The Treasury Department's muddled hints on Friday about issuing a 20-year inflation-indexed bond sent debt markets skittering as the US government mulls funding record budget deficits.
Treasury Secretary John Snow initially appeared to endorse the idea as having been decided, but then quickly backed off, sending conflicted signals to debt traders.
The Treasury dropped what some traders considered a clearer hint about its intentions around noon on Friday, in the form of its agenda for meetings this weekend between Treasury officials and major debt dealing firms from Wall Street.
"Treasury's current nominal issuance, if continued, would ultimately skew our debt portfolio toward 5- and 10-year notes. How has the increased supply of 5-year and 10-year notes affected the primary and secondary markets? What would be the effect of substituting a 20-year TIPS for nominal issuance?" the Treasury asked in the agenda.
Treasury releases its agenda for meetings with major dealers before its quarterly press conference on debt policy. The press conference is set for February 4 and will include details of the "refunding" auctions set for February 10-12.
With a US budget gap forecast at about $500 billion in 2004, many analysts expect Treasury to eventually unveil a decision on whether to add another maturity to its existing stable of 10-year Treasury Inflation-Protected Securities, or TIPS.
One debt trader said the prospect of a 20-year indexed bond only highlighted existing worries about a deluge of government debt ahead.
"We already know we are running record high budget deficits, and word of a possible 20-year TIP means there could be a whole new issue coming to light. That just piles onto the existing worries about supplies," said Doug Warner, a vice president with Man Financial and a Treasury futures trader at the Chicago Board of Trade.
Gemma Wright, debt strategist with Barclays Capital, one of the biggest US traders in indexed Treasury securities, was less concerned.
"Treasury will try to borrow at best cost to the tax payers and it's more advantageous to meet demand and attract investors and be cost effective in the TIPS market," Wright said.
A 20-year bond would have the longest maturity of any security in Treasury's current toolbox and may be seen as a stalking horse for an eventual return of the nominal 30-year bond, whose issuance was suspended unceremoniously on October 31, 2001. Friday's conflicting statements on the 20-year security echoed announcements about the bond's demise, which some traders said had not been adequately telegraphed to markets.
"No decision's been made," Snow said in an interview with CBS Radio Friday afternoon. "It's something that's under discussion, but no decision has been made."
But only about an hour earlier, when Snow had been asked about the issue on Bloomberg Radio, he had said, "It will be one of our products in the market and I hope it gets a good reception."
TIPS protect investors from the ravages of inflation by offering a return linked to government measures of price changes. The securities have not been popular among Wall Street's trading houses in part because they have been seen as difficult to trade.
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