July 29, 2011 / 1:15 PM / 7 years ago

UPDATE 5-US Treasury may drop bonds sales with no debt deal

 * Treasury may delay, cut or cancel refunding
 * 'General consensus' among dealers that delay is best
 * 10-year yield in largest one-day rally since March 2009
 (Updates with details of meeting, background on refunding)
 By Emily Flitter
 NEW YORK, July 29 (Reuters) - The U.S. government prepared
Wall Street firms on Friday for the possibility it may have to
delay or cancel a major round of bond sales if Congress doesn't
raise the nation's borrowing limit by Aug. 2.
 In a meeting at the Federal Reserve Bank of New York,
Treasury officials and representatives from the 20 primary
dealers discussed options for the quarterly slate of bond
issues if the government runs out of money next week.
 Under normal circumstances the government would require
around $42 billion in new borrowing through sales of Treasury
notes and bonds, but it won't be able to do that without new
authority to raise more debt.
 Even a delay in the new borrowing, known as the quarterly
refunding, could cause fits in the bond market. Investors such
as fund managers and short-term traders rely on Treasury
securities for activities ranging from securing savings to
collateralizing loans.
 Indeed, Treasuries accelerated their price gains when news
of possible changes to the quarterly refunding became known in
the market. The benchmark 10-year note was on track for its
largest rally since March 18, 2009, the day the Federal Reserve
announced a round of $300 billion in Treasuries purchases,
known as QE1.
 The options discussed at Friday's meeting included
decreasing the amount of the refunding, delaying it, or
eliminating it altogether and issuing cash management bills to
replace maturing securities, according to sources familiar with
the meeting.
 There was a general consensus among dealers, the sources
said, that it would be better for the Treasury to delay the
quarterly refunding rather than cut or cancel it.
 The meeting was a higher-profile version of the normal
talks Treasury holds with dealers each quarter to discuss debt
 Treasury officials confirmed the meeting was originally to
be with representatives of around half of the 20 primary
dealers -- the 20 large financial institutions that do business
directly with the Fed -- but at the last minute it was expanded
to include all of the banks and securities firms authorized to
deal directly with the Federal Reserve and the Treasury.
 Dealers were told not to discuss the details of the
meeting, and a readout of the meeting released by the Treasury
said only that the dealers agreed swift Congressional action
was necessary to lift the debt ceiling.
 The Treasury has said if the country's $14.3 trillion debt
ceiling is not raised, after Tuesday it will no longer be able
to pay all the government's bills and will be at risk of
 The Treasury is due to announce next week its borrowing
needs for the current quarter and its plans for selling debt to
meet those needs. But the political debate over whether to
raise the debt ceiling has thrown into question how much debt
Treasury can sell.
 Short-term lending markets have seen the greatest levels of
fear, with rates on Treasury debt maturing in August jumping to
six-month highs as investors dumped the debt on fears the
government may choose not to repay them. For details see
 With four days left before the United States hits its debt
limit, Republicans pressed ahead with a deficit plan that
cannot pass Congress and President Barack Obama told lawmakers
to stop wasting time and find a way "out of this mess."
 (Additional reporting by Jonathan Spicer in New York and Glenn
Somerville in Washington; Editing by Burton Frierson and Leslie

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