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Treasury Auctions at Risk from Debt Ceiling Impasse

This year the Treasury has to sell nearly $8 trillion worth of bills, notes and bonds to the public in order to repay owners of more than $6.4 trillion worth of maturing debt and to finance the current budget deficit, according to analyst Nancy Vanden Houten of Stone & McCarthy Research Associates.

Remarkably, buyers are willing to purchase those securities at such low yields that the government’s net interest cost on publicly held debt this year and next is estimated to be only a little more than $200 billion — around 1 percent of the gross domestic product. Furthermore, the auctions are run so efficiently by the Federal Reserve on behalf of the Treasury that their cost was a scant $30 million, according to the Federal Reserve Board’s 2009 annual report.

The size of these auctions dwarfs those of any other government in the world. They are successful, Vanden Houten and analysts say, because investors generally regard Treasurys as among the safest in the world, and they know that the market for the securities is so deep that they can always be sold at a moment’s notice. For most investors they are virtually as liquid as cash.

This whole edifice could be jeopardized, however, if by early August Congress hasn’t raised the $14.3 trillion limit on the combined debt held by the public and various federal trust funds, including the Social Security system. Treasury has already taken some actions, including delaying investing some money contributed by government workers in their personal retirement accounts.

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