Treasury to Delay Auctions If No Deal, Morgan Stanley Says

Treasury Would Delay Auctions If No Debt-Ceiling Deal
Timothy Geithner, U.S. treasury secretary, right, arrives to speak to the media following the Democratic Caucus luncheon at the U.S. Capitol with Senate Majority Leader Harry Reid, center, a Democrat from Nevada, and Senator Richard Durbin, a Democrat from Illinois, left, in Washington, July 14, 2011. Photographer: Andrew Harrer/Bloomberg

The Treasury would delay quarterly auctions of U.S. notes and bonds if there isn’t an extension of the nation’s debt ceiling before next week’s scheduled announcement of the sales, according to Morgan Stanley.

The U.S. would consider selling cash-management bills as a substitute, Morgan Stanley said in a note to clients after Treasury officials met with bond dealers in New York. Treasury will hold its scheduled $51 billion of three- and six-month bill auctions on Aug. 1, according to Morgan Stanley, one of the 20 primary dealers required to bid at the sales.

“They’ll delay the auctions and issue short-term cash-management bills and just keep rolling them,” said James Caron, head of U.S. interest-rate strategy at Morgan Stanley in New York. “It’s one market where rates can’t get much lower.”

The government is inching closer to running out of cash before an Aug. 2 deadline to raise the $14.3 trillion debt ceiling. House Republican leaders scrapped a vote on the debt ceiling bill late yesterday, fueling concern a compromise by the two parties won’t be reached before the deadline and casting doubt on whether the Treasury can sell more debt. A vote on the House bill has been rescheduled for later today.

“We discussed a number of options to get feedback from market participants, but have made no final decisions,” a Treasury official said.

Debt Sales

At its previous refunding announcement on May 4, the Treasury announced plans to sell $72 billion in its quarterly sales of long-term debt and that it anticipated auction sizes would “remain steady” as Congress and the White House debate raising the debt limit. The Treasury’s next scheduled refunding announcement is for Aug. 3 at 9:00 a.m. in Washington.

The government sold $32 billion of three-year notes in May, June and July, and $24 billion of 10-year notes and $16 billion of 30-year bonds in May. The 10-year and 30-year sales were lowered to $21 billion and $13 billion respectively in June and July.

Treasuries rallied today, driving benchmark 10-year yields to the lowest levels this year, on speculation lawmakers will break the deadlock over raising the nation’s debt limit.

Yields on 10-year notes tumbled 16 basis points, or 0.16 percentage point, to 2.79 percent at 3:20 p.m. in New York, according to Bloomberg Bond Trader prices. They touched 2.78 percent, the lowest level since Nov. 30. Yields are down 18 basis points this week and 38 basis points this month, the most since August. The 3.125 percent securities maturing in May 2021 climbed 1 12/32, or $13.75 per $1,000 face amount, to 102 28/32.

Standard & Poor’s placed the U.S. AAA rating on “CreditWatch” July 14, saying there’s a 50 percent chance it would be cut in the next 90 days even if an agreement is reached by the deadline. S&P said it needs to see “a credible solution to the rising U.S. government debt burden.”

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