July 30 (Bloomberg) -- The U.S. government will sell a record $60 billion in Treasury notes next week as it attempts to cover unprecedented budget deficits, the Treasury Department said.
The Treasury will auction $24 billion in three-year notes on Aug. 5, $18 billion in five-year securities the following day and $18 billion in 10-year debt on Aug. 7. The amount matches Wall Street expectations, tops the record of $58 billion set last quarter and marks the return of monthly auctions of five-year notes and a doubling of the number of annual 10-year note sales to eight.
The auctions will help the government finance budget deficits that are rising as the economy grows at half the 3.3 percent average of the last 50 years. Tax cuts and increased military spending have also boosted the government's borrowing needs. The White House projects a record deficit of $455 billion in the fiscal year that ends Sept. 30 and $475 billion next year.
``The Treasury will be a tremendous source of credit for as far as the eye can see,'' said Dana Johnson, head of research at Banc One Capital Markets in Chicago, one of 22 primary dealers that trade directly with the Federal Reserve. ``It's a relentless feature of the current environment, given the type of deficits we're seeing.''
Bond yields, which had been rising in anticipation of economic strengthening, fell today for the first day in five amid skepticism about the recovery. Yields on 10-year Treasury notes rose yesterday to their highest level since August as investors prepared for today's announcement from the government.
The 10-year note due in May 2013 rose about 5/8 point, pushing its yield down 8 basis points to 4.36 percent at 9:37 a.m. in New York.
Median Estimate
The size of the debt offering matches the median estimate of economists at 19 of the primary dealers. It is a third larger than the $40 billion of securities issued in the year-earlier quarter.
The Treasury said it wouldn't change the frequency of its debt issuance or introduce new securities. It will avoid conflicts with Federal Reserve policy meetings.
``The financing changes that Treasury has already put in place have created additional capacity to accommodate the anticipated increase in issuance and flexibility to meet the most unexpected swings in borrowing needs,'' Brian Roseboro, assistant secretary for financial markets, said in a statement.
The amount of new cash raised from the sales will be $16.3 billion. The Treasury also said it may sell cash management bills in early September and October to bolster borrowing further.
Ten-year yields have climbed almost 1.4 percentage points since falling to 3.07 percent in mid-June, the lowest since 1958. That has expanded the gap between two- and 10-year Treasury yields to 2.74 percentage points, the widest since at least 1977. As recently as May 23, the gap was only 1.99 percentage points.
$455 Billion Shortfall
The Treasury is raising debt as budget deficits mount. On Monday, it announced it would borrow a record net $230 billion in the second half of this year.
While both private sector and government economists say this year's deficit will dwarf the record $290.4 billion logged in 1992 when President George W. Bush's father was president, there is some division about how large it will be, even within the administration.
With the White House anticipating a $455 billion shortfall, primary dealer economists surveyed by Bloomberg News said last week that they expected a gap of $432 billion and said yesterday that documents released by the Treasury on Monday suggested the department is anticipating a $409 billion imbalance.
Economists said any difference between the White House and the Treasury may relate to their different challenges. The OMB may want to forecast a higher number to gain political advantage if the deficit comes in smaller, while the Treasury would prefer more accurate data rather than have to change its debt issuance plans and potentially rattle financial markets, they said.
5-Year, 10-Year Notes
In April, the Treasury announced it would begin selling more five- and 10-year notes starting next week. The auction of fresh five-year debt will be the first held on a monthly basis since June 1998. The department has also doubled the number of 10-year securities sales to eight times a year by reopening existing securities, a practice that ended in May 2002.
The refundings ``are becoming fun again as their size increases and as the frequency of new debt instruments necessary to keep the government afloat'' rises, said Dennis Gartman, economist and editor of The Gartman Letter.
Several investors have predicted the Treasury will eventually have to revive auctions of 30-year bonds which it eliminated in October 2001 to save money.
Some members of the Treasury Borrowing Advisory Committee, a group of private investors that advises the Treasury on debt management, said ``the investor base for the long-date securities may grow over time,'' according to minutes of their meeting yesterday.
Four Surplus Years
The deficits mark a turnaround from four years of budget surpluses. Fiscal 1996 through 2000 was the longest spell of black ink since before the Great Depression. Still, the projected deficit this year would amount to about 4.2 percent of gross domestic product, smaller than historical proportions. The 1992 gap was 4.7 percent of GDP, and a 1983 deficit of $207.8 billion was 6 percent, the widest since World War II.
Economists and U.S. lawmakers are divided over the effect higher deficits will have on the economy, which is still struggling to recover from the 2001 recession.
Bush administration economists say that deficits are a price worth paying for growth and national security. As lower taxes spur the economy, the budget will return to balance, they say.
They also disagree that the deficits risk sparking higher interest rates, noting that bond yields are still close to three- decade lows and any increase is related to a strengthening economy, and that the U.S. budget imbalance is dwarfed by a $5 trillion global market for dollar-denominated debt.
Snow
``Rising interest rates, as many economists will tell you, is what you see when a recovery is taking off,'' Treasury Secretary John Snow told reporters yesterday in Green Bay, Wisconsin. While he described the budget deficit as a `concern,'' Snow said Bush was aiming to halve it over the next five years.
In contrast, Democrats and some economists have branded Bush's tax cuts poorly crafted to aid the economy and warned that the deficits will widen, linger and then hobble growth by lifting interest rates for consumers and businesses. By increasing its supply of debt, the government ``crowds out'' other issuers such as companies and forces them to raise their yields to attract buyers, said Peter Orszag, a former economic adviser to President Bill Clinton and a senior fellow at the Brookings Institution.
``These deficits will have significant effects on the economy by raising the cost of borrowing, mortgage rates and credit card debts, which will undermine a whole host of economic activities,'' he said.
