The Wall Street Journal-20080129-Comeback for the -Year Bill--- Return Would Let Investors Avoid Two-Prong Plan

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Comeback for the 'Year Bill'?; Return Would Let Investors Avoid Two-Prong Plan

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The Treasury market is abuzz with talk that the government could start selling 52-week bills again to meet its rising short-term financing needs and fund its $150 billion economic-stimulus package.

The timing couldn't be better: Relaunching the "year bill" would be a boon for both the government and investors.

Yields on short-dated Treasurys have fallen to multiyear lows recently as investors bought government bonds amid worries over the U.S. economy and the financial system. That cuts the government's cost of financing.

For investors, the year bill would provide another option to preserve principal and also makes it easier to run portfolios. They can simply snap up year bills instead of using the current two-prong strategy that requires them to enter into an overnight repurchase agreement and buy a two-year note to average out to a one-year maturity.

With the Federal Reserve expected to continue to cut interest rates, year bills let fund managers trim the risk of having to reinvest money in a falling-rate environment. But if the rate cuts and the government's plan help the economy recover next year, investors can cash out the year bills and buy higher-yielding longer-dated Treasurys or good-quality credit products when bond yields rebound.

"Year bills will be attractive in a flight-to-safety environment," said Ken Anderson, fund manager at Evergreen Investment Management Co. "I am sure our Treasurys folks will be interested in it."

Treasury spokeswoman Jennifer Zuccarelli said in an email that the department discusses its financing decisions only at its quarterly refunding, which is due tomorrow.

The department last sold year bills in March 2001, when the U.S. enjoyed a budget surplus. That turned into deficit the following year, peaking in 2004 and narrowing to $163 billion for fiscal-year 2007, which ended in September. But the economic-stimulus plan and additional funding for the war in Iraq could push this year's deficit above $350 billion.

The department has already boosted the supply of three- and six- month T-bills to an all-time high of $44 billion, says the research firm Wrightson ICAP. "The one-year fiscal-stimulus package is going to create a very large one-year increase in [the Treasury's] financing needs," said Louis Crandall, chief economist of ICAP.

Mr. Crandall expects the government to start selling year bills quarterly and then increase the frequency to monthly sales in the second year, depending on financing conditions.

But after the rally in short-dated Treasury notes -- the two-year note ended yesterday unchanged in price for a yield of 2.190% -- not all investors are enthusiastic about the year bill. Gregory Habeeb, who oversees $8.5 billion of fixed-income assets at Calvert Asset Management Co. in Bethesda, Md., said he has allocated more money into high-grade corporate debt, where there are better yields to be had. "You are getting extra yields on the corporate end to make up for what you are not getting from the Treasury end," Mr. Habeeb said.

AUCTION RESULTS

Here are the results of yesterday's Treasury auctions. All bids are

awarded at a single price at the market-clearing yield. Rates are determined

by the difference between that price and the face value.

TWO-YEAR NOTES

Applications ....................................... $55,917,035,000

Accepted bids ...................................... $24,000,045,000

Bids at market-clearing yield accepted ............. 61.43%

Accepted noncompetitively .......................... $597,055,000

" foreign noncompetitively ......................... $0

Auction price (rate) ............................... 99.782126(2.237%)

Interest rate ...................................... 2.125%

Cusip number ....................................... 912828HP8

The bills are dated Jan. 31, 2008, and mature Jan. 31, 2010

13-WEEK AND 26-WEEK BILLS

13-Week 26-Week

Applications ..................... $54,697,953,000 $59,258,788,000

Accepted bids .................... $23,000,016,000 $21,000,031,000

Accepted noncomp ................. $1,585,388,000 $1,397,488,000

Accepted frgn non ................ $100,000,000 $375,000,000

Auction price (rate) ............. 99.409764(2.335%) 98.832167(2.310%)

Coupon equivalent ................ 2.388% 2.376%

Bids at market yield ............. 82.99% 24.23%

Cusip number ..................... 912795E23 912795F71

Both issues are dated Jan. 31, 2008. The 13-week bills mature May 1, 2008,

and the 26-week bills mature July 31, 2008. Betting on Harrah's

Unable to find enough investors to take on new debt tied to Harrah's Entertainment Inc.'s leveraged buyout, Wall Street underwriters yesterday took on themselves most of the junk bonds and leveraged loans they had tried to sell to others.

It was another sign of the troubles still plaguing the bond market.

Bankers earlier this month offered investors part of a $7.25 billion loan and a portion of $6.8 billion in junk bonds.

The loans went unsold. A portion of the junk-bond commitment was previously syndicated to debt investors for a fee. Those investors yesterday took on some of the debt they had committed to fund, and received tradable bonds that carry a coupon of 10.75%. But the banks are holding the majority of these bonds, some of which traded yesterday at 88 cents on the dollar, well below their par value.

In addition to the bonds, the Harrah's package includes the yet-to- be sold $7.25 billion of leveraged loans to help finance Apollo Management LP and TPG Capital LP's $27.8 billion purchase of the casino operator.

-- Cynthia Koons