October 31, 2018 / 1:12 PM / 20 days ago

U.S. Treasury to boost auction sizes, create new TIPS issuance

FILE PHOTO: One hundred dollar notes are seen in this photo illustration at a bank in Seoul January 9, 2013. REUTERS/Lee Jae-Won/File Photo

WASHINGTON (Reuters) - The U.S. Treasury said on Wednesday it will increase the size of debt auctions in the coming months, an indication of a rising federal deficit and a shrinking bond portfolio at the U.S. Federal Reserve.

The announcement stems from both an extended stretch of U.S. economic growth, which has led the Fed to reduce support for the economy, as well as a $1.5 trillion tax cut package under President Donald Trump that has widened the federal deficit.

GRAPHIC: U.S. Treasury bill and note issuance interactive graphic - tmsnrt.rs/2O5H6Fh

The government closed the 2018 fiscal year with a deficit of $779 billion, its widest in six years. Borrowing costs have also been rising as the U.S. central bank raises short-term interest rates while also reducing its holdings of long-term federal government bonds.

On Wednesday, Treasury said it was increasing the sizes of its 2-year, 3-year and 5-year note auctions by $1 billion per month over the next two months. In November, it will increase the size of its 2-year fixed rate note auction by $1 billion and also boost the size of auctions for 7-year and 10-year notes as well as 30-year bonds by the same amount during the month.

Treasury said it was also creating a new 5-year inflation-protected security issuance, with its first auction to be held in October 2019.

The department hopes the new issuance will lower debt finance costs by filling a gap in market demand for inflation-adjusted securities, known as Treasury Inflation-Protected Securities (TIPS).

By having more 5-year TIPS auctions, investors will be better able to “price the seasonality” of inflation readings into market prices for TIPS, Treasury Deputy Assistant Secretary Brian Smith said in a statement.

Reporting by Jason Lange; Editing by Paul Simao

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