Transcripts

Bailout Fever Spreads To The Bond Market

PAUL KANGAS: Next week will be a big week for the bond market. The Treasury is set to announce its cash needs for the next quarter and bond traders are expecting a record number of new issues. That's raising concerns companies will have a harder time selling commercial paper in a crowded marketplace. Scott Gurvey reports.

SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: Considering what it's spending, it should be no surprise the government needs money. The last time Treasury announced borrowing plans was before it took over mortgage giants Fannie Mae and Freddie Mac, before Congress authorized $700 billion to buy bad assets and inject capital into the nation's biggest banks and before it put more than $100 billion in insurance giant AIG. Some of that money showed up in the last fiscal year just ended, which saw the Treasury issue $724 billion in notes and bonds. Now Brian Edmonds, head of trading for primary dealer Cantor Fitzgerald, says in the current fiscal year the government may need to borrow nearly $2 trillion.

BRIAN EDMONDS, SR. MANAGING DIR., CANTOR FITZGERALD: It's a significant boost given deficit expectations and the expectations of the financing that the Fed has done. The Treasury and the Fed has basically become a financial intermediary and has replaced a lot of the financial institutions in the marketplace.

GURVEY: Because the Fed has in many instances replaced rather than added to overall borrowing, many Fed watchers say bond market fears of higher interest rates are overdone. Alex Li of Credit Suisse points to this month's market action.

ALEX LI, DIRECTOR INTEREST RATES PRODUCTS, CREDIT SUISSE: Treasury issued over $500 billion of special financing bills to give to the Fed as a liquidity measure. Although the supply was so big, you know, bill rates have stayed extremely low. It's just a reflection of demand for safe haven assets in the current market turmoil.

GURVEY: While higher rates may not be needed to create demand for the flood of Treasuries to come, one change Brian Edmonds sees coming is a broader variety of maturities for Treasury securities.

EDMONDS: We are expecting at this announcement this week we will hear of a new issuance of three-year notes. We expect 10-year notes and 30-year bonds to be also announced. We believe that ultimately the Fed and the Treasury will come with seven-year securities as well, but the current mix of securities will most likely remain and the Fed will simply increase the size of existing issuance.

GURVEY: Treasury issues its estimates of borrowing needs for the next two quarters on Monday and the formal refunding statement for next quarter on Wednesday. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.