Treasury to expand borrowing with 3-year note

WASHINGTON (Reuters) - The U.S. Treasury said on Wednesday it will resurrect the 3-year note and conduct more frequent auctions of 10-year notes and 30-year bonds to cope with staggering borrowing needs that some say could reach $2.1 trillion in the current fiscal year.

The Treasury said it will sell $55 billion worth of these securities next week to refund $54.9 billion in maturing debt.

It said the new 3-year note auctions would be held monthly and it will also move to monthly auctions of 10-year notes, including reopenings in December and January.

The 30-year bond auctions will now be conducted on a quarterly basis instead of twice a year.

The Treasury retired the 3-year note just 18 months ago when better economic times allowed it to cut borrowing, but the situation has quickly reversed.

"Over the last several months, changes in economic conditions, financial markets and fiscal policy, as well as a decline in nonmarketable debt issuance, have contributed to an increase in Treasury's marketable borrowing needs," the Treasury said in a statement.

U.S. tax receipts are being hurt by a moribund economy and financial market losses, while the government is spending hundreds of billions of dollars on financial rescue programs and continuing heavy outlays for wars in Iraq and Afghanistan.

MORE ADJUSTMENTS SEEN

The Treasury may need to borrow up to $2.1 trillion in marketable debt in fiscal 2009, according to some members of the Treasury's borrowing advisory committee, made up of 18 primary government bond dealers.

In minutes of a meeting with the panel, Treasury officials cited consensus estimates of a $1.4 trillion borrowing need in 2009, but noted that this could vary by $500 million.

"These are highly uncertain times," added Karthik Ramanathan, the Treasury's acting assistant secretary for financial markets told a news conference.

The Treasury said it will monitor its debt needs and may make other adjustments, including reintroducing or establishing new benchmark securities. Meanwhile it could expand issues in its current auction calendar for Treasury bills and notes and will issue cash management bills during the quarter.

While the Treasury has focused recently on shorter-dated securities, it may look at medium- to longer-dated securities to meet additional borrowing needs, Ramanathan noted in the borrowing committee minutes.

"It sounds like we're going to see more issuance everywhere except for short-term TIPS," said Lou Crandall chief economist at Wrightson ICAP in Jersey City, New Jersey, referring to Treasury inflation-protected securities.

Ramanathan noted that demand for shorter-dated TIPS was less enthusiastic than for the longer-dated inflation-indexed notes. Some studies have shown that borrowing via short-term TIPS is more expensive than via normal securities.

Therefore, focusing on longer-term TIPS may be a more cost effective approach for the Treasury, Ramanthan said. But he added that no decisions have been made. The Treasury will sell 10-year and 20-year TIPS in January and has scheduled a 5-year TIPS issue for April.

Ramanathan said he was not concerned about flooding the market with Treasury securities and noted that there was "tremendous demand" across the yield curve, including from foreign investors.

But analysts still questioned whether the Treasury's borrowing schedule was enough, given that President-elect Barack Obama may have new economic stimulus spending plans early in the new year and the timing was uncertain for Treasury bank capital injections and asset purchases.

"Certainly, Treasury has created some head room for now and thus has bought time for the new administration to get key people into place and come up with their own thoughts," said Stephen Stanley, Chief Economist at RBS Greenwich Capital in Greenwich, Connecticut.

Regarding financial markets, the Treasury again urged brokers to take steps to prevent failed trades of Treasury securities, which increased substantially increased in recent months. "Regulatory measures may be considered if private sector efforts are not implemented.

Rattled financial markets were showing some signs of returning to normal, members of the Treasury borrowing committee said. "Some financial market indicators suggest that financial markets have seen the worst and that credit market deterioration has at least stabilized and may even be improving."

At the same time, markets were still showing signs of an aversion to risk. "It will take time for risk appetite to return to more historically normal levels."

(Additional reporting by Mark Felsenthal; Editing by Chizu Nomiyama)