Wednesday, May 04, 2005

U.S. Treasury Says It May Reintroduce 30-Year Bond

The New York Times
May 4, 2005
U.S. Treasury Says It May Reintroduce 30-Year Bond

In a surprise announcement that roiled the bond market and cost some traders and investors millions of dollars in losses, the Treasury Department announced today that it was considering whether to resume selling the 30-year bond, the one-time benchmark of the world's largest bond market.

The resurrection of the 30-year bond, which the Treasury stopped issuing in October 2001, comes as the Treasury confronts the enormous borrowing needs to cover the federal budget deficit. Treasury officials said today that the bond would help them be more flexible in their borrowing, which would lower costs for taxpayers.

But regular issuance of 30-year bonds also could have enormous implications for Wall Street, pension funds and millions of aging Americans.

For Wall Street, the 30-year bond is a long-term security that is more volatile than shorter-term securities. And Wall Street traders love volatility because it is an opportunity to make money.

For pensions, a new 30-year bond could become a benchmark that could lessen the underfunding of pensions. It also could help provide a vehicle for pension funds to match their costs to the income from a long-term security, making pension management less risky.

As for the aging baby boomers, a 30-year bond would give them a safe, long-term security to put their money in that is better matched to the population's lengthening life expectancy.

"Very long time horizons are implicit in things like pensions," said Neal M. Soss, chief economist at CSFB. "Very long time horizons are implicit in things like I.R.A.'s and 401(k)'s. And very long time horizons are implicit in the longer lives Americans are living."

The Treasury is expected to make its final decision in August. If the Treasury decides to re-issue 30-year bonds, the sales would begin in February 2006, with a second sale later in the year. The total of bonds issued would be $20 billion to $30 billion a year.

The announcement caught the bond market unprepared and the price of the old 30-year bond plunged as much as 2 1/2 points as its yield, which moves in the opposite direction shot as high as 4.67 percent, from around 4.5 percent, in just minutes.

Because a lot of traders have been betting that longer-term interest rates would rise more slowly than short-term term rates, the sudden surge in the 30-year bond's yield meant that there were a lot of losses, traders said.

But despite the cost of the surprise announcement, Wall Street was still generally happy with the Treasury's decision. "It was a surprise, but it was something the market had been calling for, for a long time," said Lundy Wright, who runs the Treasury desk at Nomura Securities International. "So in the long term it was not an unwanted development."