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Treasury Investors Face Deluge After Short-Term Debt Shortage

The Treasury and the Federal Reserve plan to sell as much as $116.5 billion in notes next week amid a scarcity of short-term debt in a market seeking lower-risk investments.

Treasury investors have faced a contraction in short-term securities as the government has stepped up the sale of longer-term debt in an effort to increase the average maturity of its holdings and keep borrowing costs near record lows. That has left few havens for investors concerned about the spread of Europe’s sovereign-debt crisis.

“There’s plenty of demand for Treasuries,” said Ray Remy, head of fixed-income trading in New York at Daiwa Capital Markets America Inc., one of 21 primary dealers obligated to bid in U.S. Treasury auctions. “The market is focused on Europe.”

The Fed is scheduled on Nov. 21 to sell up to $17.5 billion in notes maturing two years and less under a program market participants have dubbed Operation Twist, in which it is divesting $400 billion in short-term notes and purchasing the same amount of longer-term securities. The Fed will offer $8.75 billion in notes maturing February to July 2012 and another $8.75 billion of securities maturing March to November 2014.

The supply next week includes the possibility of a record $52.5 billion on Nov. 21, with the Treasury selling $35 billion in two-year notes. The Treasury will sell $35 billion in five-year notes on Nov. 22 and $29 billion in seven-year debt the next day. Its weekly total of $99 billion helps plug the gap at a time when it may issue about $72 billion less debt due within 12 months than it retires in December and January.

Low Yields

Treasury yields have remained low amid concern about contagion from Europe’s debt crisis and the slow pace of the U.S. economic recovery. The yield on the 10-year note dropped from a 2011 high of 3.77 percent on Feb. 9 and touched a record low of 1.67 percent on Sept. 23. It yielded 2.02 percent at 2:16 p.m. The yield on the two-year note dropped from a 2011 high of 0.89 percent to a low of 0.14 percent on Sept. 20. The yield today touched 0.27 percent, near a three-week high.

Shorter-term Treasury yields may gain about three basis points, or 0.03 percentage point, with next week’s supply, Remy said.

“It will put pressure on the front end of the market,” Remy said. “It’s a significant amount of securities in a holiday shortened week.”

The record for notes sold in one week is $129 billion during the week of April 26, 2010, when the U.S. auctioned $44 billion in two-year notes, $42 billion in five-year securities, $32 billion in seven-year debt and $11 billion in five-year Treasury Inflation Protected Securities.

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