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Record debt sale by Treasury may prompt monetization

Section: Daily Dispatches

Treasury in Plans for Record Debt Sale

By Michael Mackenzie and Krishna Guha
Financial Times, London
Wednesday, February 4, 2009

The US Treasury on Wednesday opened the floodgates of government bond issuance, revealing plans for a record debt sale in February and more frequent auctions in the months to come.

The announcement came amid growing fears about US government deficits and sent the yield on the benchmark 10-year Treasury note rising to 2.95 per cent, up from just over 2 per cent at the end of December.

The rise in Treasury yields has been pushing mortgage rates higher, complicating efforts to revive the economy. The US Federal Reserve said last week it was "prepared" to buy Treasuries if that would be a "particularly effective" way of reducing private borrowing costs.

"The Fed has to be troubled by the fact that mortgage rates have been rising, and the buying of Treasuries by the Fed may come sooner than the market expects," said William O'Donnell, UBS strategist.

The Treasury said it would sell $67 billion (L46 billion) in new securities next week, the largest ever quarterly refunding, beating the last peak in August 2003. It may also start monthly sales of all its benchmark Treasury securities.

At the end of February, the Treasury will start selling seven-year notes every month for the first time since the issue was discontinued in 1993. Sales of 30-year bonds will double to eight times a year and the Treasury will say in May whether the bond will be sold every month.

For Barack Obama's administration, the step-up in borrowing costs comes as it is fighting to secure an $800 billion-plus fiscal stimulus, and is likely to need many hundreds of billions more to fund a banking sector clean-up.

The Treasury Borrowing Advisory Committee expressed concern on Wednesday over the sharp jump in net borrowing needs, which market analysts estimate could reach $1,500 billion to $2,500 billion for the 2009 financial year.

Traders are particularly concerned about the appetite for Treasuries among foreign investors, who hold more than half the outstanding $5,500 billion in Treasury debt.

In recent years, demand for US government debt has been stoked by developing countries running huge trade surpluses with the US and recycling dollars by buying Treasuries. However, many are facing growing pressure to stimulate their own economies and are seeing their current account surpluses decline as global demand diminishes.

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