* Smaller budget gap could delay debt ceiling fight
* Analysts now see debt ceiling reached closer to October
* Treasury plans to index FRNs to three-month bill auction
By Anna Yukhananov
WASHINGTON, May 1 The U.S. Treasury Department
said on Wednesday it might be able to sell less long-term debt
in the future if the U.S. budget deficit continues to come down.
In its quarterly debt refunding announcement, the Treasury
did hold the sizes of its longer-dated debt sales steady this
quarter. It said on Wednesday that it would trim issuance of
short-term bills to take into account a drop in its borrowing
needs, which is expected to persist until the end of June.
A bigger-than-expected rise in tax receipts to Washington
has improved the U.S. fiscal outlook, and the Treasury and
private analysts have been taken by surprise by how quickly the
deficit is shrinking. Belt tightening in the wake of the series
of mandatory budget cuts worth $85 billion - known as the
"sequester" - could further reduce federal borrowing needs if it
doesn't inflict lasting damage to the economy.
The Treasury earlier this week said it would pay down debt
in the third quarter for the first time in six years. The
improved view means the U.S. Treasury could stave off the date
when it bumps up against the legal limit on the nation's debt
until October using emergency cash measures; analysts a few
weeks ago thought the limit could be hit in June.
Higher tax receipts "will give Congress some breathing room
on the debt ceiling debate and they will not have to come up
with an 11th hour deal before the August recess," said Bill
Irving, portfolio manager at Fidelity Investments in Merrimack,
The government's first-time paying down its debt since the
Great Recession should lower its short-term borrowing costs as
well as those for banks and Wall Street, analysts said.
The Treasury also agreed to set the interest rate for its
planned floating-rate notes against the rate cleared at the
weekly three-month bill auction. The final rule on the notes
should be issued in the coming months, and the first auction
should happen either in the last quarter of this year or the
first quarter of 2014.
Deputy Assistant Secretary James Clark said Treasury was
considering issuing $10 billion to $15 billion in floating-rate
notes each month, according to minutes of the Treasury Borrowing
Advisory Committee, published on Wednesday. The committee also
agreed the notes should start with a two-year maturity.
Fidelity's Irving said the expected drop in the deficit
should lower the U.S.'s overall debt burden, perhaps lowering
its deficit-to-gross domestic product (GDP) ratio to about 5
percent this year from 7 percent last year. "With our
debt-to-GDP stabilizing, it will help the U.S. maintain its
safe-haven status. That's very good for Treasuries," he said.
FILLING GOVERNMENT COFFERS
Tax receipts so far this year have been higher than expected
due partly to the expiration of the payroll tax holiday at the
start of the year, while tax refunds were lower than in previous
years, according to the committee's minutes.
Analysts also attributed higher tax revenues to some
workers' move to paying taxes on their compensation at 2012 tax
rates rather than risking paying them at higher ones this year.
As a result, the Treasury had $79 billion in cash at the
start of April, more than double what it had forecast. This
resulted in a sharp cutback on bill supply since mid-April.
Analysts cautioned this pickup in tax receipts might not
last as the economy may head for a slowdown. It seemed the
Treasury's borrowing committee seemed to share this view too.
"Members concluded that it was more prudent to wait and
better understand the increase in receipts before making a
decision to adjust financing," the minutes said. Members of the
committee decided that adjusting bill issuance could help manage
funding needs for now.
Therefore, Treasury said it would stick with similar auction
sizes as in previous quarters, with $32 billion in three-year
notes, $24 billion in 10-year notes and $16 billion in 30-year
bonds. The auctions together will raise about $12.4 billion in
new cash, officials said.
Treasury declined to give a precise estimate for when the
government will run out of borrowing room after the suspension
of the debt limit expires on May 19, but said it will begin
emergency measures immediately if Congress does not raise the
Officials said it was hard to estimate how much time
emergency cash measures could provide due to uncertainty about
how government spending cuts, the pace of the economic recovery
and the timing of other "sizable cash flows" would affect
Analysts are now predicting the United States may not hit
the legal limit on its debt until October, giving Republican
lawmakers more time to use the debt limit as leverage to extract