New U.S. five-year notes may end up as old 7-year issue
Aug 22 (Reuters) - Math in the bond world is rarely intuitive and often baffles outsiders.
In the latest of such head-scratching calculations, Uncle Sam might pull a move that belongs on fashion runways - recycling something old into something new.
The U.S. Treasury Department said on Thursday the five-year debt it plans to sell next week might be counted as an old seven-year note issued two years ago, if they end up having the same coupon rate and maturity.
"By combining these issues into one, it causes less confusion," said Gennadiy Goldberg, an interest rate strategist at TD Securities in New York.
Goldberg said this might occur more at future Treasuries auctions if bond yields continue to rise, possibly matching the coupon rates and maturities of older bond issues.
During the current bond market sell-off, the yields on five-year Treasury notes like most other medium to longer-dated maturities reached two-year highs this week.
The upcoming five-year Treasury debt supply which will mature in August 2018 might be sold in a yield range of 1.500 percent to 1.624 percent, the Treasury said.
If this were to happen, the Treasury would consider reopening a seven-year note issue that has a 1-1/2 percent coupon which it originally sold two years ago, rather than minting a brand new five-year issue.
"If the auction results in the issuance of an additional amount of the outstanding 7-year notes rather than a new 5-year note, it will be indicated in the Treasury auction results press release and by a special announcement," the Treasury said in a statement.
On Thursday, that seven-year note issue due in August 2018 was 5/32 lower in price with a yield of 1.7037 percent, up 3.5 basis points from late on Wednesday.
In the "when-issued" sector, traders expected the $35 billion worth of the upcoming five-year supply to sell at a yield of 1.711 percent.
If this "when-issued" yield holds into next week's five-year auction, the Treasury will issue a new five-year note because it will carry a coupon rate of 1-5/8 percent rather than reopening the existing seven-year note issue that has a lower coupon rate of 1-1/2 percent, Goldberg said.
Meanwhile, the Treasury will auction the five-year notes next Wednesday after it sells $34 billion in two-year notes next Tuesday and before it sells $29 billion in seven-year notes next Thursday.
The auction size of the two-year notes as expected by Wall Street shrank by $1 billion from July. This was the first time in nearly three years the Treasury pared its two-year note offering as higher tax receipts have reduced federal short-term borrowing needs and as part of the preparation for the Treasury to introduce two-year floating-rate notes by early 2014, according to analysts.
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