Who will buy?: John Kemp
Thu Oct 30, 2008 7:53pm IST

By John Kemp

LONDON (Reuters) - The Treasury's need to shift a record volume of debt securities in the next twelve months recalls the rose seller in the musical adaptation of Charles Dickens' Oliver Twist. She asks "Who will buy my sweet red roses, two blooms for a penny?."

Finding no takers, she ends the disconsolately wondering "Must be someone .. who will buy?."

Anthony Ryan, the acting undersecretary for domestic finance at the U.S. Treasury, must be wondering much the same thing, as he wonders how to sell all the debt securities needed to fund the Troubled Asset Relief Program (TARP), the Federal Reserve's various emergency lending facilities, and the federal government's increasingly wide budget deficit for 2009.

The Treasury has borrowed $877 billion since the end of Aug - including $500 billion from the public - to boost the Federal Reserve's balance sheet and start funding the TARP.

But almost all of this borrowing has been done in the form of very short-term cash management bills - with $320 billion issued in September and another $520 billion issued in October. Little or none of it has been replaced yet with longer-dated bills, notes and bonds in the regular series.

ALMOST HALF DEBT TO MATURE WITHIN A YEAR

The result is a huge shift in the Treasury's debt profile, and a massive overhang of very short-term paper that must eventually be transformed into longer-dated paper, and in the meantime must be constantly rolled every few weeks.

The attached charts show the maturity profile of marketable Treasury securities issued to the public. The first shows the full maturity profile ( https://customers.reuters.com/d/grap...EBTEXT1008.gif ) while the second provides a more detailed look at just those securities maturing with the next five years ( https://customers.reuters.com/d/grap...USDEBT1008.gif ).

The massive issuance of short-term cash management bills in recent weeks to fund recent financial rescues is dramatically remaking the government's debt profile.

The debt profile at the end of July, before the latest crisis, showed just over a third of the outstanding debt due to mature in less than twelve months (37%), with similar amounts due to expire in 1-5 years (33%) and in over five years (30%).

But following heavy borrowing, the proportion of debt scheduled to expire within one year had risen to 41% at the end of September and looks set to rise to almost 50% by the end of October.

To put this in perspective, the amount of debt that the Treasury will need to refund within one year has jumped from $1.8 trillion at the end of July to $2.1 trillion at the end of September and is likely to reach almost $2.4 trillion by the end of this month.

Actual borrowing needs will be even higher than this because the Treasury has still not finished funding TARP (which could result in another $500 billion of debt issuance).

Nor has it even started funding the projected budget deficit for 2009 (which will amount to at least another $500 billion even before Congress considers additional tax breaks, support for homeowners and fiscal stimulus).

In total, the government will have to borrow more than $3 trillion in the markets in the next twelve months to replace maturing debt and fund new programs.

LIMITED APPETITE LONGER PAPER

Undersecretary Ryan admitted yesterday "this year's financing needs will be unprecedented." But he expressed confidence investors would value the liquidity and safety of government securities and be ready buyers for the flood of paper that will be offered them.

Ryan indicated the government was thinking about reinstating three-year notes to provide more intermediate funding options. But he also admitted the government might seek to lengthen the maturity of the cash management bills, a sign that officials and primary dealers are uncertain about the appetite for placing such a huge volume of debt securities and might have to rely on shorter duration funding for some time.

Placing all this debt will prove tricky. Buying medium or long-term Treasury securities in the current market could prove a very bad investment indeed.

Yields on Treasury securities are being artificially compressed by the flood of money seeking to avoid credit risk in the banking system and a safe home in the government debt market. But when the liquidity and credit premium eventually diminishes, as it must if the economy is to return to health, there is a risk yields will rise substantially, inflicting losses on anyone who bought them at more depressed levels.

Yields at 2.70% for five years and 3.80% for ten years do not look particularly attractive.
maladroit Reviewed by maladroit on . US treasury facing a crisis Who will buy?: John Kemp Thu Oct 30, 2008 7:53pm IST By John Kemp LONDON (Reuters) - The Treasury's need to shift a record volume of debt securities in the next twelve months recalls the rose seller in the musical adaptation of Charles Dickens' Oliver Twist. She asks "Who will buy my sweet red roses, two blooms for a penny?." Finding no takers, she ends the disconsolately wondering "Must be someone .. who will buy?." Anthony Ryan, the acting undersecretary for domestic finance at Rating: 5