US Treasury to boost 10-year note sales as fiscal deficit swells

By David Lawder

WASHINGTON, July 25 (Reuters) - Faced with a swelling federal budget deficit as a slowing economy saps tax revenues, the U.S. Treasury is expected to boost the frequency of 10-year note sales and offer more 30-year bonds next month.

Analysts estimate the Treasury will announce plans to sell $15 billion to $16 billion in 10-year notes and $9 billion to $10 billion in long bonds at its refunding announcment on Wednesday.

"There's a realization that these higher deficits are going to be with us for a while because the outlook for growth in the second half and into next year has deteriorated," said Lou Crandall, chief economist at Wrightson ICAP in Jersey City, New Jersey. "It's an appropriate time for the Treasury to be locking in some longer-term borrowing."

Analysts widely anticipate that the 10-year note auctions will move from quarterly to monthly, with new issues and reopenings every other month. It sold $15 billion 10-year-notes and $6.0 billion in 30-year bonds in the last quarter

The Treasury signaled at its last refunding at the end of April that it may bring the 3-year note out of retirement, but several analysts said more issuance in longer maturities were needed to balance supplies with with market demand.

The Treasury held a record $31 billion auction of 2-year notes two year notes on Wednesday and has sharply increased sizes of bill offerings, including $52 billion of 1-year bills this quarter alone after reintroducing them in May.

"The biggest problem with bringing back the three-year is that front-end supply have already been increased significantly" Barclays Capital analysts wrote in a research report on Friday. There are "clear signs that investors may balk at more supply there if financial market volatility eases."

Analysts also said the Treasury also could bring back seven-year notes as another option to meet longer-term demand. Although 30-year bond sizes will likely increase, the maturity is "relatively expensive" for the Treasury, Crandall said.