U.S. issues $7 trillion debt, supply to stabilize

By Burton Frierson

NEW YORK (Reuters) - The U.S. government will have issued $7 trillion in bonds by the time the current fiscal year ends next week, but it expects the debt deluge to stabilize by mid 2010, a Treasury official said on Wednesday.

Though markets and the economy are improving, efforts to provide a firm foundation for recovery will require increases to the U.S. Treasury's conventional bonds going forward, as well as debt securities that are indexed to inflation.

However, this expansion may take place in an environment where investors consider leaving the safe-haven Treasury market for riskier assets, and debt issuance is likely to level off mid next year, said Treasury Acting Assistant Secretary for Financial Markets Karthik Ramanathan.

"In fiscal year 2009, which ends next week, Treasury will have issued $7 trillion in gross issuance -- that's in a 12-month period," Ramanathan told a financial markets conference in New York.

"This issuance was necessary to meet nearly $1.7 trillion in net marketable borrowing needs, nearly $1 trillion more than what we raised last year," he added.

DEMAND TO WANE

The heavily-indebted U.S. government has seen tremendous demand for Treasury debt securities this year due to a flight-to-quality into the safe haven assets.

However, Ramanathan said some of this demand would begin to taper off and investors were likely to favor other sectors as the financial markets recovery continues.

"Rather than being discouraged by this move to more risky assets we should actually be encouraged," he said. "It is the natural progression from the state we were in last year."

The collapse of Lehman Brothers investment bank in September 2008 sparked the massive migration toward safe-haven assets, though the stock market has been in a remarkable rally since the spring.

Investors have also returned in numbers to the corporate debt market, which suffered during last year's turmoil.

There is still a long way to go toward market and economic stabilization but good progress is taking place, Ramanathan said, adding that officials were no longer focused "on LIBOR/OIS spreads on a daily or hourly basis."

"We still have a long way to go and...there are going to be bumps along the way, but at least we're seeing the signs of traction," he added.

The LIBOR/OIS spread is a market measure that reflects the difference between the cost of so-called risk-free borrowing, such as that done by the U.S. Treasury, and lending to the private sector, which is normally considered less safe.

LONGER MATURITIES?

When asked whether the Treasury would consider offering a longer maturity bond in the future, Ramanathan said, "We are content with our current suite of securities."

The Treasury's longest maturity is the 30-year bond.

However, issuance will increase in the near term, as has been the case all year.

"Going forward we expect to increase both nominal and inflation indexed coupon issuance incrementally and gradually over the next nine months to extend the average maturity of the debt," he said.

Due to structural changes in the budget deficit, Ramanathan said he expected the average maturity of the debt to stabilize at six to seven years, exceeding historic averages of five years.

However, he said he expected coupon debt securities, or the bonds Treasury issues, to stabilize next summer and potentially go down toward the end of next year.

(Reporting by Burton Frierson; Editing by Andrew Hay)