U.S. Treasury Steps Up Debt Sales to Reduce Shortages (Update4) By Daniel Kruger and Rebecca Christie
Oct. 8 (Bloomberg) -- The U.S. Treasury began selling an additional $40 billion of debt to meet demand for government securities in an effort to alleviate ``protracted shortages.'' The first two of four so-called reopenings of 10-year notes sold at higher yields than the outstanding securities were trading at before the auctions. In giving dealers one hour to prepare for the sales, the government was forced to offer concessions, meaning it lost $345 million in potential proceeds, according to an analysis by Credit Suisse Securities USA LLC. Demand for the relative safety of government securities has surged this month as the seizure in credit markets around the world deepened. That has resulted in trades in the repurchase agreement, or repo, market going uncompleted. Such failures to deliver or receive Treasuries in the $7 trillion-a-day market for borrowing and lending securities have set a record. ``People are so nervous about the financial crisis that they're holding on to their collateral and not lending it out,'' said Dominic Konstam at Credit Suisse Securities, one of the 17 primary U.S. government securities dealers that trade with the Federal Reserve. ``That obviously creates enormous stresses for trading Treasuries and unintended losses. That's why they're failing, because of the financial crisis.'' The market disruptions primarily affect two-year notes through 30-year bonds, Karthik Ramanathan, the Treasury's head of debt management, said in a statement released in Washington. First Sales In a reopening, securities pay interest at the same rate and mature on the same date as those sold in the original sale. The government's first $10 billion reopening, of a note maturing in May 2015, yielded 3.31 percent. That was about 40 basis points, or 0.40 percentage point, higher than the outstanding security's yield. The second auction, of a note that matures in August 2015, yielded 3.44 percent, about 10 basis points higher than the outstanding note's yield. In a scheduled auction today, the government's $6 billion reopening of a Treasury Inflation Protected Securities issue maturing July 2018 yielded 5 basis points more than the previously issued debt. ``Giving the market a day of notice, you probably would have had a more constructive auction,'' said Brian Edmonds, head of interest rates at Cantor Fitzgerald LP in New York, also a primary dealer. Two Sales Tomorrow The Treasury will sell notes that mature in February 2015 and February 2018 tomorrow. ``I would figure they're going to continue to do this, especially in the 10-year and 30-year sectors where the dislocations are huge,'' said Charles Comiskey, co-head of U.S. Treasury trading in New York at HSBC Securities USA Inc., another primary dealer. ``This is all part of the deleveraging process.'' The reopenings signaled the Treasury's willingness to protect the liquidity of the government debt market as financial firms face continued funding pressure, and to pay for a record budget deficit that has ballooned along with the scale of the credit crisis. Congress passed a $700 billion financial-market bailout Oct. 3 designed to unlock credit markets. It authorizes the government to buy troubled assets from financial institutions reeling from record home foreclosures. The Troubled Asset Relief Program, or TARP, would push funding needs to $1.5 trillion in 2009 and 2010, according to Merrill Lynch & Co. economists Drew Matus and David Rosenberg in New York. `Significant Amount' ``The Treasury needs to raise a significant amount of cash, and quickly,'' said Michael Pond, an interest-rate strategist in New York at Barclays Capital Inc., another primary dealer. The price of the first note sold today was about $30 per bond lower at auction than in the open market, which amounted ``a Christmas gift'' to dealers, said Andrew Brenner, co-head of structured products and emerging markets in New York at MF Global Inc. ``They need more primary dealers,'' Brenner said. The absence of Lehman Brothers Holdings Inc. from the market following its bankruptcy filing will be ``a big blow.'' The number of primary securities dealers declined to 17 this year with Lehman's collapse, the acquisition by Bank of America Corp. of the troubled Countrywide Financial Corp. and JPMorgan Chase & Co.'s takeover of Bear Stearns Cos. The number will be further reduced when Bank of America completes its purchase of Merrill Lynch & Co. Private-Sector Help The reopenings are an effort to ``address upcoming borrowing needs and further enhance liquidity in the Treasury market,'' Ramanathan said. The Treasury will monitor transactions that don't settle properly, called failed trades or fails, and encourage market participants to find ways to solve the problem, he said. ``Private-sector participants should take additional steps from a monitoring and supervisory perspective to ensure that settlement fails do not reach levels that impact financing markets,'' he said. To contact the reporters on this story: Daniel Kruger in New York at [EMAIL PROTECTED]; Rebecca Christie in Washington at [EMAIL PROTECTED] --~--~---------~--~----~------------~-------~--~----~ Thanks for being part of "PoliticalForum" at Google Groups. For options & help see http://groups.google.com/group/PoliticalForum * Visit our other community at http://www.PoliticalForum.com/ * It's active and moderated. Register and vote in our polls. * Read the latest breaking news, and more. -~----------~----~----~----~------~----~------~--~---
