predictably.”
Banks and other financial firms will probably increase their holdings of Treasury securities as the so-called Basel III bank capital rules take effect, the minutes said. The panel cited one forecast that estimated by 2015, the new rules would lead to $400 billion in new Treasury security purchases by commercial banks.
Treasury officials told the panel they are watching the bill market for signs of strain, since bills now make up a smaller than usual percentage of the Treasury market. To help manage short-term borrowing needs, the Treasury said it may issue cash-management bills in the current quarter.
The economy is growing slower than its potential, which has limited growth in tax receipts, Treasury officials said in the advisory committee minutes. The committee’s report to the department said “growth in economic activity appears to have stabilized, and risks of a sharper slowing look to have diminished.”
Next week’s auctions of bonds and notes will raise $58.2 billion in new cash, with the rest of the proceeds going to pay off maturing debt, the Treasury said.
The current quarter’s total long-term debt sales declined from the $74 billion in notes and bonds sold at the previous refunding in August.
Earlier this week, the Treasury lowered its estimate for government borrowing from October through December as it continues to adjust its financing needs amid economic recovery.
Borrowing will total a net $362 billion in the current quarter, compared with an estimate three months ago of $380 billion, the department said. The Treasury also projected borrowing of $431 billion in the three months to March 31.
Auctions of long-term debt were projected to be smaller than the total of $74 billion sold in August, when the Treasury sold $34 billion in three-year notes, $24 billion in 10-year notes and $16 billion in 30-year bonds. The median forecast of 15 analysts surveyed predicted a $3 billion cut in three-year note sales, with the other two auction sizes unchanged.
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