The 30-year U.S. Treasury bond is coming back. To many, that is good news. But, in a way, it is also bad news. It is good because it will...
WASHINGTON — The 30-year U.S. Treasury bond is coming back.
To many, that is good news. But, in a way, it is also bad news.
It is good because it will help the U.S. government finance its huge deficit and debt at longer terms, even as the baby boom prepares to retire. It is good because it would offer investors, such as big pension funds and insurance companies in particular, a safe, longer-run option in which to park their large portfolios.
It is bad because it means that there is much a bigger deficit, and debt, to finance even as the baby boom prepares to retire.
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It signals what most Americans know already. The nation’s financial condition has worsened dramatically in a few years, and there is a need for a longer-term debt security that the government could issue to bring more certainty to its debt management.
When the U.S. Treasury Department announced yesterday it will resume offering the 30-year “long” bond again next year, it wasn’t much of a surprise to the financial markets. The government had signaled this policy change some time ago.
The 30-year bond at one time was considered an important, closely watched benchmark for gauging inflation expectations in financial markets. When interest rates on these tradable bonds went up, it meant to policy-makers in Washington, D.C., that inflation was on the rise. With the re-issuance next year, the impact on long-term interest rates isn’t expected to be dramatic, if there is any impact at all, economists said.
Analysts said it is a good time for the Treasury to resume the long bond since long-term interest rates are now so low — with the 30-year bond fetching about 4.5 percent in financial markets.
Other countries issue the long bond to attract funds, and recently France offered a 50-year bond. The Treasury Department said it would not follow the French in issuing debt for such a long period, even if the French bond proved popular with investors.
The government’s 20-year inflation-indexed bonds now have the longest maturity.
David Wyss, chief economist at Standard & Poor’s, a major credit-rating company, said that pension funds would particularly find the 30-year bond useful as an investment.
“There is a lot of demand for long-term assets out there,” he said. “It provides a safe, long-term guaranteed rate of return. The other point is that they are not as enamored with the stock market as they once were.”
The return to the 30-year bond reflects the fact that taxes have been slashed even as the government has increased its spending for the war in Iraq, homeland security, health care and many other domestic needs.
“It is mostly a capitulation that deficits are going to be around for a while,” said Ed Peters, chief investment officer of PanAgora Asset Management, a Boston-based firm that manages assets for pension funds, endowments, pension funds and financial-service companies around the world.
The Treasury, which borrows money to finance the annual deficit and the government’s mounting debt, said that from $20 billion to $30 billion in 30-year bonds would be offered each year.
The government stopped selling the long bond in October 2001, back when it was a different world, financially speaking. There were few worries about the deficit and the market for 30-year bonds appeared to have dried up.
But that turned out to be the last year the government posted a surplus. Since then, that surplus has turned to deficit, so that now, the government forecasts nothing but year after year of red ink.
In fact, the picture for the federal debt and the deficit is projected to turn decidedly worse in the next decade as the baby boom puts greater demands on the U.S. Treasury when they begin to retire.
“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,” said Randal Quarles, the Treasury’s undersecretary for domestic finance.
One question is whether foreign investors will find the 30-year bond attractive. In recent years a newly wealthy China has increasingly invested in U.S. securities, but there is no evidence whether Beijing will become a buyer. Another interested player might be Japan, which has bought the bonds in the past.
Brian Wesbury, economist at Claymore Securities in Chicago, said the decision is “good news for the taxpayer” because it will help bring down the government’s borrowing costs.
“If you have to finance government, you ought to do it at the lowest rate possible,” he said.
Bill Hummer, chief economist at Wayne Hummer Investments, added, “It should never have been discontinued.” Hummer said the bond would fill a void in long-term security offerings and bring about better management of the federal debt.
If the government has issued too many short-term bonds, it has to roll over the debt more frequently, exposing it to greater market risk or what financial analysts call “rollover risk.”
Hummer said the U.S. needed to join other countries that offer long-dated government bonds to stay competitive. He predicted that long-term interest rates might go up a little as a result of the change.
“It is mostly a capitulation that deficits are going to be around for a while.”
Chief investment officer
of PanAgora Asset Management