U.S. Treasury to Sell $74 Billion in Long-Term Debt

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The U.S. Treasury Department plans to sell $74 billion in its quarterly sales of long-term debt next week as lower projected budget deficits allow the government to reduce borrowing at a “gradual pace.”

The Treasury said it will auction $34 billion in three-year notes on Aug. 10, $24 billion in 10-year notes Aug. 11 and $16 billion in 30-year bonds Aug. 12. The total amount was in line with the median forecast in a Bloomberg News survey of bond dealers.

The Treasury is starting to scale back auction sizes, after expanding debt sales to finance annual budget deficits exceeding $1 trillion for the past two years. Bond dealers expect the 2010 budget deficit to be smaller than the White House forecast for $1.47 trillion.

“The ultimate magnitude of offering size reductions will depend on the pace and extent of the economic recovery,” said Mary Miller, assistant secretary for financial markets, at a press conference in Washington. In refunding documents, Treasury officials said they are monitoring risks to the economy and will remain “extremely flexible” so they can respond to changing conditions.

The Treasury said economic growth is leading to an improvement in tax receipts at about the same rate as in past recoveries. The Treasury already has begun to trim its borrowing, making auction-size cuts that reduce borrowing capacity by $232 billion when considered over a 12-month period.

Auction Sizes

Matthew Rutherford, the deputy assistant secretary for federal finance, told the Treasury’s borrowing advisory committee yesterday that there is room to scale back auction sizes further, at a slower pace than the reductions so far, according to minutes of the meeting released today.

“Once these cuts are complete, Treasury will likely hold auction sizes constant for a period of time to assess the fiscal outlook,” the minutes said.

As the Treasury shifts its borrowing patterns, the average maturity of government debt will extend at “a slower pace,” the Treasury said. The department also doesn’t plan any immediate changes to its composition of bill offerings, Miller said.

Miller said the Treasury expects that the federal debt limit may be reached in the first half of 2011 if Congress does not act before then. She said one of the Treasury’s tools to fend off the limit would be another suspension of the Supplementary Financing Program, in which the Treasury sells bills on behalf of the Federal Reserve.

Fed Assets

The Treasury said its debt offerings won’t be affected if the Fed decides to change the way it invests in Treasury auctions. In a June meeting, Fed policy makers discussed limiting auction purchases to securities with three years or less until maturity.

“As long as the Fed is rolling over its securities, we’re indifferent,” Rutherford said.

The Treasury also said it is considering more frequent auctions of Treasury Inflation-Protected Securities to improve liquidity in the market for securities also known as TIPS. The department said it will consult with market participants and announce plans for 2011 at its November refunding.

“Issuance will gradually increase,” the Treasury said of TIPS. Rutherford said the Treasury’s options include adding additional sales of five- and 30-year securities.

Bill Sales

To help manage short-term borrowing needs, the Treasury said it plans to sell cash-management bills in the current quarter.

Next week’s auctions of bonds and notes will raise $41 billion in new cash, with the rest of the proceeds going to pay off maturing debt, the Treasury said.

The current quarter’s total long-term debt sales declined from the $78 billion in notes and bonds sold at the previous refunding in May.

Earlier this week, the Treasury lowered its estimate for government borrowing from July through September, reflecting a reduction in federal spending. Borrowing will total a net $350 billion in the current quarter, compared with an estimate three months ago of $376 billion, the department said.

The Treasury also projected borrowing of $380 billion in the three months to Dec. 31.

Auction Cuts

Auctions of long-term debt were projected to be smaller than the total of $78 billion sold in May, when the Treasury sold $38 billion in three-year notes, $24 billion in 10-year notes and $16 billion in 30-year bonds. The median forecast of six analysts surveyed predicted a $4 billion cut in three-year note sales, with the other two auction sizes unchanged.

Bond dealers predicted a $1.35 trillion deficit in fiscal 2010 and a $1.21 trillion deficit in 2011 in a survey provided to the Treasury before this week’s announcements. Dealers expected the Treasury to sell $39 billion in three-year notes next week, $25 billion of 10-year debt and $16 billion in 30-year bonds, according to the median estimate in a Bloomberg News survey.

“It’s more of the same for now,” Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut, said in an interview ahead of the announcement. “The only real question is whether they’re going to ultimately add another couple of TIPS auctions.”

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