Originally created 05/06/04

Treasury to offer 2 inflation-indexed notes to help finance national debt



WASHINGTON -- The Treasury Department announced Wednesday that it is adding two securities to help finance the national debt, which recently topped $7 trillion.

The department is adding a 20-year inflation-indexed bond, which it has not offered before, and a 5-year inflation-indexed note, which was auctioned twice in 1997 and then discontinued, Treasury officials said.

The first auction of the 20-year inflation-indexed bond will be held in July and the first auction for the 5-year inflation-indexed note will be conducted in October. Auctions for each security - known as Treasury Inflation-Protected Securities, or TIPS - will be held twice a year. Those two securities will join the current inflation-indexed 10-year note now sold.

Government securities dealers and government officials believe that the 20-year inflation-indexed bond will be attractive to traders, insurance companies, pension funds and mutual funds as a way to hedge against inflation risk. Finance experts believe individual investors may be drawn to the shorter-term 5-year inflation-indexed note.

Treasury officials said that individual investors wanting to purchase the new securities can do so through a bank or other financial institution. People also should be able to buy them online through Treasury, where they need to designate a bank from which funds would be withdrawn to pay for the bonds, Treasury officials said.

"Inflation-protected securities are always a prudent choice for investors looking to preserve their capital and purchasing power and that is especially true in an environment where you're likely to see higher inflation," said Greg McBride, a financial analyst at Bankrate.com, an online financial service.

Recent economic reports show inflation is creeping up. Federal Reserve policy-makers indicated Tuesday that they aren't yet worried by that. Still, the pricing climate has changed from a year ago, when Fed policy-makers were worried about the threat of deflation, a widespread and prolonged price decline.

Owners of TIPS receive interest payments every six months and a payment of principal when the security matures. Interest and redemption payments are tied to the Consumer Price Index inflation gauge. If inflation occurs throughout the life of the security, every interest payment will be greater than the previous one.

Asked whether it would be costly to Treasury to offer TIPS in a rising inflation climate, Timothy Bitsberger, deputy assistant secretary for federal finance, replied: "We believe that by diversifying our liability, diversifying our investor base, we're reaching out to more investors and protecting ourselves against a variety of different economic outcomes."

Treasury's decision on the addition of the two securities came as the department considered the government's financing needs, something it does on a quarterly basis.

The growing national debt is a result of soaring federal government deficits, which Democrats blame on president's Bush large tax cuts in 2001 and 2003. The Bush administration, however, has blamed the red ink on the cost of fighting terrorism at home and abroad and a weak economy, which finally staged a material rebound in the second half of last year.

Treasury, as part of its financing plan for the current quarter, also said it will auction $54 billion in notes next week. The department will sell $24 billion in three-year notes, maturing May 15, 2007, on Tuesday. It will sell another $15 billion in five-year notes, maturing on May 15, 2009, on Wednesday, and sell an additional $15 billion in 10-year notes, maturing on May 15, 2014, on Thursday.