U.S. may revive 1-year bill as budget gap grows

By Richard Leong

NEW YORK, April 23 (Reuters) - The U.S. government may consider reviving the one-year Treasury bill to fill a bloating budget gap and raise funds to pay for a $152 billion stimulus plan as tax receipts may fall due to a slowing economy.

There has been talk that the Treasury Department could also bring back the three-year note after it stopped issuing that maturity just a year ago when the government's coffer was flooded with record inflows, analysts said.

Given the structure of the yield curve, it is now much cheaper for the government to issue short-dated securities to raise funds rather than issue long-dated bonds. Longer dated yields could spike higher than short-dated yields if inflation rises further due to surging oil and food costs.

At the same time, demand for short-dated Treasuries has surged as investors snatch up the government debt in their search for a safe haven amid the worst market in decades.

"They could bring back both by this time next year," Lou Crandall, chief economist at Wrightson ICAP in Jersey City, New Jersey, said of the possible return of one-year bills and three-year notes.

Last week, the U.S. Treasury sent a questionnaire to Wall Street bond dealers who do business directly with the Federal Reserve. It asked them for their views on the size of the federal budget deficit and changes to its debt issuance calendar as borrowing needs increase.

The White House has forecast a federal deficit of at least $410 billion for fiscal 2008, more than double the $163 billion last year.

This fiscal deterioration has resulted in a spike in government borrowing this year, especially in the Treasury selling more bills -- government IOUs whose maturity is a year or less.

In addition to pumping up its T-bill issuance, the Treasury has steadily raised the monthly offerings of two-year and five-year coupon notes.

On Wednesday, the Treasury is set to sell $30 billion in new two-year notes, the largest two-year offering ever.

A day later, it will sell $19 billion in five-year notes, which is the biggest offering of this maturity since it began to be sold on a monthly basis in mid-2003.

STRONG T-BILL APPETITE

Historically speaking, a spike in Treasury issuance tends to raise the borrowing costs for everybody.

But that negative outcome has not yet materialized because of the ravenous appetite for short-dated, low-risk U.S. government securities as investor seek refuge from the current market turmoil.

Bringing back the one-year or 52-week T-bill, whose issuance stopped more than seven years ago, will satisfy investor demand without causing a noticeable rise in borrowing costs, analysts said.

"People want the short-term nature of it," said George Goncalves, chief Treasury, TIPS/agency strategist with Morgan Stanley in New York.

This current climate stands in stark contrast to the two years ago period when investors clamored for safe, long-dated securities. The Treasury responded by reintroducing the 30-year bond.

For the Treasury, one-year T-bill sale can return as early as mid-year, analysts said.

The Treasury could issue $15 billion to $20 billion in 1-year bills each month. This would raise $180 billion to $240 billion a year, almost enough to offset the currently forecast increase in the budget deficit, according to analysts.

If one-year bills were sold today, investors would buy them at a rate in the 1.80 percent to 1.85 percent range, analysts say.

If the Treasury signals its intention to bring back 1-year bills and perhaps three-year notes, it will do so next Tuesday when it is scheduled to announce its borrowing needs for the second quarter.

(Additional reporting by David Lawder in Washington) (Editing by Theodore d'Afflisio)