U.S. Treasury to Sell $42 Billion in Notes

The U.S. will sell $42 billion in Treasury notes next week, bring back three-year notes in May and will auction more five-year securities throughout the year, all to help pay for mounting budget deficits, the Treasury said Wednesday.

The announcement helped drive yields on existing Treasury securities higher as investors reacted to the prospect of an increased supply of debt.

A weak economy and falling stocks have depressed tax revenue at the same time that the war on terrorism and rising unemployment benefits are boosting federal spending, leaving the government headed for a second straight annual budget deficit.

That’s forcing the Treasury to borrow more to pay the government’s bills. It was only a few years ago that many economists believed Uncle Sam would run huge surpluses this decade.

To raise about $30.4 billion in net new cash (after paying off some maturing debt) the Treasury plans to auction $24 billion in five-year notes Tuesday and $18 billion in 10-year notes Wednesday.

In May, the government will begin selling three-year notes again after an absence of six years. The Treasury also will increase the annual number of five-year note auctions to eight from four. But officials said there are no plans to begin selling new 30-year bonds. The last sale of those bonds was in 2001.

The size of the debt offering announced Wednesday is the largest since the Treasury sold $44.5 billion in February 1996.

In the bond market Wed- nesday, yields rose on longer-term securities, with the 10-year T-note ending at 4%, up from 3.92% on Tuesday. The five-year T-note yield jumped to 2.99% from 2.90%. Still, yields are below their levels of mid-January, as worries about a possible U.S.-Iraq war have continued to push some investors into Treasury issues as a haven.

Even as its borrowing plans ramp up, the Treasury is about two weeks away from hitting the limit of its authority to borrow and may have to temporarily tap government pension funds if Congress doesn’t sanction an increase, officials said.

The Treasury will reach its $6.4-trillion debt limit around Feb. 20, Peter Fisher, undersecretary of Treasury for domestic finance, told reporters. “If the statutory debt ceiling is not raised, the Treasury will have to begin to use a number of stopgap devices to manage debt subject to limit,” he said. As of Monday, the total debt subject to the limit stood at $6.343 trillion.

Despite some investors’ concerns that rising government debt issuance could drive up market interest rates over the next few years, Treasury officials said the government’s share of borrowing is low by historical standards.

“We’re still in very comfortable ranges,” said Brian Roseboro, assistant secretary for financial markets.

Measured relative to the size of the economy, President Bush’s projected deficit for fiscal 2004 would be about 2.8% of gross domestic product, the Office of Management and Budget estimated.

The government had a record $290.4-billion deficit in 1992, amounting to 4.7% of GDP.