Uncertain Over Deficit Reduction, Treasury Drops Plans to Shrink Bond Auctions

Treasury says it will continue to gradually increase the average maturity of its debt portfolio.

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WASHINGTON (Reuters) — The Treasury on Wednesday dropped plans to gradually shrink the size of its bond and note auctions because of uncertainty over fiscal stimulus legislation and deficit reduction moves by a congressional panel.

The Treasury announced a $72 billion quarterly refunding of its 3-year, 10-year and 30-year debt securities, which will raise $48.1 billion in new cash, and said it would take a wait- and-see approach to the fiscal outlook.

"Given the current range of potential fiscal policy outcomes, Treasury believes that it is prudent to hold offering sizes for notes and bonds stable over the near term," Treasury Assistant Secretary Mary Miller said in a statement.

Miller had announced in August that Treasury expected to gradually decrease offering amounts for bonds and notes following a resolution of a debt ceiling impasse in Congress that brought the United States to the brink of default.

President Barack Obama is seeking to persuade lawmakers to approve individual job-creating measures, initially proposed as a $447 billion tax-cut and spending package that was stalled by Senate Republicans. It was to provide short-term stimulus to the economy while a medium-term plan to cut deficits was developed.

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In documents made available on Wednesday, the Treasury's borrowing advisory committee indicated skepticism about the ability of a congressional "super committee" to bring U.S. deficits under control.

The 12-member bipartisan panel is considering a range of plans that would slash deficits by as much as $3 trillion over 10 years, but Democrats and Republicans are still deeply divided over what mix of spending cuts and revenue increases are needed. It has until November 23 to produce recommendations.

"The progress of these deliberations is uncertain and market participants do not have high expectations for the outcome," said a report by the advisers, who are from top Wall Street firms.

The uncertainty was reflected in dealers' estimates of future borrowing needs, which range widely from $950 billion to $2.45 trillion in fiscal 2012 and $800 billion to $2.25 trillion for fiscal 2013.

The dealers also had much more pessimistic deficit forecasts than either the White House of nonpartisan Congressional Budget Office. For fiscal 2014, the dealers forecast a deficit of $812 billion, compared with a $380 billion CBO projection and $476 billion from the White House budget office.

The Treasury said it would continue to gradually increase gross issuance of inflation-indexed notes, known as TIPS, but it did not specify an amount, saying it needed further feedback from market participants.

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It said it would continue to gradually increase the average maturity of its debt portfolio, which currently stands just over 62 months. Although it did not specify a target, minutes of the Treasury borrowing advisory committee cited a hypothetical example in which the maturity would rise to 70 months by increasing bond and note issuance on a pro-rata basis while keeping bills constant.

The department also said it would continue to study two potential changes -- introduction of its first-ever floating-rate debt security and allowing bids for bill auctions to fall into negative territory.

Treasury Deputy Assistant Secretary Matt Rutherford noted in the borrowing committee minutes that the floating rate notes "have many features that make them a potentially attractive instrument for Treasury, there still a lot of work that needs to be done on the product related to cost, structure and demand."