Uncle Sam: D E S P E R A T E for cash:
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U.S. Treasuries Fall; Budget Deficit May Prompt Record Quarterly Note Sale
By Monee Fields-White
New York, April 21 (Bloomberg) -- U.S. government notes fell as analysts speculated the Treasury Department will sell a record amount of debt at its quarterly auctions next month to fund a budget deficit inflated by the Iraq war.
The Treasury may offer $64 billion in three-, five- and 10- year notes, about 44 percent more than the high set in 1996, according to Barclays Capital Inc., one of 22 bond firms that trade with the Federal Reserve. The Treasury today said it plans to sell a record- tying $27 billion in two-year notes at its monthly auction Wednesday.
Investors had ``put Treasury supply on the backburner because of the war with Iraq and flow of economic data,'' said Gary Pollack, who helps manage $10 billion at Deutsche Bank AG's private banking unit. ``Now, it's time to face the piper, and the piper is Treasury supply -- creating some pressure on prices.''
The 3 7/8 percent note maturing in 2013 shed about 1/4, or $2.50 per $1,000 face amount, to 99 3/32 at 5 p.m. in New York. Its yield climbed 3 basis points to 3.98 percent. The 3 percent note maturing in February 2008 fell 1/8 to 100 3/16, sending its yield up 3 basis points to 2.96 percent. A basis point is 0.01 percentage point.
Pollack holds fewer Treasuries than his benchmark, the Lehman Brothers Intermediate Government Credit Index. He will consider buying one-year bills and 10-year notes after the three-year note auction, he said.
As interest rates rise over time, ``the mix of one-year bills and 10-year notes will outperform a bullet of five-year notes,'' Pollack said.
Stocks, Budget Deficit
Benchmark 10-year notes have lost 1.3 percent in value and yields have risen 18 basis points this month while the Standard & Poor's 500 Index has gained 5.2 percent. The index fell 0.2 percent today. Bond trading was below average with offices closed in Europe for Easter, analysts said.
Stocks ``continue to grind higher, which is putting pressure on bonds,'' said James Caron, a fixed-income strategist at Merrill Lynch & Co., a primary dealer. ``It's really quiet,'' with trading down about 75 percent from the norm, he said.
The U.S. had a $58.7 billion budget shortfall in March, the Treasury said April 18. The deficit was higher than the median estimate of $55 billion of 39 economists surveyed by Bloomberg News. The Bush administration has estimated a record annual gap of more than $300 billion this fiscal year, excluding war costs.
The Treasury will sell $26 billion of 3-year notes, $18 billion of five-year debt and $20 billion of 10-year securities, said Gemma Wright, director of market research at Barclays Capital. The total of $64 billion would surpass the previous all- time high of $44.5 billion reached in 1996.
``We have a $380 billion to $400 billion budget deficit forecasted for this fiscal year,'' said Wright.
Treasury `Surprise'
Economists polled by Bloomberg News expected the U.S. would sell as much as $25 billion of two-year notes on Wednesday. Today's announcement of a $27 billion offering matches the record amount sold in the past 11 months.
``The Treasury surprised us,'' said Joseph Lavorgna, senior economist at Deutsche Bank Securities, who expected the government to reduce the sale amount to about $23 billion. ``This hints that April tax collection is even worse than expected.''
The government may increase the total amount raised via its first sale of three-year notes since 1997 on May 6, followed by a five- year note sale May 7 and 10-year debt on May 8, analysts said. The amount of the offerings will be announced on April 30.
``The market is already gearing up for what will be the largest refunding package on record,'' Lou Crandall, chief economist at Wrightson ICAP, said in a research note. He expects the Treasury to announce sales of $18 billion each of three-, five- and 10-year notes.
The extra yield on 10-year Treasuries compared with two-year notes was 2.30 percentage points, 10 basis points narrower than the level reached on April 4, which was the widest in a decade.
Ten-Year Outlook
``There's not a lot that the Treasury hasn't forewarned the markets about,'' said Bob Gay, head of fixed-income strategy at Commerzbank Securities Inc. ``The only question is: how big is the number and if there is any changes to the strategies that they outlined a month ago or more.''
Gay expects 10-year note yields to range between 3.75 percent and 4.25 percent in the next month.
Some investors say losses may be short-lived on signs economic growth is slowing, a survey conducted Thursday by research firm Ried, Thunberg & Co showed.
The Conference Board today said its index of leading economic indicators fell 0.2 percent in March, its second monthly drop. The government is likely to report Friday that the economy expanded at a 2.3 percent annual pace in the first three months of the year, according to the median forecast of economists in a Bloomberg survey. The estimate is below the 3 percent to 4 percent economists say is necessary for a sustainable recovery.
Last Updated: April 21, 2003 17:09 EDT |
