Page last updated at 17:34 GMT, Wednesday, 5 November 2008

US treasury sells bail-out bonds

The US Treasury
US Treasury says the bonds are needed to manage rising debt levels

The United States government plans to sell bonds worth $55bn (34bn) next week in an effort to finance its bank rescue programme.

In a first $25bn auction on Monday, the Treasury Department will launch a new type of bond, which will reach maturity after three years.

The rest of the amount will be raised later next week through the sale of traditional 10-year and 30-year bonds.

US bonds earn a fixed rate of interest every six months until maturity.

Mounting deficit

By selling bonds and notes the US government will finance the rescue package aimed at buying up Wall Street's bad debts in an effort to ease the credit crunch which is crippling the US economy.

The US Treasury expects to raise up to $550bn by the end of 2008.

A debt security - or more simply an IOU. The bond states when a loan must be repaid and what interest the borrower (issuer) must pay to the holder.

The administration will use some of the money raised through bonds to purchase toxic assets from troubled banks, hoping that they will increase in value once the crisis has passed.

The Treasury argued that launching the new type of bonds was critical in a moment when other sources of revenue were diminishing.

"The deterioration in the economy and financial markets has led to a commensurate decline in individual and corporate tax receipts", it said in a statement.

The US administration expects the total deficit for the 2008 financial year to raise to $455bn, with the forecast for 2009 close to $1 trillion.

US banks have been struggling since the middle of 2007 with rising mortgage defaults and a credit crisis that has virtually frozen inter-bank lending and severely restricted lending to consumers.

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