Aug. 3 (Bloomberg) -- The U.S. Treasury Department revived the 30-year bond today after a four-year hiatus and said it will sell $44 billion in other notes this quarter to fund the government, the smallest sale in more than two years.

The department plans to issue 30-year securities in the first quarter of 2006 and sell them twice a year. The Treasury is asking the market for advice on the exact date of issue and other elements of its auction calendar.

``The decision is based on our commitment to prudent debt management, our desire to maintain a cost effective and diversified debt portfolio,'' Treasury Secretary John Snow told reporters during a trip to Brazil. ``We plan semi-annual auctions of relatively modest size, beginning in February.''

The government is reviving the 30-year bond to broaden its debt offerings, attract a wider group of investors and hold down borrowing costs. Its return comes as the Treasury cuts its funding need for this quarter by $7 billion from the prior quarter. The government is issuing less debt because the budget deficit is narrowing for the first time in George W. Bush's presidency.

The department already reduced the size of its auction of two-year notes by a combined $4 billion in May and June, the biggest two-month decline in a quarter century.

Schedule

Ward McCarthy, principal at Stone & McCarthy Research in Skillman, New Jersey, said there are ``many possible combinations and permutations'' for setting an exact schedule for auctioning the 30-year bonds. ``It is complicated by the fact that the budget picture has created the possibility that they may have to make changes to the coupon calendar to adjust for an improved budget.''

The yield on the 4 1/8 percent 10-year note maturing in May 2015 rose 1/4 and the yield fell 3 basis points, or 0.03 percentage point, to 4.30 percent as of 10:58 a.m. in New York, according to bond broker Cantor Fitzgerald LP. The yield is up from 3.92 percent at the end of June. The price of the 5 3/8 percent 30-year bond maturing in February 2031 rose 9/16 and the yield fell 4 basis points to 4.51 percent.

For its regular quarterly refunding, the Treasury will auction $18 billion in three-year notes Aug. 8, $13 billion in five-year securities Aug. 10 and $13 billion in 10-year debt Aug. 11. The total issuance is less than the $46 billion median forecast of 11 economists surveyed by Bloomberg News and will be the smallest since January through March 2003.

No Surprises

``Unlike three months ago, there were no major surprises in today's refunding announcement,'' said Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Connecticut.

Citing increased revenue from an expanding economy, the Bush administration earlier this month predicted it would cut the budget deficit to $333 billion in the fiscal year ending Sept. 30 from a record $412 billion the previous year. The forecast puts the government on a path to achieve Bush's goal of cutting the budget deficit in half, or to 2 percent of gross domestic product, by 2009.

``The deficit isn't falling it's plunging,'' Timothy Bitsberger, assistant secretary for financial markets, said at a press conference in Washington. That means investors ``should expect some volatility'' in the size of the Treasury's debt offerings as the government adjusts to changes in tax receipts.

Stabilizing Average Maturity

The reintroduction of the 30-year bond will ``stabilize'' the average maturity of government debt without reducing it any further, he said. The average maturity on U.S. debt has fallen to 53 months from 70 months in October 2001.

Bitsberger said the government is not considering eliminating any debt maturities currently offered and does not plan to offer 50-year bonds. He said the Treasury will probably reach its statutory debt limit in the first quarter of next year, requiring congressional authorization for more borrowing. Bitsberger said the department doesn't know how much more borrowing authority it will need because of the evolving budget situation.

The government is reissuing the 30-year bond at a time when long-term yields are lower than a year earlier and the gap between 30-year Treasuries and other maturities is shrinking. The difference in yields between 10-year and 30-year bonds shrunk to 19 basis points this week, the lowest since 2000. Selling long bonds will allow the government to lock in borrowing costs that are near the record low of 4.17 percent in June 2003. The yield on the 30-year bond was 4.54 percent yesterday.

Industry Request

The Bond Market Association, an industry group, urged the Treasury in a letter last month to bring back the long bond. It said 98 percent of investment firms it surveyed said they would be more likely to trade in long-term debt if the 30-year security was reintroduced.

``By issuing 30-years, the Treasury gets to borrow at the lowest possible cost, and their customers get what they want,'' said Stanley. ``A pension fund with a 30-year-old worker has locked in a 30-year liability. To match that, they may very well want to lock in an asset with a very long duration.''

Demand for long-term Treasuries is rising as aging investors seek to move from equities into safer investments and pension funds and insurance companies look for assets that better match their liabilities.

``The asset allocation preferences of the baby boom group will play an increasing role in financial market developments,'' the association said in the letter. ``During the next few years we could see considerable portfolio diversification out of equities and into fixed income.''

Previous Budget Surpluses

Treasury ended sales of the 30-year bond on Oct. 31, 2001, with then-undersecretary for domestic finance Peter Fisher saying they were too costly and that demand was too weak. Fisher, now a managing director at BlackRock Inc., a New York-based fund manager, declined to comment.

At the time, the government had recorded four straight annual budget surpluses and forecasters and private economists were predicting more surpluses this decade. An economic downturn, combined with increased spending on two wars and $1.6 trillion in tax cuts, turned those surpluses into deficits.

Investors this year began speculating the department would need longer-term securities to pay for the deficits, rework Social Security and pension programs, and compete with longer- term debt issued this year in Europe.

France sold 6 billion euros ($8 billion) of 50-year bonds in February, double the amount the government said it expected. Spain issued 32-year debt in January and the Netherlands sold 30- year bonds last month. The U.K. began auctioning 50-year debt on May 26.

Bond trading accounted for 35 percent of combined revenue in each of the past two years at the top five independent U.S. securities firms, according to data compiled by Bloomberg. The five are Morgan Stanley, Goldman Sachs Group Inc., Lehman Brothers, Bear Stearns Cos. and Merrill Lynch & Co.

Details

The U.S. sold more than $600 billion of 30-year bonds after 1977, when it became the government's main tool for raising long- term funds. By 2001, it accounted for 21 percent of the $2.9 trillion in Treasuries outstanding, according to the Bond Market Association. At the end of last year, the security still represented 14 percent of the $3.9 trillion of marketable debt at that time.

To contact the reporter on this story: Andrew Ward in Washington awardl@bloomberg.net; Alison Fitzgerald in Washington alisonfitzgerald@bloomberg.net

Last Updated: August 3, 2005 11:06 EDT