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U.S. Treasury Asks Dealers How to Reduce Coupon Auction Sizes

The U.S. Treasury Department asked bond dealers about the best way to shrink the size of its long-term debt auctions as economy recovers and the government no longer needs to expand its borrowing calendar.

“Debt managers are contemplating a reduction in coupon sizes as the fiscal outlook improves. How should Treasury accomplish such a reduction?” the Treasury asked in a quarterly survey.

The agenda for April 30 meetings shows the Treasury’s effort to watch for market disruptions and manage record borrowing. The U.S. is braced for a second consecutive year of $1 trillion-plus budget deficits as the economy recovers from the worst recession since the Great Depression.

The Treasury also is weighing how to expand sales of Treasury Inflation Protected Securities, or TIPS, and considering the effect of new Securities and Exchange Commission rules on money-market mutual fund holdings.

The department asked dealers for their views on adding TIPS auctions, potentially through a second reopening of 10-year inflation-linked notes.

“What considerations should Treasury keep in mind?” the Treasury asked. “Going forward, what other changes regarding TIPS issuance should Treasury be evaluating?”

Dealers were asked how the Treasury short-term debt market may be influenced by SEC changes to its 2a-7 rule, which affects the liquidity and weighted average maturity required for money market mutual funds.

“Please discuss how these changes may impact the demand for Treasury bills and any effects they may have on broader Treasury repo and cash market functioning,” the department said.

Issuance Projections

The Treasury also asked dealers for their projections of Treasury’s bill and bond issuance.

“We expect the Treasury to start to reduce its note and bond offering sizes gradually in order to bring its coupon issuance into line with the underlying trend in its borrowing needs,” said Louis Crandall, chief economist at Wrightson ICAP in Jersey City, New Jersey.

Treasury officials will meet next week with nine of the 18 primary dealers in government securities. The department will release its borrowing needs on May 3, with the announcement of quarterly sales of long-term debt scheduled for May 5.

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