Last Updated: July 30, 2003 09:40 EDT
The Treasury will auction $24 billion in three-year notes on Aug. 5, $18 billion in five-year securities the following day and $18 billion in 10-year debt on Aug. 7. The amount matches Wall Street expectations, tops the record of $58 billion set last quarter and marks the return of monthly auctions of five-year notes and a doubling of the number of annual 10-year note sales to eight.
The auctions will help the government finance budget deficits that are rising as the economy grows at half the 3.3 percent average of the last 50 years. Tax cuts and increased military spending have also boosted the government's borrowing needs. The White House projects a record deficit of $455 billion in the fiscal year that ends Sept. 30 and $475 billion next year.
``The Treasury will be a tremendous source of credit for as far as the eye can see,'' said Dana Johnson, head of research at Banc One Capital Markets in Chicago, one of 22 primary dealers that trade directly with the Federal Reserve. ``It's a relentless feature of the current environment, given the type of deficits we're seeing.''
Bond yields, which had been rising in anticipation of economic strengthening, fell today for the first day in five amid skepticism about the recovery. Yields on 10-year Treasury notes rose yesterday to their highest level since August as investors prepared for today's announcement from the government.
The 10-year note due in May 2013 rose about 5/8 point, pushing its yield down 8 basis points to 4.36 percent at 9:37 a.m. in New York.
Median Estimate
The size of the debt offering matches the median estimate of economists at 19 of the primary dealers. It is a third larger than the $40 billion of securities issued in the year-earlier quarter.
The Treasury said it wouldn't change the frequency of its debt issuance or introduce new securities. It will avoid conflicts with Federal Reserve policy meetings.
``The financing changes that Treasury has already put in place have created additional capacity to accommodate the anticipated increase in issuance and flexibility to meet the most unexpected swings in borrowing needs,'' Brian Roseboro, assistant secretary for financial markets, said in a statement.
The amount of new cash raised from the sales will be $16.3 billion. The Treasury also said it may sell cash management bills in early September and October to bolster borrowing further.
Ten-year yields have climbed almost 1.4 percentage points since falling to 3.07 percent in mid-June, the lowest since 1958. That has expanded the gap between two- and 10-year Treasury yields to 2.74 percentage points, the widest since at least 1977. As recently as May 23, the gap was only 1.99 percentage points.
$455 Billion Shortfall
The Treasury is raising debt as budget deficits mount. On Monday, it announced it would borrow a record net $230 billion in the second half of this year.
While both private sector and government economists say this year's deficit will dwarf the record $290.4 billion logged in 1992 when President George W. Bush's father was president, there is some division about how large it will be, even within the administration.
With the White House anticipating a $455 billion shortfall, primary dealer economists surveyed by Bloomberg News said last week that they expected a gap of $432 billion and said yesterday that documents released by the Treasury on Monday suggested the department is anticipating a $409 billion imbalance.
Economists said any difference between the White House and the Treasury may relate to their different challenges. The OMB may want to forecast a higher number to gain political advantage if the deficit comes in smaller, while the Treasury would prefer more accurate data rather than have to change its debt issuance plans and potentially rattle financial markets, they said.
5-Year, 10-Year Notes
In April, the Treasury announced it would begin selling more five- and 10-year notes starting next week. The auction of fresh five-year debt will be the first held on a monthly basis since June 1998. The department has also doubled the number of 10-year securities sales to eight times a year by reopening existing securities, a practice that ended in May 2002.
The refundings ``are becoming fun again as their size increases and as the frequency of new debt instruments necessary to keep the government afloat'' rises, said Dennis Gartman, economist and editor of The Gartman Letter.
Several investors have predicted the Treasury will eventually have to revive auctions of 30-year bonds which it eliminated in October 2001 to save money.
Some members of the Treasury Borrowing Advisory Committee, a group of private investors that advises the Treasury on debt management, said ``the investor base for the long-date securities may grow over time,'' according to minutes of their meeting yesterday.
Four Surplus Years
The deficits mark a turnaround from four years of budget surpluses. Fiscal 1996 through 2000 was the longest spell of black ink since before the Great Depression. Still, the projected deficit this year would amount to about 4.2 percent of gross domestic product, smaller than historical proportions. The 1992 gap was 4.7 percent of GDP, and a 1983 deficit of $207.8 billion was 6 percent, the widest since World War II.
Economists and U.S. lawmakers are divided over the effect higher deficits will have on the economy, which is still struggling to recover from the 2001 recession.
Bush administration economists say that deficits are a price worth paying for growth and national security. As lower taxes spur the economy, the budget will return to balance, they say.
They also disagree that the deficits risk sparking higher interest rates, noting that bond yields are still close to three- decade lows and any increase is related to a strengthening economy, and that the U.S. budget imbalance is dwarfed by a $5 trillion global market for dollar-denominated debt.
Snow
``Rising interest rates, as many economists will tell you, is what you see when a recovery is taking off,'' Treasury Secretary John Snow told reporters yesterday in Green Bay, Wisconsin. While he described the budget deficit as a `concern,'' Snow said Bush was aiming to halve it over the next five years.
In contrast, Democrats and some economists have branded Bush's tax cuts poorly crafted to aid the economy and warned that the deficits will widen, linger and then hobble growth by lifting interest rates for consumers and businesses. By increasing its supply of debt, the government ``crowds out'' other issuers such as companies and forces them to raise their yields to attract buyers, said Peter Orszag, a former economic adviser to President Bill Clinton and a senior fellow at the Brookings Institution.
``These deficits will have significant effects on the economy by raising the cost of borrowing, mortgage rates and credit card debts, which will undermine a whole host of economic activities,'' he said.
Last Updated: July 30, 2003 09:40 EDT
