U.S. Halts Bond Sales to Municipalities to Avoid Debt Limit

May 15 (Bloomberg) -- The U.S. Treasury Department said it will suspend sales of State and Local Government Series non- marketable securities to help keep funding the government to stay within the statutory debt limit. Peter Cook reports Bloomberg Television's "Street Smart." (Source: Bloomberg)

The U.S. Treasury Department suspended sales of securities to local and state governments, the first of several steps it can take to keep funding the government without breaching the nation’s debt limit.

The Treasury said it will suspend sales of State and Local Government Series non-marketable securities until further notice, effective at noon Washington time on May 17, the department’s Bureau of Public Debt said in a statement today. “The suspension will assist Treasury’s management of the debt subject to limit,” it said in the statement.

The securities, called “slugs,” are sold to states and municipalities so they can comply with federal tax laws and arbitrage rules when they have money to invest from their issuance of tax-exempt bonds. The move is the first of several possible “extraordinary measures” the Treasury can take to comply with the debt ceiling as the Obama administration and Congress negotiate a longer-term solution.

“The markets have gotten used to the Treasury Department employing extraordinary measures,” Stephen Myrow, managing director at ACG Analytics Inc., said in an interview. “For better or worse, the use of extraordinary measures actually has become quite ordinary.”

Lew September

Treasury Secretary Jacob J. Lew said May 10 a one-time payment from Fannie Mae confirms that the nation’s debt ceiling won’t be reached until September. The mortgage financier seized by U.S. regulators in 2008 said it will pay the Treasury $59.4 billion after reporting a record quarterly profit driven by rising home prices and declining delinquencies.

Earlier this year, Congress voted to suspend the limit until mid-May to avoid the risk of default and focused instead on automatic spending cuts, known as sequestration, which it also failed to avert.

Without SLGS, governments can buy Treasuries from brokerage firms instead, which may be more costly.

The U.S. budget deficit will shrink this year to $642 billion, the smallest shortfall in five years, a government report said yesterday. Last year’s shortfall was $1.1 trillion.

The nonpartisan Congressional Budget Office reduced its estimate of this year’s likely shortfall by more than $200 billion compared with its February projection. The agency pointed to stronger-than-expected tax receipts and payments to the Treasury by Fannie Mae and Freddie Mac, another government-owned mortgage financier.

Next year’s deficit will further shrink to $560 billion, CBO said in yesterday’s report. The deficit will continue to fall in 2015, according to the report, before beginning to grow again.

To contact the reporter on this story: Meera Louis in Washington at mlouis1@bloomberg.net

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

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