UPDATE 2-U.S. Treasury looks to offset future drop in Fed bond purchases

(Adds comments on ultra-long bonds from press conference)

WASHINGTON, Aug 2 (Reuters) - The U.S. Treasury said on Wednesday it will keep coupon auctions steady in the third quarter and could increase issuance of bills and a broader set of coupons later in the year to make up for a future decline in Federal Reserve bond purchases.

"Treasury will likely respond to additional borrowing needs ... by increasing both Treasury bill and Treasury nominal coupon auction sizes," Monique Rollins, Treasury's acting assistant secretary for financial markets, said in a statement.

She added that Treasury will offer further guidance when the timing of the U.S. central bank's plans becomes available.

Minutes from the Treasury's borrowing advisory committee, also released on Wednesday, indicated a decision by Treasury could come at the next refunding announcement in November and likely no later than the end of the first quarter in 2018.

"It's a small signal Treasury is not going to ramp up auctions quickly but has the flexibility to offer a more market friendly transition than some have recommended," Jim Vogel, FTN Financial's interest rates strategist, wrote in a research note following Treasury's statement.

Long-dated debt yields plunged and the yield curve flattened to its lowest levels in a week after the refunding announcement.

The Fed has signaled it may begin as early as September to cut its $4.2 trillion portfolio of Treasury bonds and mortgage-backed securities, which it bought in the wake of the 2007-2009 financial crisis and recession.


In its quarterly refunding announcement, Treasury also said it would auction $62 billion in coupon debt next week. It gave no further immediate information on the timing of a decision for its consideration of introducing ultra-long bonds.

In May, Treasury said it was studying the possibility of issuing ultra-long bonds although its advisory committee had questioned investor enthusiasm for such a change.

An ultra-long bond would fit in with Treasury's objective to fund the government at the least cost over time.

"We are still looking at the ultra-long," Rollins told reporters at a press conference after the refunding announcement. "We're looking at gaining feedback from market participants."

She added that Treasury's current focus is on the Fed's tapering of its bond portfolio and the debt ceiling.

On Monday, Treasury said it expects to raise $96 billion through credit markets during the July-September quarter, down $2 billion from its initial estimate.

It also said it expects to issue $501 billion in net marketable debt in the fourth quarter, a marked jump that in part reflects Treasury's current inability to increase borrowing in the third quarter as it struggles to raise the nation's statutory borrowing limit, currently at $19.9 trillion.

Congress has yet to reach a deal and U.S. Treasury Secretary Steven Mnuchin has warned the government will fully exhaust its borrowing capacity in October.

"A substantial portion of this marketable borrowing reflects Treasury's plan to restore the cash balance to a prudent level," Treasury said. (Reporting by Lindsay Dunsmuir; Additional reporting by Richard Leong in New York; Editing by Paul Simao)