The U.S. Treasury said on Wednesday it will resume issuing 52-week bills after a seven-year break, as budget deficits swell due to falling revenues and higher spending in a slowing economy.
The Treasury, announcing its quarterly refunding plans, said it would sell $21 billion of 10-year notes and 30-year bonds. It also said it would pay down about $53 billion of maturing debt in auctions next week.
The Treasury retired the 52-week bills in February 2001, when the United States was running budget surpluses after a decade-long economic expansion.
It is now adding the bill to its debt offering lineup just one year after it retired the 3-year note amid better-than-expected tax revenues produced by booming corporate profits and capital gains.
It said that situation had turned swiftly around.
"Over the last several months, changes in economic conditions, financial markets, monetary and fiscal policy have impacted Treasury's marketable borrowing needs," the Treasury said in a statement. "Financial market strains have impacted the real economy, and the nation has experienced lower economic growth, lower receipts, and increased outlays."
The first of the monthly auctions of 52-week bills will be announced on May 29 and will be held on June 3.
The Treasury said it expected to increase bill and nominal coupon issuance over the remainder of the 2008 fiscal year, which ends Sept. 30, and will issue cash management bills in May, June, August and September, some of which may be longer-dated.
The Treasury cited spending on tax rebates associated with the fiscal stimulus plan as a key reason for increasing its borrowing expectations over the next year.
The Treasury Borrowing Advisory Committee -- made up of 22 primary government bond dealers -- said in a report to the Treasury that a recent survey showed the deficit for fiscal 2008 will exceed $400 billion, with some economists anticipating a deficit of more than $500 billion. This compares with the fiscal 2007 deficit of $163 billion.
In addition to lower revenues from a slowing economy and increased spending, the Federal Reserve has redeemed Treasury holdings and made some outright sales in recent months to support its efforts to boost financial market liquidity.
This has resulted in an additional $200 billion in bills and coupon issuances so far this fiscal year, the Treasury said.
In addition, state and local governments are buying fewer State and Local Government Series securities due to a reduction in tax-exempt bond issuance, forcing the Treasury to issue more higher-yielding bills, notes and bonds.
The refunding announced on Wednesday reflects a shift towards the shorter end of the yield curve, where yields and borrowing costs are lower. Some members of the borrowing committee said this heavy demand for short-term Treasury debt reflected a re-pricing of risk that could unwind at some point, raising borrowing costs.
While members agreed that the time was right for the resumption of 52-week bill issuance, there was more debate on how best to fund intermediate-term borrowing.
"Some members felt that the three year note could be reintroduced without much difficulty. Several other members suggested that introducing a longer-dated instrument such as the 7-year note or moving to monthly 10-year note issuance were better alternatives," the committee said, according to minutes of the meeting.