Published: Wednesday, 5 Aug 2009 | 4:27 AM ET

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The U.S. Treasury said on Wednesday it will issue more inflation-indexed securities as it tries to attract more investors to the mountain of debt it needs to sell to fight recession.

The shift toward Treasury inflation-protected securities, or TIPS, comes amid increasing investor concerns about rising inflation as the economy recovers, fueled by the Federal Reserve's unprecedented liquidity actions and record U.S. deficit spending.

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Officials from China and other countries holding large amounts of Treasury debt have voiced concerns about the value of their assets declining if inflation surges and the dollar weakens.

Announcing a record $75 billion refunding of 3-year, 10-year and 30-year debt, the Treasury also said it would consider replacing its 20-year Treasury Inflation Protected Securities with a 30-year TIPS.

This could create more liquidity for the long-dated TIPS by aligning it with the benchmark 30-year Treasury bond, a Treasury official said.

Any specific changes to the TIPS program would be announced in November.

Boosting TIPS sales "is a result of weaker confidene among foreign investors because they are demanding these inflation-protected securities," said Richard DeKaser, president of Woodley Park Research in Washington.

"It is a wise strategy because inflation is not a problem but weakening confidence among foreign investors is a concern."

The Wall Street Journal reported on Tuesday that China is has indicated it wants to buy more TIPS, which are designed to protect investor purchasing power by increasing the amount of the principal borrowed to adjust for inflation and thereby also increasing the amount of interest paid.

A U.S. Treasury official declined to comment on whether the department held discussions with China about ramping up the TIPS program. China now holds over $800 billion in Treasury debt.

"Treasury is committed to issuing TIPS in a regular and predictable manner across the yield curve," the Treasury said in a statement.

"These securities are an important part of our overall debt management strategy and market participants can expect issuance to gradually increase in FY 2010."

Thus far, the Treasury has relied heavily on shorter-dated bills and notes to ramp up its borrowing, but is shifting to securities with longer maturities -- a move the Treasury's advisory committee of primary dealers said could prove difficult.

"The government's considerable funding needs are "problematic for the longer end of the Treasury market," the committee said in meeting minutes, adding that current budget deficits were "unsustainable".

The announcement briefly sent U.S. Treasury debt prices lower, but they turned higher after fresh data showed the important U.S. services sector contracted in July at a faster pace than in June.

Long-dated TIPS reacted favorably to the Treasury's pledge to support these bonds. Twenty-year TIPS prices were on track to post their best one-day rise in two months.

In its refunding, the Treasury said it would sell $37 billion in three-year notes, $23 billion in 10-year notes and $15 billion in 30-year bonds in auctions next week, raising $14.9 billion in new cash.

The department said it was "well poised to meet the balance of its financing requirements not only for the remainder of this year but also for fiscal 2010," according to minutes of a meeting with primary bond dealers.

The Treasury's borrowing advisory committee estimated that the Treasury's net debt issuance for fiscal 2009, which ends Sept. 30, would be $1.5 trillion to $2.05 trillion. This would fall to $1 trillion to $1.6 trillion for 2010.

"We continue to see very strong demand at all of our auctions, bid-to-cover ratios have been rising despite the fact that we continue to increase issuance," Matthew Rutherford, the Treasury's deputy assistant secretary for federal finance. "In addition, I think that we continue to see a very healthy array of investors come in, both domestically and internationally."

The Treasury also said it expected to reach the $12.1 trillion statutory debt limit in the October-December quarter. It pledged to work with Congress to make sure the debt limit is raised in a timely manner.

Bond dealers estimated the U.S. deficit for fiscal 2009 at about $1.644 trillion, about $100 billion lower than their estimate months ago and below Congressional Budget Office estimates of $1.825 trillion.

This is due to repayments of federal bank bailout funds, lower than forecast Treasury purchases of mortgage securities and slightly lower than expected outlays, a Treasury official said.

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