Treasury sales could top $1 trillion to fund bailout
U.S. could also bring back 7-year note, do more frequent sales
10/30 01:50 PM
NEW YORK (MarketWatch) -- Major bond dealers say the United States may have to issue more than $1 trillion in debt during its current fiscal year, by far the most ever, to fund massive programs designed to bail out the banking system.
That would be a "staggering" increase from recent years, said Michael Cloherty, an interest-rate strategist at Bank of America Corp., one of the 17 primary government-security dealers required to bid at Treasury auctions.
The Treasury Department will announce Monday how much of that full-year borrowing it anticipates selling in the first half of the government's 2009 fiscal year, which began this month.
In its past fiscal year ended September, the government sold $724 billion in notes, bonds and inflation-indexed debt, according to Wrightson ICAP, a research firm specializing in government finance.
If the debt issue swells to $1 trillion, as Barclays Capital, Credit Suisse and others anticipate, the issuance would represent a 38% increase in one year.
"This year's financing needs will be unprecedented," the Treasury's acting undersecretary for domestic finance, Anthony Ryan, said Tuesday.
The Treasury gave its last quarterly estimate in July, before the government took conservatorship of mortgage giants Fannie Mae (FNM:$0.9629,$0.0629,6.99%) and Freddie Mac (FRE:$1.10,00$0.0600,5.77%) , and Congress passed a $700 billion package to buy bad assets from financial institutions and inject capital into struggling banks. At that time, it said it expected to borrow $142 billion in this quarter.
Also since that earlier estimate, the Federal Reserve has ramped up its multiple programs designed to ease strains in short-term lending markets by loaning out Treasurys and increasing currency swaps with other central banks so they could loan dollars.
These programs will pressure the Treasury to offer more debt more frequently and by using different types of securities, according to analysts.
One unknown is how much it will have to pay up for all this debt.
A good time to borrow?
So far, the government has been getting a deal when it taps investors because of the credit crisis and anxiety about losses in equities, commodities and global assets. Treasury yields are near multiyear lows as investors have sought the relative safety they offer. The lower yields go, the less the government pays to finance its programs.
"The debt is going into really good hands because everybody is looking for the safest, government-guaranteed paper, given the stock-market turmoil and weak economy," said Alex Li, interest-rate strategist at primary dealer Credit Suisse.
The government's longest-term debt, the 30-year bond , touched an all-time low below 4% in October.
Yields on 2-year notes , the traditional beneficiary of safe-haven bids, remain near the lowest in decades.
Foreign investors, which hold a little more than half of all U.S. debt in the market, have shown no signs of a curbed appetite. They have increased purchases of Treasurys as other forms of debt and equities have been falling.
Current low yields may not last, however. Bond analysts and investors are worried because more issuance tends to mean higher yields, since more supply reduces the value of current holdings.
"We see the tables really turning hard against the Treasury market" as Treasury borrowing rises "meteorically" past $1.5 trillion, said William O'Donnell, U.S. government bond strategist at primary dealer UBS Securities.
Compounding pressures, the Treasury will take out this large tab as an economic slowdown is likely to reduce tax receipts to the government, lowering the amount it has to cover more regular expenses.
Analysts also note that lawmakers are considering another stimulus package of some form, which may add $150 billion to $300 billion to the government's debt load.
Odd denominations could make a comeback
The Treasury is likely to raise cash by expanding its borrowing needs each month at least for this year.
So far, the Treasury has been issuing more bills, the shortest debt vehicle, to deposit at the Fed for it to loan out, but will need to issue longer-term debt as the bills mature.
Increased debt sales are likely to start with November's quarterly sales of 10-year notes and 30-year bonds . Borrowing levels are already near 40-year highs: The Treasury's monthly sales of 2-year and 5-year notes are the biggest since the Treasury began issuing securities regularly in the 1970s.
Primary dealers also expect longer-term debt to be sold more often, such as selling 10-year notes monthly.
The government also may reintroduce other maturities that it stopped selling when the government wasn't running such a big deficit.
Ryan said Tuesday that it may resume selling 3-year notes, last sold in May 2007. The 7-year note also may make a comeback after a 15-year absence, analysts added.
The Treasury already asked its 17 dealers about what timing, sizing and maturities of debt could be best absorbed by the marketplace. That input always goes into how much it sells in its quarterly refunding, which it will announce on Nov. 5.
