UPDATE 2-U.S. to boost 30-year bond sales as borrowing soars

(Adds details, comments from news conference)

By David Lawder

WASHINGTON, April 29 (Reuters) - The U.S. Treasury on Wednesday said it would sell $71 billion in notes and bonds next week in a record quarterly refunding and move to monthly auctions of 30-year debt to finance massive stimulus and financial rescue spending.

The Treasury said of the total, $52.2 billion would pay off debt maturing on May 15 and $18.8 billion would be new cash.

It forecast gross debt issuance of $8 trillion for fiscal 2009, which ends Sept. 30, and net new issuance of $2 trillion. This compares with $5.5 trillion in gross issuance and $700 billion in net issuance in fiscal 2008.

"We feel confident that we can address these large borrowing needs," said Karthik Ramanathan, the Treasury's acting assistant secretary for financial markets.

Increasing the number of 30-year issues to 12 per year from eight, including reopenings, would "extend the length of our portfolio, increase our flexibility and help us reach capacity in terms of our financing needs," he added.

The refunding was largely in line with expectations, and U.S. Treasury debt prices were modestly higher after the announcement. Ten-year Treasury notes 10YT=RR were up 4/32 in price to yield 3.00 pct, down 1 basis point from Tuesday.

"It's a relatively benign announcement. We are in an environment that the market is nervous over offerings larger than what is anticipated. The three-year was actually at the lower end of expectations," said Lou Brien, market strategist with DRW Trading in Chicago.

The Treasury will sell $35 billion of 3-year notes on May 5, $22 billion of 10-year notes on May 6 and $14 billion in 30-year bonds on May 7. The long bond will be now be reopened on June 11 and July 9.

But Ramanathan also warned that the federal government would breach its $12.1 trillion debt ceiling by the second half of this calendar year and noted that government bond dealers are now predicting a fiscal 2009 U.S. budget deficit of $1.75 trillion, compared with $1.63 trillion in February.

Treasury officials said additional maturities were discussed with dealers, but were not needed at this point. The Treasury brought 3-year notes out of retirement in November and reintroduced 7-year notes in February.

4-YEAR, 20-YEAR DISMISSED

Members of the Treasury's primary bond dealer advisory committee dismissed the idea of maturities of 4 years, 20 years and over 30 years, according to minutes of their meeting on Tuesday.

The 4-year note would not attract a new base of investors, members said, while the 20-year bond was deemed "difficult to sell and usually cheap."

Several members agreed maintaining existing maturities was preferable to adding new ones, and one suggested the Treasury could move to twice-a-month 2-year note auctions in future.

There had been some speculation in markets that the Treasury might introduce a 50-year bond, but there was no specific mention of an issue with that maturity in the minutes. Members did say, however, that issues beyond 30 years could prove illiquid and costly, while raising very little new debt.

Members also pointed out that Treasuries have benefited from a flight to quality and risk aversion among global investors, with aggregate inflows shifting "dramatically" in favor of Treasuries.

In addition, the Treasury announced that to cut the incidence of failed trades in the vast market for U.S. Treasury securities, the Treasury Market Practices Group and securities industry groups agreed to begin imposing cash charges on firms that fail to deliver securities, starting on May 1.

The charges would act as an "incentive" to promptly resolve trades and avoid such failures, which tend to occur in falling interest-rate environments, Ramanathan said. (Additional reporting by Corbett Daly in Washington and Richard Leong in New York; Editing by Andrea Ricci)