Treasury to expand debt arsenal as deficit rises

WASHINGTON (Reuters) - Facing the need to borrow up to a staggering $2.1 trillion in the current fiscal year to fund economic rescue programs, the U.S. Treasury is expected to significantly expand its debt securities arsenal.

Analysts anticipate that the Treasury on Wednesday will announce the return of the 3-year note and adopt more frequent offerings of 10-year notes and 30-year bonds. It may also consider more reopenings of shorter maturities.

"They are going to pull out all the stops. There's a good chance they'll come back to a quarterly 3-year note, monthly 5-year (note) auctions and increase issuance pretty substantially across the board," said Kim Rupert, head of global fixed-income analysis at Action Economics in San Francisco.

The Treasury Department said on Monday it would need to borrow a record $550 billion in the October-December quarter, including a likely $300 billion in financing for Federal Reserve liquidity operations.

The total was $408 billion higher than previous estimates announced in July 2008 due to outlays for economic assistance programs, lower tax receipts and lower issuance of non-marketable debt securities to state and local governments.

The Treasury anticipates $368 billion in borrowing in the January-March quarter.

The Treasury said a survey of 18 primary bond dealers showed a consensus for a fiscal 2009 federal budget deficit of $988 billion -- more than doubling the record $455 billion deficit in fiscal 2008, which ended September 30.

The dealer consensus for fiscal 2009 marketable borrowing was $1.4 trillion, with a range of $1.1 trillion to $2.1 trillion.

MASSIVE SCALE

Goldman Sachs estimates a $2 trillion borrowing requirement that would finance an $850 billion federal deficit, fund $500 billion in Treasury purchases of bank assets and equity, and roll over $561 billion in maturing coupon securities as net sales of state and local securities fall $100 billion.

"The sheer scale of this need suggests to us that Treasury will adopt all three of the options it has so far indicated are under consideration," Goldman analysts said in a research note. "These include moving to a full monthly cycle of 10-year notes, moving to a full quarterly cycle of 30-year bonds, and

reintroducing the 3-year note as part of the regular quarterly refunding operation."

Wrightson ICAP chief economist Lou Crandall said the Treasury will need more options.

"Our own guess is that the Treasury will issue a set of stand-alone notes outside the framework of its regular recurring auction cycles," Crandall said in a research note, adding that some dealers have advocated new maturities such as 4-year and 7-year notes or 15-year bonds.

"We think these options are less likely, but they cannot be ruled out," he said.

UBS analyst Chris Ahrens said in a research note that the Treasury will likely announce sales of $30 billion to $32 billion of 3-year notes, $20 billion to $22 billion of 10-year notes and an $8 billion to $10 billion re-opening of 30-year bonds. It will likely launch monthly 10-year reopenings and quarterly long bond auctions in February 2009.

"The fiscal situation is so volatile and has changed so dramatically that our confidence level for these forecasts is lower than normal," he wrote.

(Reporting by David Lawder; Editing by Jan Paschal)