The U.S. Treasury said on Wednesday it will resurrect the 3-year note and conduct more frequent auctions of 10-year notes and 30-year bonds to cope with staggering borrowing needs that some say could reach $2 trillion in the current fiscal year.
In the meantime, the Federal Reserve raised the interest rate paid on reserves to the Fed funds rate. The Fed said the change will help the fund rate trade close to its target rate.
The Treasury said it will sell $55 billion worth of these debt securities next week to refund $54.9 billion in maturing debt.
It said the new 3-year note auctions would be held monthly and it will also move to monthly auctions of 10-year notes, including reopenings in December and January.
Meanwhile, the Federal Reserve raised the interest rate paid on reserves to the Fed funds rate. The Fed said the change will help the fund rate trade close to its target rate.(Video: Steve Liesman discusses the Fed move.)
The 30-year bond auctions will now be conducted on a quarterly basis instead of twice a year.
"Over the last several months, changes in economic conditions, financial markets and fiscal policy, as well as a decline in nonmarketable debt issuance have contributed to an increase in Treasury's marketable borrowing needs," the Treasury said in a statement.
U.S. tax receipts are being hurt by a moribund economy, while the government is spending hundreds of billions of dollars on financial rescue programs while continuing high spending on wars in Iraq and Afghanistan.
The Treasury may need to borrow up to $2 trillion in fiscal 2009, according to some members of the Treasury's borrowing advisory committee, made up of 18 primary government bond dealers.
In minutes of a meeting with the panel, Treasury officials cited estimates of a $1.4 trillion borrowing need in 2009, but noted that this could vary by $500 million.
In addition to the 3-, 10-, and 30-year securities, the Treasury said the balance of its financing needs will be met by its current calendar of weekly bills, monthly 52-week bills and monthly 2-year, 3-year and 5-year note offerings, as well as inflation-protected notes.
The Treasury said it will monitor its debt needs and may make other adjustments, including reintroducing or establishing new benchmark securities.
Rattled financial markets were showing some signs of returning to normal, members of the borrowing committee said.
"Some financial market indicators suggest that financial markets have seen the worst and that credit market deterioration has at least stabilized and may even be improving." At the same time, markets were still showing signs of an aversion to risk.
"It will take time for risk appetite to return to more historically normal levels."
Meanwhile, In the meantime, the Federal Reserve raised the interest rate paid on reserves to the Fed funds rate. The Fed said the change will help the fund rate trade close to its target rate.
-- CNBC's Steve Liesman contributed to this story.