Treasury Sees Debt Limit End 2012, Plans $72 Billion Sale

The U.S. Treasury Department reiterated today it expects to reach the federal debt limit “near the end of 2012,” and said that it plans to sell $72 billion in notes and bonds in next week’s refunding.

The Treasury said in a statement today that it can use “extraordinary measures” that would “provide sufficient ‘headroom’ under the debt limit to allow the government to continue to meet its obligations until early in 2013.” The Treasury also said an auction under its planned floating-rate note program is “estimated to be at least one year away.”

“Extraordinary measures are temporary in nature and not a solution,” Thomas Simons, a government debt economist at Jefferies Group Inc. in New York said. “Considering the debt ceiling is going to be tied into the fiscal cliff discussions, there is a risk that we end up with another debt ceiling scenario like last year.”

The so-called fiscal cliff refers to the more than $600 billion of federal spending cuts and tax increases that will automatically take effect at the start of next year unless Congress acts. In August 2011, as part of an agreement to increase the debt limit, Congress came up with the automatic spending cuts, known as sequestration, as the backstop to a deficit-reduction supercommittee.

Election Year

Election-year politics and the divide between the parties have prevented an agreement so far, leading Treasury to caution on Aug. 1 that it expects to reach its debt limit of $16.4 trillion near the end of this year. The Treasury at that time also raised the prospect of using “extraordinary measures.”

The Treasury intends to auction $32 billion in 3-year notes on Nov. 6; $24 billion in 10-year notes on Nov. 7; and $16 billion in 30-year bonds on Nov. 8. The Treasury has kept its quarterly refunding at $72 billion since Nov. 2010.

“Going forward, Treasury will continue to provide guidance to market participants regarding any changes in the fiscal outlook that might affect the government’s financing needs,” Treasury said in a statement.

Treasuries pared losses as investors purchased U.S. government debt at month-end to match adjustments in indexes used as performance benchmarks, following yesterday’s closure for Hurricane Sandy. U.S. 10-year rates rose one basis point, or 0.01 percentage point, to 1.73 percent as of 9:17 a.m. in New York, according to Bloomberg Bond Trader data.

Dodd-Frank Act

Capital and liquidity requirements from the 2010 overhaul of financial regulation in the Dodd-Frank Act, and from the Basel III global rules, have increased demand for short-term, high-quality debt at a time when supply has diminished.

The Treasury said it hasn’t yet made a decision on whether to allow negative-rate bidding in auctions of Treasury bills.

The Treasury told members of the Treasury Borrowing Advisory Committee to study “operational issues” connected with possible negative-rate bidding, according to minutes of a conference call with members of the committee.

The Treasury said it was on schedule for its first auction of floating-rate notes late next year. The conference call was held instead of the usual dealer meeting because of Hurricane Sandy. The committee of bond dealers meets quarterly with the Treasury.

To contact the reporters on this story: Meera Louis in Washington at mlouis1@bloomberg.net Kasia Klimasinska in Washington at kklimasinska@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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