Treasury seeks dealer advice on TIPS liquidity

WASHINGTON (Reuters) - The U.S. Treasury Department on Friday said it asked primary bond dealers for advice on meeting its burgeoning financing needs, including ways to improve liquidity and investor diversity in its inflation-indexed notes program.

In the dealer survey for its next quarterly debt refunding, the Treasury asked dealers for their views on possible adjustments to its debt issuance calendar, as well as on recent trends and volatility in the Treasury markets.

The Treasury wants to discuss at a July 30 dealer meeting changes to the Treasury Inflation-Protected Securities (TIPS) program that could "maximize the diversification benefits of inflation-linked debt issuance and improve TIPS market liquidity more generally."

Although the Treasury has vastly expanded its issuance of regular Treasury bills, notes and bonds, it has not proportionally expanded its TIPS issuance thus far. In recent weeks, TIPS have outperformed regular Treasuries in secondary markets, as concerns about future inflation have risen.

A Treasury official reaffirmed the department's commitment to its inflation-indexed notes programs.

"Treasury is committed to the TIPS program. We recognize that it is an important component of our overall debt management

strategy, and we are soliciting feedback from the market on what steps we can take to improve the program," said Matthew Rutherford, Treasury deputy assistant secretary for federal finance.

The Treasury is next expected to announce the refunding of its maturing 3-year, 10-year and 30-year debt on August 5, with new overall borrowing estimates for the third and fourth quarters on August 3.

The Treasury is closing in on the end of a fiscal year on September 30 in which its net new issuance of debt is forecast to top $2 trillion to pay for financial rescues, economic stimulus programs and cover a steep drop in tax revenues due to the recession.

In addition, a Treasury official said the incidence of failed trades in the Treasury market had declined since the imposition of fines last quarter on firms that failed to deliver promised securities. Firms must pay 3 percent of the transaction value of securities that they fail to deliver.

Incidence of so-called "fails" tend to rise during times of extremely low interest rates on Treasury debt, which had prevailed in late 2008 and early 2009 as the financial crisis reached its worst points.

(Reporting by David Lawder; Editing by Kenneth Barry)