Washington: The US Treasury said on Wednesday it will resume issuing 52-week bills after a seven-year break, as budget deficits swell due to slowing revenues and higher spending in a sluggish economy.
The Treasury, announcing its quarterly refunding plans, said it would sell $21 billion of 10-year notes and 30-year bonds. It also said it would pay down about $53 billion of maturing debt in the auctions next week.
The Treasury retired the 52-week bills in February 2001, when the United States was running budget surpluses after a decade-long economic expansion.
It is now adding the bill to its debt offering lineup just one year after it retired the 3-year note amid better-than-expected tax revenues produced by booming corporate profits and capital gains.
The Treasury also said the situation has turned swiftly around.
“Over the last several months, changes in economic conditions, financial markets, monetary and fiscal policy have impacted Treasury’s marketable borrowing needs,” the Treasury said in a statement. “Financial market strains have impacted the real economy, and the nation has experienced lower economic growth, lower receipts, and increased outlays.”
The first of the monthly auctions of 52-week bills will be announced on May 29 and will be held on June 3.
The Treasury said it expected to increase bill and nominal coupon issuance over the remainder of the 2008 fiscal year, which ends Sept. 30, and will issue cash management bills in May, June, August and September, some of which may be longer-dated.
Treasury market analysts said the return of the 52-week bill reflects pessimism about the strength of future tax receipts and growing budget deficits.
“Treasury officials did what they always do. They tend to get nervous when their cushion gets narrow and are almost always incrementally more aggressive than I assume,” said Stephen Stanley, Chief Economist at RBS Greenwich Capital.
“So, my read is, ‘Let’s take a deep breath, get a handle on tax revenues and the economy over the next three or six months, and then think about what further additions to the auction calendar will be necessary,´” he said.
TAX REBATES, HIGHER DEFICIT
The Treasury cited spending on tax rebates associated with the government’s $152 billion fiscal stimulus plan as a key reason for raising borrowing expectations over the next year.
The Treasury Borrowing Advisory Committee -- made up of 22 primary government bond dealers -- said in a report to the Treasury that a recent survey showed the deficit for fiscal 2008 will average a record $414 billion, with some economists forecasting the gap would exceed $500 billion -- more than tripling last year’s $163 billion deficit.
In addition to lower revenues from a slowing economy and increased spending, the Federal Reserve has redeemed Treasury holdings and made some outright sales in recent months to support its efforts to boost financial market liquidity and ease the worst credit crisis in decades.
This has resulted in an additional $200 billion in bills and coupon issuances so far this fiscal year, the Treasury said. Municipal bond issuers are also buying fewer State and Local Government Series securities, or SLGS, forcing the Treasury to increase issuance of higher-yielding bills, notes and bonds.
The Treasury said it may also consider other moves such as increasing coupon issuance and reintroducing the 3-year note or other maturities, if borrowing needs continue to grow.
“It is a dynamic environment and we’ll evaluate it and make adjustments as necessary,” said Anthony Ryan, the Treasury’s assistant secretary for financial markets, noting that the situation “changed dramatically” in the past two quarters.
In the borrowing advisory committee’s minutes, there was more debate as to how Treasury should fund its medium-term needs.
“Some members felt that the 3-year note could be reintroduced without much difficulty. Several other members suggested that introducing a longer-dated instrument, such as the 7-year note or moving to monthly 10-year note issuance, were better alternatives,” the minutes said.
The refunding announced on Wednesday reflects a shift toward the shorter end of the yield curve, where yields and borrowing costs are lower as investors flee to safety amid roiling markets.
This could unwind as markets settle down, raising borrowing costs, but Treasury officials said they saw continued strong demand for shorter-dated maturities.
“There is a host of nontraditional buyers and buyers of securities at the short end who have no other place to go at this point,” said Karthik Ramanathan, the Treasury’s debt management director.