UPDATE 3-U.S. Treasury to pause debt reduction, add TIPS

* U.S. Treasury says to pause reduction in debt issuance

* Inflation-indexed note auctions to increase

* Treasury to sell $72 billion in notes, bonds next week

* Dealers express concern about increased Fed purchases
(Updates with Fed decision, adds analyst comment)

By David Lawder and Pedro DaCosta

WASHINGTON, Nov 3 (BestGrowthStock) – The U.S. Treasury on
Wednesday said it would pause a six-month campaign to curb debt
issuance and expand auctions of inflation-indexed notes next
year, citing uncertainty over tax revenues and the economy.

In its quarterly refunding announcement, the Treasury said
it would likely maintain coupon auction sizes at current levels
over the coming quarter to assess the fiscal outlook.

“The outcome of tax policy, coupled with uncertainty about
the economic growth outlook, will impact Treasury’s ability to
continue to cut auction sizes in the coming months,” the
Treasury said in minutes of a Treasury Borrowing Advisory
Committee meeting.

Reductions could resume in calendar 2011, however. The
Treasury began reducing auction sizes, mainly at the shorter
end of the coupon curve, in May after a dramatic increase in
borrowing last year to finance stimulus measures and bailouts.

A Republican takeover of the House of Representatives and
gains in the Senate in Tuesday’s elections cloud the Obama
administration’s plans to allow tax cuts for those earning over
$250,000 to expire. At the same time, the economy is suffering
from stubbornly high unemployment; the jobless rate is expected
to remain at 9.6 percent in October data due on Friday.

“We’ve right-sized our borrowing to the current
environment,” Mary Miller, the Treasury’s assistant secretary
for financial markets, told a news conference. “We’ll take a
pause here, and we’ll just look at things, and in the next
quarter determine whether we should continue in that direction
or keep borrowing at these levels.”

RBS economist Michelle Girard called the pause “prudent”
but saw room for the Treasury to cut offerings by some $100
billion in the current fiscal year, which started Oct. 1.

“A substantial amount of uncertainty surrounding the
outlook for the deficit will be resolved by the spring,” she
said in a note to clients.

$72 BLN REFUNDING PACKAGE

The Treasury said it would sell $72 billion of 3-year,
10-year and 30-year debt next week, refunding $13.8 billion of
securities maturing on Nov. 15. The auctions will raise $58.2
billion of new cash. For details see [ID:WALTLE6QR].

As expected, the Treasury said it would add a second
reopening next year in each of its 5- and 30-year offerings of
Treasury Inflation Protected Securities to cope with increasing
demand. This will bring the frequency of TIPS auctions to one
per month. The Treasury said it expects to offer over $100
billion of TIPS in calendar 2011.

TIPS, which offer investors protection against inflation,
have seen robust demand, with yields in the latest auctions in
negative territory. The Treasury said TIPS, which now comprise
7 percent of debt issuance, will increase their share steadily
over the next year.

ANGST OVER FED PURCHASES

Treasury officials said primary government bond dealers had
expressed concern about the supply of longer-dated Treasuries
given expectations of further Federal Reserve buying. The Fed
later on Wednesday announced a new bond buying program.
[ID:nN03120542]

“The question arose regarding whether the Fed and the
Treasury were working at cross purposes, given that Treasury is
extending the average maturity of the portfolio while the Fed
is expected to purchase longer-dated securities,” the Treasury
said in the borrowing committee minutes.

One panel member noted this was “economically equivalent to
Treasury reducing longer-dated coupons and issuing more
bills.”

Miller added that while Treasury is watching the Fed moves
closely, the government did not plan to increase coupon
issuance in response to any Fed buying. Though the Fed and
Treasury operate independently, Miller said they both wanted to
maintain a highly liquid and well-functioning debt market.
(Editing by Andrew Hay and Kenneth Barry)

UPDATE 3-U.S. Treasury to pause debt reduction, add TIPS