UPDATE 2-U.S. Treasury to cut auction sizes as borrowing needs fall
* Auction sizes will be unchanged next week
* Treasury plans first floating-rate auction for January
* Debt limit won't be breached until at least Labor Day
WASHINGTON, July 31 (Reuters) - The United States plans to decrease the auction sizes of two- and three-year notes over the coming months because improving government finances have reduced the need for debt financing, the U.S. Treasury said on Wednesday.
In addition, the extra cash coming into the Treasury's coffers should help it continue paying for government operations, giving Congress time to raise the nation's borrowing limit when it returns from a recess in early September, Treasury said.
The Treasury, in its quarterly refunding announcement, said the auction size next week will remain the same size, with plans to borrow $72 billion in debt securities.
But in the next month, the Treasury plans to cut by $1 billion the coupon auction size of two-year notes, Matthew Rutherford, Treasury's assistant secretary for financial markets, told reporters on Wednesday.
Auction sizes for both two- and three-year notes will fall by a further $1 billion in September or October, he said.
The U.S. government's deficit has fallen faster than many analysts were expecting this year, driven by higher tax revenue, public spending cuts and big payments to the Treasury from Fannie Mae and Freddie Mac, the two mortgage finance companies were bailed out by taxpayers during the financial crisis.
Most of the additional funds have come from Fannie Mae, which in May said it would return $59 billion to the Treasury in quarterly dividends.
Treasury on Wednesday also said it plans to hold its first floating-rate note auction at the end of January, and it issued final rules on Wednesday describing how these notes will be structured. More details are to be provided about the size of the auction in November.
The floating-rate notes, Treasury's first new security since 1997, are expected to attract investors who want to be sure they do not miss out on higher returns if interest rates begin to move higher. The launch also means Treasury now no longer plans to introduce any other products, such as the 50-year bond it discussed earlier.
In next week's coupon auction, the government will issue $32 billion in three-year notes, $24 billion in 10-year notes and $16 billion in 30-year bonds, the Treasury said.
Although the battle in Washington over the deficit has faded from view, the government's ability to keep paying its bills remains uncertain.
The U.S. Treasury has been using emergency cash measures to ensure it can keep paying the nation's bills while staying under the $16.7 trillion limit on the nation's borrowing, which was reinstated in mid-May. Republicans in Congress have refused to raise the legal limit without further spending cuts.
U.S. Treasury Secretary Jack Lew has said these measures should allow the government to keep funding itself at least until Labor Day, on Sept. 2. But many private analysts say Treasury will likely not run out of options until some time in October or early November.
Treasury's Rutherford on Wednesday declined to specify how long Treasury's maneuvers could hold off the day of reckoning, saying forecasts for government spending were still uncertain.
"We strongly urge Congress to act in a timely manner (in raising the debt limit)," he said. A showdown over the debt ceiling in 2011 sparked wild stock market swings and cost the United States its top-tier AAA credit rating, as markets fretted about the chance of a U.S. default.
Treasury has already used several so-called extraordinary measures, such as suspending sales of certain state securities. But it has not yet dipped into the exchange stabilization fund, which could free up another $23 billion. This seldom-used fund was earmarked to stabilize currency rates and access the dollar balance to avoid debt issuance.