Dec. 10 (Bloomberg) -- The U.S may introduce new financing methods to sell a record amount of debt needed to pay for as much as $2 trillion in borrowing needs this year, Treasury’s debt-management chief said.

“Treasury needs to be prepared to meet additional financing needs if necessary,” Treasury Assistant Secretary Karthik Ramanathan said in a speech today in New York. “This challenge may require novel approaches to debt management.”

Ramanthan said public spending and a slowing economy will require “conventional” ways to raise money -- increasing the size and frequency of debt issuance, selling cash-management bills when short-term funds run low and reintroducing securities when necessary. He said debt sales may occur “in a short period of time.”

“There is plenty of uncertainty and risk that they need to borrow more,” said Michael Pond, an interest-rate strategist in New York at Barclays Capital Inc., one of 17 firms required to bid at government auctions. “They are trying to prepare the market for any potential changes down the road.”

Ramanthan said the introduction of a new seven-year note and the additional issuance of existing 30-year bonds has been suggested as ways to increase debt sales to close a federal deficit in fiscal 2009 expected to reach a record, according to Wall Street economists. He cited private analysts’ estimates of borrowing needs that may reach $1.5 trillion to $2 trillion in the financial year that ends in September 2009.

Market Catalyst

“The fact that Ramanthan was on the tape with the seven- year and the 30-year is significant,” said George Goncalves, chief Treasury and agency strategist with Morgan Stanley, another primary dealer. “There is going to be a need to flesh out the curve in order to raise the cash that’s needed.”

The government has pledged $700 billion for a financial- system rescue plan and another $800 billion to buy mortgage- backed securities and other debt backed by consumer loans to soften the worst financial crisis since the Great Depression. Financial firms have now lost nearly $1 trillion related to soured subprime mortgages.

“The growth of Treasury and government-guaranteed debt will act as a catalyst for the return of smooth functioning credit markets and economic recovery, both of which will gain momentum as risk appetite returns,” Ramanathan said.

The budget deficit swelled to $164.4 billion last month, the Treasury Department reported separately, the second straight month it widened. It was $98.2 billion last November.

“Novel” Approaches

Treasuries have returned 11.9 percent in 2008, their best year since 2000, according to Merrill Lynch & Co. indexes. During that time, the three-month bill rate declined zero percent from 3.24 percent, while the yield on the benchmark 10- year note fell to 2.69 percent from 4.02 percent as the meltdown of the mortgage market pushed the U.S. into recession.

In calling for the consideration of “novel” approaches, Ramanthan fueled speculation about how the government may look to fund the budget and the financial-system rescue.

The Treasury may introduce a 50-year bond, though it’s not expected, while the Fed may issue bills or bill-like securities and use the proceeds to buy longer-term Treasuries, Pond said.

“You just never know what they are going to do,” Pond said. “I wouldn’t rule anything out.”

‘Fails’ Decline

Ramanathan also said the number of failed trades in U.S. government securities has declined since early November, when the department announced a review of two-year and five-year note holdings.

“Fails to deliver have declined from nearly $800 billion to less than $150 billion -- a massive reduction in a very short period of time and another sign of increased efficiencies in our debt markets,” he said.

Treasuries are in such high demand that investors are lending cash for next to nothing to obtain the securities as collateral through so-called repos, which dealers use to finance their holdings. The problem is many parties involved in the repurchase agreements aren’t delivering the bonds because there is no penalty for not doing so, causing “fails” to exceed $5 trillion in the week ended Oct. 22, according to the Federal Reserve Bank of New York.

To contact the reporters on this story: John Brinsley in Washington at jbrinsley@bloomberg.net; Dakin Campbell in New York at dcampbell27@bloomberg.net

Last Updated: December 10, 2008 18:18 EST