The U.S. Treasury Department (search) announced on Wednesday it would resume selling 30-year bonds (search) in early 2006, and said it would offer a smaller-than-expected $44 billion in its quarterly refunding auctions next week.

"The Treasury has determined that we have the flexibility to issue 30-year bonds cost-effectively while maintaining deep and liquid markets in our other securities," said Treasury Undersecretary for Domestic Finance Randal Quarles (search).

"We believe this is a prudent debt management step that will continue to allow Treasury to finance the government's borrowing needs at the lowest cost over time."

The Bush administration canceled 30-year bond issuance in October 2001 but has come under pressure from Wall Street to resume the sales to add liquidity in long-term debt markets (search).

Facing large budget deficits that followed a recession, stock market collapse, tax cuts and huge war costs, the Treasury Department said in May it might revive the long bond to give the government more borrowing options.

Semiannual auctions of 30-year bonds will begin in the January-March quarter of 2006, with the first nominal security maturing on Feb. 15, 2036, Treasury said. It said it would outline any changes to the debt issuance calendar in November.

Financial markets showed little reaction to the announcement, which was widely expected after Treasury's May refunding statement. Analysts praised the move.

"Welcome back! We've missed you," said Richard Schlanger, a portfolio manager at Pioneer Investments. "The Treasury has laid the foundation so it doesn't come as surprise."

The Bond Market Association (search) said the long bond's return would save the government money and reduce its risk exposure as interest rates rise.

"Resumption of issuance of their 30-year bond is likely to provide Treasury with greater flexibility in managing its debt portfolio and make it better able to lower its borrowing costs over the long-term, thus saving money for U.S. taxpayers," the industry group said.

"Resuming issuance will also reduce the government's interest rate rollover risk, which results from refinancing outstanding debt at potentially higher rates."

In its refunding announcement, Treasury said it would sell $18 billion in three-year notes on Monday, Aug. 8; $13 billion in five-year notes on Wednesday, Aug. 10; and $13 billion in 10-year notes on Thursday, Aug. 11.

The sales will refund $18.6 billion of publicly held securities and government account holdings maturing on Aug. 15, and raise about $25.4 billion in new cash for the government.

Analysts had expected Treasury to sell about $46 billion in next week's refunding auctions, less than the $51 billion it sold in the previous four quarterly offerings, because of an improved near-term U.S. budget outlook.

Treasury said on Monday it would need to borrow $59 billion in the July-to-September quarter, far less than the $103 billion first forecast, as a result of a robust tax intake and higher state and local government securities issuances.

Wall Street executives advising the Treasury Department on borrowing issues said a proposed lending facility to reduce "fails" in the debt repurchase market had merit.

"Treasury envisions a lending facility offering unlimited quantities of specific securities and onerous borrowing rates for fixed term repo financing," the Treasury Borrowing Advisory Committee said in a report to the government.

"Several members stated favorable views of the proposal, particularly if enacted in concert with other steps such as enforcement of buy-in rules, industry cooperation, and encouraging futures exchanges to cash settle or re-coupon contracts," the committee said.

The Treasury Department is seeking to cut the number of fails episodes, which occur when one party to a repo transaction fails to deliver the securities required to complete the transaction.

Its proposed facility aims to promote liquidity, efficient settlement and investor confidence in the Treasury market. Treasury has said the impact of the facility on debt issuance would be minimal, and establishing it could take years.