The Treasury Department's decision to reintroduce the 30-year bond starting next year will give consumers a safe investment option with...
NEW YORK — The Treasury Department’s decision to reintroduce the 30-year bond starting next year will give consumers a safe investment option with a long-term maturity and could help boost rates on other securities.
Here are some questions and answers about the possible financial impact:
Q: Why is the Treasury doing this now?
A: The government borrows money from the public to fund the federal budget deficit by selling bills, notes and bonds.
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Lyle Gramley, a former governor of the Federal Reserve, said that by bringing back the 30-year bond, the government will be able to lock in lower interest rates for a longer period of time.
“It will reduce the government’s cost of borrowing, if you assume that interest rates are going to go higher in the future,” said Gramley, senior economic adviser to the Stanford Washington Research Group in Washington, D.C. “So long term, it will save the Treasury money.”
Q: Who is likely to buy 30-year Treasury bonds?
A: Jill Hershey, vice president for legislative affairs with the Bond Market Association trade group in Washington, D.C., thinks consumers and institutional investors — pension funds, insurance companies, asset-management firms — will be interested because U.S. government securities are known for “safety and soundness.”
Institutional investors have lobbied for the Treasury to bring back the 30-year bond because it will help them match liabilities and assets, she said. For example, a pension fund may want to invest in long-term bonds to ensure that there will be enough money 30 years later to pay out to retiring workers.
Consumers might be interested, too.
“A 30-year-old worker might find it an attractive investment option,” Hershey said. “But for someone near retirement, it probably wouldn’t make as much sense.”
Hershey said consumers can buy the long bonds in several ways. The Treasury’s sales Web site, www.treasurydirect.gov, lets consumers participate in auctions, or they can buy bonds through banks and brokerages. Consumers also can invest in bond mutual funds, which hold a variety of securities.
Q: So they’re going to be a good deal for consumers?
A: The answer depends largely on how much consumers can earn on short- and medium-term investments compared to what they can earn tying their money up for 30 years, said Greg McBride, a financial analyst with Bankrate.com in North Palm Beach, Fla.
If the 30-year bonds were on sale today, he said, “the difference between short-term and long-term interest rates is not enough to compensate the investor for tying up money for so many years.”
Right now, for example, a consumer can earn more than 4 percent on some one-year bank certificates of deposit compared with a 4.3 percent yield on the 10-year Treasury note.
“There’s little incentive to go long,” McBride said.
When the 30-year bonds finally come to market next year, consumer interest “will depend very much on whether long rates are substantially above short rates,” he said.
Q: Are there any indirect consequences for consumers?
A: It turns out there may be.
Paul Vogel, president and chief executive of Enterprise Trust in St. Louis, said most consumers aren’t interested in investing for 30 years.
But they might be interested in shorter maturities, and the reintroduction of the 30-year bond may help boost the rates on those shorter securities. Here’s his thinking:
When the government got rid of the 30-year bond, investors who wanted long maturities started bidding heavily for the 10-year bond. As demand rose, yields fell.
“Once the 30-year comes back out, a lot of people who had been bidding on 10-year paper will start bidding on the 30-year as well,” he said. “So demand on the 10-year should go down and yields should rise.”
The same should be true for government securities that mature in 5 years, he added.
“I believe you’re going to see more favorable pricing on 10-year, and therefore the 5-year securities,” Vogel said. “A lot of consumers will benefit from that.”