T-Note Sale May Require Higher Yields

NEW YORK —  U.S. government borrowing is set to swell in the next few months, and analysts are worried the binge is coming just as investors’ appetite for Treasury securities is waning.

Faced with red ink for at least the next three years, the Treasury today will outline plans to sell as much as $40 billion of five- and 10-year government notes next week.

In recent months, investors ranging from pension funds to small savers couldn’t get enough of super-safe Treasuries while stock prices fell to five-year lows. But now that many are rediscovering a taste for equity risk, the government may have to pay higher yields than planned to find investors who will take its new debt.

On Tuesday the yield on five-year T-notes rose to 3.61% from 3.58% on Monday and 3.39% on Friday. The 10-year T-note--a benchmark for mortgage rates--rose to 4.59% from 4.55% on Monday and 4.38% on Friday.

Shorter-term Treasury yields also have resurged in recent days. The two-year T-note yield closed at 2.42% on Tuesday, up from a generational low of 2.22% on Friday.

The Treasury said Monday that it expected to borrow $76 billion in the current and final quarter of the government’s fiscal year, which ends in September. That’s the largest quarterly borrowing need since 1996 and is up 38% from estimates made in late April, when the government said it would need to borrow $55 billion.

Federal tax revenues have trailed expectations, in large part because of a drop in capital gains. Meanwhile, government spending has jumped in the aftermath of the September terrorist attacks.

The Office of Management and Budget has forecast a $165-billion federal deficit for the current fiscal year, up more than 50% from estimates in January. The office does not expect the government to run a modest surplus until fiscal 2005.

Wall Street is looking for much higher deficits between now and 2005. As market participants begin anticipating that the Federal Reserve will raise its benchmark short-term interest rate by late this year from the current 1.75%, analysts said the Treasury will have a harder time selling short-term notes to finance the deficit and will rely more on longer-term securities.

A recovering stock market and stronger economic reports could ensure that Treasury yields continue to rebound in the next few months, many analysts said.

But others warn that a U.S. military attack on Iraq, or another major terrorist attack on U.S. soil, could send investors pouring back into the Treasury market, pulling yields down again.