U.S. to Offer 5-Year Notes Tied to Inflation, Curb 10-Year Fixed

The Treasury Department, shifting its borrowing strategy as the budget deficit shrinks, said Monday that it will begin auctioning a five-year inflation-indexed note in July and October and cut back on offerings of 10-year fixed-rate notes.

The department will also go ahead with plans to introduce a 30-year inflation-indexed bond next year, Deputy Treasury Secretary Lawrence Summers told a news conference.

Auctions of 10-year inflation-indexed notes, $15 billion of which are outstanding, will resume in January, he said. The mix of TIPS--Treasury inflation protection securities--will alternate among five-, 10- and 30-year, though a final schedule has yet to be developed, he said.

Meanwhile, the Treasury is scrapping two of its six 10-year fixed-rate note auctions in response to the decrease in the deficit, which is expected to drop below $100 billion this year. Some estimates are projecting a $67-billion shortfall for fiscal 1997, Summers said.

A shrinking budget deficit reduces the need for borrowing in financial markets. The department is also responding to investor demand for inflation-indexed securities, Summers said.

“There was speculation this was going to happen, but there’s a little surprise they did it this quickly,” said Marcello Frustaci, a trader at Daiwa Securities America Inc. in New York. “Usually the Treasury gives a little more lead time.”

The auction of five-year inflation-indexed notes is set for July 8. A date has yet to be set for the October sale, though Summers said it will be a reopening of the issue sold next month, to help build a liquid market.

A Wall Street advisory panel earlier this year recommended the Treasury consider selling five-year notes, saying such securities would be more popular with investors, especially those who use the notes to construct derivative securities. The panel also recommended reducing the number of auctions for the 10-year fixed-rate notes.

The Treasury’s original plans had the 10-year indexed-note sales being conducted quarterly. With the recent surge in tax payments and efforts to cut spending in Congress, however, the Treasury’s need to raise cash has diminished, and officials indicated they would consider selling the shorter maturity notes semiannually and the 10-year notes semiannually.

During the current quarter, the Treasury plans to retire a record $65 billion in debt.