Treasury on track for record debt refunding
WASHINGTON (Reuters) - Despite a temporary pullback in year-end borrowing, the U.S. Treasury on Wednesday is expected to announce a $3 billion increase in 3-, 10- and 30-year debt sales to a record $80 billion and take some cautious steps toward lengthening its debt maturities.
A number of analysts predict that the Treasury will introduce 30-year Treasury inflation-indexed notes, or TIPS, to replace the current 20-year TIPS. Treasury officials recently reiterated that they are considering such a move.
The 30-year TIPS would be better aligned with the benchmark 30-year Treasury bond. The Treasury has also said it is committed to boosting liquidity in the TIPS market after expanding much of its borrowing in recent years with shorter-dated normal bills and notes.
"The 20-year TIPS do not have a direct nominal comparison and thus makes it a peculiar instrument to hedge as well as trade on a breakeven basis," George Goncalves, chief fixed income rates strategist at Cantor Fitzgerald in New York said in a research report.
Analysts largely expect the Treasury to announce on Wednesday that it will hold auctions next week of $40 billion for 3-year notes, $24 billion for 10 year notes and $16 billion for 30-year bonds.
The sales -- $1 billion higher for each maturity compared to the July-September quarter -- will refund about $38 billion of Treasury securities maturing on November 15 and raise $42 billion in new cash.
Treasury is expected to make the announcement at 9 a.m.
BORROWING LULL
On Monday, the Treasury said it expected to borrow a net $276 billion through sales of marketable debt in the fourth quarter, about $209 billion less than it previously forecast for the period. This was largely due to the wind-down of a Treasury program to finance Federal Reserve liquidity actions, a move taken in part to avoid breaching the $12.1 trillion statutory limit on Treasury debt.
"It's more of a one-time factor than a sustainable improvement in the borrowing outlook. The next quarter, it's going to go back up," said Kim Rupert, head of fixed income strategy at Action Economics LLC in San Francisco.
"I think we're looking at trillion-dollar deficits for the next 10 years, perhaps. With that outlook, borrowing needs are going to be very high and there is a massive amount of debt that needs to be sold just to roll over what's maturing," Rupert said. "It's pretty precarious actually."
The Treasury's borrowing advisory committee, made up of its 18 primary bond dealers, also is expected to provide updated estimates on Wednesday of fiscal 2010 deficits and net debt issuance, which it pegged in August at $1 trillion to $1.6 trillion.
The group in the past has advocated an expansion of longer-dated coupon issuance, while the vast bulk of Treasury's borrowing expansion has been in maturities of three years and below -- a trend that could cause problems if deficits remain high when this debt comes due.
Karthik Ramanathan, the Treasury's acting assistant secretary for financial markets, said last month that Treasury would "incrementally and gradually" increase sales of bonds and notes to lengthen the average maturity of the marketable debt portfolio to six to seven years from a historical average of about five years.
He added that Treasury also may move Treasury bill auctions to a consistent time, possibly 11:30 a.m. (currently 1630 GMT), to avoid scheduling conflicts with sales of extra securities that Treasury may offer.
Ramanthan and other Treasury officials at a 10 a.m. (1500 GMT) news conference on Wednesday also may provide details on how the Treasury plans to avoid hitting the $12.1 trillion debt ceiling in the next several weeks. As of Tuesday, the U.S. national debt stood at $11.918 trillion, according to Treasury data.
The Obama administration has asked Congress to raise the debt limit, but lawmakers have yet to act.
(Reporting by David Lawder; Editing by Diane Craft)
