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US Treasury to retire 3-year note as budget improves

The Treasury, announcing a $32 billion refunding of three-year and 10-year notes US10YTRR and 30-year bonds US30YTRR, said it would pay down about $22.6 billion of maturing debt in the refunding.

“Discontinuing the three-year note will allow Treasury to ensure large liquid benchmark issuances, better balance its portfolio, and manage the improving fiscal outlook,” Treasury Assistant Secretary for Financial Markets Anthony Ryan said in a statement.

The final scheduled three-year note auction, slated at $14.0 billion, is scheduled for May 7.

The Treasury will also sell $13.0 billion of 10-year notes and $5.0 billion of 30-year bonds. The amounts largely met Wall Street forecasts for the three- and 10-year notes, but the 30-year bond reopening was about $1 billion less than expectations.

A Treasury official said that given the reduction in budget deficits, the $5 billion 30-year bond auction was “the right size” after a $9 billion auction in February. He said the Treasury, however, was not changing its guidance that total 30-year issuance for 2007 would still slightly exceed the $24 billion issued in 2006.

The Treasury last year brought the 30-year bond out of a retirement of more than four years. The 3-year note was eliminated in 1998 during the last major boom in tax receipts, but Treasury resumed them in 2003 as borrowing for the Iraq war soared.

Taxes generated by a sustained US economic recovery has brought down annual Treasury debt issuance from a 2004 peak of $4.69 trillion.

The Treasury queried members of its Treasury Borrowing Advisory Committee, made up of 22 primary bond dealers, on further possible adjustments to its issuance if the budget improves further.

Some members recommended that the Treasury continue to evaluate possible elimination of the 5-year Treasury Inflation-Protected Securities and consolidation of 10-year note auctions, according to minutes of the advisory committee meeting.

Several members said the 5-year TIPS offered little investor value and were traded primarily by investors and speculators anticipating near-term changes in commodity prices and inflation measures.

But a Treasury official said the Treasury was “committed to the TIPS program” and was not ready to make any changes.

Treasury Debt Management Director Karthik Ramanathan told members of the committee that increased issuance of State and Local Government Series (SLGS) securities also had led to a decline of nearly $50 billion in marketable borrowing needs.

The Treasury also said it was considering ways to enhance its cash and debt management.

According to the advisory committee meeting minutes, one member suggested the Treasury study a method of debt buy-back used by other countries, called “the switch.”

This involves issuing debt in one part of the yield curve to repurchase debt in another part of the yield curve. The member also suggested the idea of continuous buybacks in small sizes to better balance the overall portfolio and maturity structure.

Some committee members, however, advised against regular debt buybacks because they may not fall into Treasury’s desire for “regular and predictable behavior” in debt market operations.