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Apr 30 2008 11:58AM EDT

Grim Budget Outlook Forces Treasury to Bring Back 1-Year Bill

First it was the rebirth of the long bond in 2006, and now, after a 7-year hiatus, the 1-year bill has been given new life as worsening economic conditions mean less tax revenue.

But the rebirth of the 1-year bill won't provide sufficient financing, worried securities industry advisors to the Treasury. From a release today:

The majority of members believe that the addition of the year bill combined with increases to the size and frequency of existing coupon debt over coming quarters will still not be sufficient to satisfy the increased financing needs of the Treasury over the intermediate and longer term.

Other options include bringing back the 3-year note -- which was dumped last May as corporate profits increased tax revenues -- reviving the 7-year note or issuing more 10-year notes.

But the latter two options are unlikely, RBS Greenwich Capital's Stephen Stanley wrote in a research note:

"Treasury will want to think long and hard about locking in hefty issuance for 7 or 10 years, if big deficits are boing to be a two- or three-year cyclical phenomenon."

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