Better finances means US Treasury will reduce auction sizes

The United States plans to decrease the auction sizes of two- and three-year notes over the coming months because improving government finances have reduced the need for debt financing, the US Treasury said yesterday.

In addition, the extra cash coming into the Treasury’s coffers should help it continue paying for government operations, giving Congress time to raise the nation’s borrowing limit when it returns from a recess in early September, Treasury said.

The Treasury, in its quarterly refunding announcement, said the auction size next week will remain the same size, with plans to borrow $72bn (€54bn) in debt securities.

But in the next month, the Treasury plans to cut by $1bn the coupon auction size of two-year notes, Matthew Rutherford, Treasury’s assistant secretary for financial markets, told reporters.

Auction sizes for both two- and three-year notes will fall by a further $1bn in September or October, he said.

The US government’s deficit has fallen faster than many analysts were expecting this year, driven by higher tax revenue, public spending cuts and big payments to the Treasury from Fannie Mae and Freddie Mac, the two mortgage finance companies bailed out by taxpayers during the financial crisis.

Most of the additional funds have come from Fannie Mae, which in May said it would return $59bn to the Treasury in quarterly dividends.

Treasury yesterday also said it plans to hold its first floating-rate note auction at the end of January, and it issued final rules yesterday describing how these notes will be structured.

The floating-rate notes, Treasury’s first new security since 1997, are expected to attract investors who want to be sure they do not miss out on higher returns if interest rates begin to move higher.