Concerns over fiscal debate hit U.S. debt issuance plans

WASHINGTON Wed Nov 6, 2013 11:22am EST

WASHINGTON (Reuters) - The U.S. Treasury put on hold reductions in the size of some of its debt auctions on Wednesday out of concern that last month's fiscal policy showdown hurt the economy and could slow progress in reducing the deficit.

A strengthening recovery and budget austerity have helped America slash its budget deficit, but growth has probably suffered of late as a political impasse led to a partial government shutdown and raised the specter of a debt default.

Economists disagree over how much the impasse dragged on the economy and will slow progress towards narrowing the deficit, which may put upward pressure on the government's borrowing needs.

"It's just too early to know at this point," Treasury Assistant Secretary Matt Rutherford told a news conference as he detailed Treasury's quarterly refunding needs.

The Treasury had gradually reduced 2-year and 3-year auction sizes since August as the deficit narrowed. The budget gap shrank to $680 billion in the 12 months through September, down from $1.09 trillion a year earlier.

Rutherford urged Congress to increase a legal limit on government borrowing "well before" February 7, when the current debt cap is due to expire, to avoid a repeat of this year's standoff.

The recent debt ceiling debate hit some corners of the financial market hard in the weeks leading up to the day when officials warned they would have to stop borrowing.

"We don't want to see that again," Rutherford said.

Washington came to the brink of default last month when lawmakers debated whether or not to raise the borrowing limit. Not doing so would have left the government unable to write checks for everyone from creditors to pensioners, and yields on short term debt spiked during the impasse because investors feared they might not get paid.

A new debt ceiling will come into effect on February 8, and Rutherford said the government would be able to juggle its accounts to keep from defaulting on its obligations for "a period of time" afterward.

He did not specify how long these so-called extraordinary measures would keep Washington from running out of money. Many analysts expect the measures could get the government through mid-March, and possibly longer.

The Treasury plans to offer $70 billion in securities next week to refund about $63.5 billion in maturing debt and raise $6.5 billion in new cash.

The United States will auction its first-ever two-year floating rate notes on January 29, aiming to sell $10 billion to $15 billion. It would be the first of 12 monthly auctions for the FRNs in 2014, Rutherford said, and the first new Treasury security since 1997.

The Treasury is also considering holding more auctions of five-year inflation-linked securities, or TIPS, every year after a request from market participants. It will announce a decision on any changes to its TIPS program on February 5.

(Reporting by Jason Lange; Editing by Krista Hughes and Chizu Nomiyama)

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