Will world swallow another half-trillion in U.S. Treasuries this quarter?


U.S. to Borrow Record $550 Billion This Quarter, Treasury Says

By Rebecca Christie and John Brinsley
Bloomberg News
Monday, November 3, 2008


WASHINGTON -- The U.S. Treasury predicted it would borrow this quarter more than three times the amount initially forecast as weaker economic growth and the costs of a new bank rescue package swell the budget deficit.

Borrowing needs will rise to $550 billion in the three months to Dec. 31, compared with the $142 billion predicted in July, the Treasury said in a statement in Washington. That would be more than double the largest ever -- a record $244 billion in new marketable debt in the first three months of this year.

The worsening credit crisis is straining the country's finances and will leave the winner of tomorrow's U.S. presidential election facing the worst budget shortfall on record next year. The Treasury may announce in two days plans to expand sales of bills, notes and bonds to fund the gap, analysts said.

"Economic conditions have deteriorated notably over the past few months," Phillip Swagel, Treasury's assistant secretary for economic policy, said in a statement. "It will take time for financial markets to stabilize and for credit market strains to ease."

After improving for three straight years, the U.S. budget deficit deteriorated as a slowing economy hurt tax revenue and spending increased, reaching a record $455 billion shortfall in fiscal year 2008, which ended Sept. 30.

The Bush administration, which entered office in 2001 with a $127 billion budget surplus, in July predicted the next president faces a deficit totaling $482 billion in fiscal 2009. In early October, Congress passed a $700 billion bank rescue package that's draining federal coffers and leading some analysts to forecast a deficit of $1 trillion for this year.

"The U.S. Treasury faces an unprecedented financing need," said Goldman Sachs analyst Ed McKelvey, echoing a similar comment last week by Anthony Ryan, the Treasury's acting undersecretary for domestic finance.

A Treasury survey of primary dealers of government securities today showed expectations for the budget gap this year to reach $988 billion.

At its quarterly refunding announcement Nov. 5, the Treasury is likely to announce $25 billion in three-year notes, $20 billion in 10-year notes and $8 billion in 30-year bonds for its next refunding cycle, according to the median forecast of six economists surveyed by Bloomberg News.

The Treasury sells a variety of bills and shorter-term notes to meet the rest of its financing needs.

Ryan said last week that the Treasury plans to increase the sizes of its bill, note, and bond auctions, and he repeated that officials are considering additional sales of three-year notes and other longer-term debt.

"Treasury may need to address many different policy objectives" with its financing program, Ryan told the Securities Industry and Financial Markets Association Oct. 28.

McKelvey predicts the Treasury's total 2009 borrowing needs at about $2 trillion.

The Treasury predicted three months ago it would borrow $171 billion in marketable debt in the July-to-September quarter and have a cash balance Sept. 30 of $45 billion. Today, the department said the actual amount it borrowed $530 billion in the third quarter and the cash balance at the end of the period was $372 billion, including a supplementary financing program at the Federal Reserve.

Before the Treasury's announcement, analysts were predicting more red ink in coming quarters.

Ward McCarthy of Stone & McCarthy Research Associates in New Jersey said he's expecting financing needs of $715 billion from October through December, followed by $320 billion in the January-March quarter. He predicted a $1.02 trillion 2009 deficit.

"All budget and financing projections should be considered to be fluid," he said.

Goldman Sachs projected $400 billion in borrowing needs for the final three months of 2008, followed by $375 billion for the first quarter next year. Those estimates don't, however, include borrowing for the Fed's supplementary financing program, which has already borrowed $220 billion since Oct. 1, Goldman Sachs economists said in a research note.

The Securities Industry and Financial Markets Association is projecting a $687.5 billion budget deficit for fiscal year 2009, according to a survey of its members released Oct. 31.

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