US Treasury set to buy back government bonds

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THE UNITED STATES announced plans to buy back government bonds yesterday, with the mounting federal budget surplus allowing it to reduce the $3.6 trillion national debt.

The bond market rallied sharply as traders took in the prospective reduction in supply of stock. However, the news failed to prompt any recovery in the dollar, which weakened against the yen and the euro.

"Enhancing the liquidity of Treasury's benchmark securities should lower the government's interest costs over time and promote overall market liquidity," the US Treasury Secretary, Lawrence Summers, said, announcing the plans for public comment.

He added: "Reducing the supply of Treasury debt held by the public brings enormous benefits for our economy."

The government would buy back stock in reverse auctions, due to start next year, he said. Meanwhile, the benchmark 30 year Treasury bonds will be issued less frequently, with no further November auctions - although the February and August auctions will continue.

The budget surplus is expected to grow from $69.4bn last fiscal year to $120bn in the current fiscal year, with massive surpluses accumulating for as far as the official forecasts can see. It has already been in surplus for two years running, for the first time since 1956-57.

That has allowed the US to plan its first buybacks since 1972. If all goes to plan, the national debt will have been paid off by 2015, although Republicans in Congress are keen to see some of the savings earmarked for big tax cuts.

The federal government has $5.5 trillion in outstanding securities, of which $3.6 trillion is held by the public and the remainder by government trust funds.

Gary Gensler, the Treasury under-secretary responsible for domestic finance, said Treasury debt was taking an ever-smaller share of the capital markets. The share of privately held Treasuries in the debt market has fallen from a third in 1992 to just under a quarter, and their share of gross issuance has dropped to 18 per cent from 40 per cent in 1990.

"This has made more funds available for the private sector, fuelling a surge in private business investment," he said.

The reaction in the bond market was concentrated in the long end of the yield curve, as 30-year bonds put on nearly a full point and yields came down to 6.089 per cent. As well as separately announcing that it will cut the number of long bond auctions from three a year to two, the US Treasury is also considering a reduction in the issuance of 52-week bills and two-year notes. In the third quarter, it will pay down $11bn in debt by issuing fewer new securities.

The dollar slid to a three-month low against the euro of 1.0766, and was down to 114.52 against the yen. Despite speculation in the markets that the US and Japan would intervene to cap the yen's rise, no action has been forthcoming.