Geithner widens bonds gap with new sales

Treasury Secretary Timothy Geithner’s plans to lock in near record-low borrowing costs in 2010 may mean a second year of losses on longer-term bonds.

After selling $1.9 trillion of short-term securities to finance President Barack Obama’s efforts to end the worst recession since the 1930s, the Treasury plans to lengthen the average due date of its outstanding debt to 72 months from a 26-year low of 49 months. That may mean boosting sales of 10- and 30-year bonds by 40 per cent over the next year to $600 billion, according to FTN Financial in Memphis, Tennessee, driving down prices of longer-term securities.

“The Treasury will want a longer debt duration before interest rates rise,” said Tsutomu Komiya, an investment manager in Tokyo at Daiwa Asset Management Co, which oversees the equivalent of $105.8 billion. “We have to deal with sales, sales, sales. The huge issuance will make Treasury yields go higher.”

Replacing bills with bonds may drive up the so-called yield curve as the Federal Reserve keeps its target rate for overnight loans between banks unchanged near zero until the second half of 2010, according to the weighted average of 67 forecasts in a Bloomberg survey. The gap between yields on 2-year and 10-year notes widened to 2.47 percentage points, compared with an average of 0.8 point since 1977.

While a so-called steeper yield curve is usually a sign of diminishing demand from investors anticipating faster economic growth and inflation, coupons on bonds near the lowest on record show there’s no lack of appetite for government debt following this year’s record sales. Bond investors are on track for the biggest annual loss since at least 1978, according to Merrill Lynch & Co index data.

Treasury has sold $1.6 trillion in notes and bonds to finance a budget deficit that reached a record $1.4 trillion in fiscal year 2009 that ended September 30. Debt amounted to 9.9 per cent of the nation’s economy, triple the size of the 2008 shortfall.