May 4 (Bloomberg) -- The U.S. Treasury, under pressure to finance record budget deficits, said it may resume selling 30-year bonds, a security the department eliminated four years ago and vowed not to bring back.

Prices on existing 30-year bonds plummeted after the Treasury said today it would consider bringing back the bond, a benchmark for government debt for more than two decades.

Since President George W. Bush's administration eliminated sales of 30-year bonds in 2001, the deficit swelled to a record $412 billion last year as the U.S. waged two Middle East wars and enacted $1.6 billion in tax cuts. Reviving the security also allows the Treasury to finance the government at long-term interest rates that are around the lowest since mid-2003.

``It was inevitable and somewhat overdue,'' said Gareth Fielding, head of fixed income at Rothschild Private Management Ltd., the world's second-biggest privately owned investment bank.

With the prospect of new supply coming onto the market, investors pushed down the price of the 5 3/8 percent bond due in February 2031 by about 1 1/2 points to 112 as of 1:51 p.m. in New York. The yield rose 9 basis points, or 0.09 percentage point, to 4.58 percent, the biggest increase since March 9.

The Treasury said it will make no decision until Aug. 3. Even so, ``the market will start to price in the fact that they will do it,'' said Raymond Remy, head of fixed income at Daiwa Securities Inc. in New York. ``It's very big news.''

Long-Term Needs

Securities dealers and investors sought the return of the so- called long bond, which became the mainstay of government financing after was introduced in 1977. Demand for existing 30- year bonds has made it the year's best-performing Treasury security, with a return of 6.1 percent, more than five times the turn on Treasuries overall.

Investors bet that 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. The average maturity on government debt fell to 53 months now from 70 months in October 2001, when the government said it was cutting the 30-year bond.

``Our pension funds need this kind of thing, our insurance companies need this kind of thing, our international competitiveness as the premier financial center of the world needs this kind of thing,'' said Neal Soss, chief economist at Credit Suisse First Boston, in an interview.

Treasury Announcement

The Treasury Department announced the decision today in Washington as it said the government plans to sell $51 billion in notes next week to help finance operations in coming months.

``We are doing this because times have changed, and our debt portfolio has changed,'' said Timothy Bitsberger, assistant secretary for financial markets, in a press conference. ``We believe now we have the flexibility to issue 30-year bonds and maintain liquid issuance in all of our other securities.''

``This is a decision independent of what our deficits are,'' Bitsberger said.

If the Treasury does issue new bonds, he said the department will do so on a semi-annual basis beginning in February. The Treasury said it expects to sell $20 billion to $30 billion in bonds if they are revived.

``It's about time,'' said Robert Auwaerter, who oversees about $265 billion in bond investments as head of fixed income at Vanguard Group in Malvern, Pennsylvania. ``You have rates still at historically low levels. Why allow the average weighted maturity of the debt to shorten in that environment?''

Wall Street Potential

The return of the bond may mean additional profit for Wall Street firms seeking to extend a three-year boom in fixed-income trading, which accounts for between 10 percent and 35 percent of their revenue. The bond boosts earnings by allowing longer-term hedging and by providing investments to sell to clients.

``The Treasury is right in reconsidering its earlier decision,'' said Micah Green, chief executive officer of the Bond Market Association, in an interview. ``There's clearly demand for longer-term paper throughout the world. We have always believed that the 30-year Treasury is an important tool.''

Wall Street's biggest winners would be the largest brokerages and investment banks among the Treasury's 22 primary dealers, said E. Craig Coats, co-head of fixed income at Keefe, Bruyette & Wood Inc., a New York investment bank. Such dealers meet with the Treasury and underwrite sales, bidding directly on regularly auctioned U.S. bills and notes.

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.

``The larger primary dealers will be the main beneficiaries of this as they are going to be the main players in the auctions and clients will gravitate toward them,'' Coats said.

Eliminating the Bond

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 in New York. At the end of last year, the security still represented 14 percent of the $3.9 trillion of debt.

Peter Fisher, then the Treasury's undersecretary for domestic finance, announced the end of new sales of the 30-year bond in October 2001, and Treasury Secretary John Snow vowed not to reissue it after he joined the department 16 months later.

Fisher said when he made the decision the 30-year was too costly and demand for it too weak. The government pays higher interest on bonds than on short-term debt to compensate for the longer-term risk. Fisher declined to comment today.

Surpluses Into Deficits

At the time the bond was eliminated, the bipartisan Congressional Budget Office was projecting budget surpluses would grow to $5.6 trillion by 2011. That forecast proved wrong as tax cuts, recession and wars in Afghanistan and Iraq generated deficits that reached a record $412 billion in 2004 and are expected to linger through the next five years. The CBO said in March it anticipates a cumulative budget shortfall of $980 billion between 2006 and 2015.

The Bush administration also is pursuing policies that may require bonds. Its plan to overhaul Social Security by introducing private fixed-income and stock accounts will require an estimated $2 trillion in transition costs. The Labor Department is also proposing new rules for pension funds that may require them to measure the market value of their assets and liabilities against the yields of long-term debt. Bitsberger said the new debate over the bond was unrelated to such policies.

In a letter to Snow released today, a committee of investors who advise the Treasury said ``most members felt that given the decline in the average maturity of debt and the likelihood that it will decline further in coming years, a reintroduction would give the Treasury greater flexibility with a modest associated cost.''

Advisers Seek Return

New sales would have ``little, if any, disruption, and supply would be easily absorbed given current global and local demand dynamics,'' the Borrowing Advisory Committee said. The panel also suggested the Treasury consider ``the full myriad of longer- duration financing alternatives'' rather than just the 30-year bond.

``Treasury needs to be responsive to changing market conditions if it is to remain a competitive issuer in the global markets,'' Ward McCarthy a principal at Stone & McCarthy Research Associates in Princeton, New Jersey, said before today's announcement.

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. will begin auctioning 50-year debt on May 26.

Borrowing Needs

In documents released today, the Treasury said it would consider the effect of bond sales on the issuance of existing securities, costs, borrowing needs and portfolio characteristics. It said it started the debate because ``low cost borrowing over time requires issuance diversification.''

Committee members advised the Treasury to stop selling bonds in 2001, when the federal government was in surplus, then reversed course and told the department in July 2003 that it might come under pressure to resume bond sales as deficits mounted. That was the panel's last joint comment on the bond before today.

Snow told reporters April 20 that while he didn't plan to auction bonds, he could ``never say never.'' Randal Quarles, Bush's choice to become the Treasury's undersecretary of domestic finance, said March 11 the U.S. is ``certainly open to hearing the case for the restatement of the 30-year bond.''

Stanley Collender, managing director of Financial Dynamics Inc., an investment consulting firm in Washington, said Democrats might use the decision to question the administration's faith in narrowing the budget deficit. Bush has vowed to halve the budget imbalance to around 2 percent of the economy by 2009.

``It's an excuse for Democrats to talk about the deficit and the debt and failed fiscal policies,'' Collender said.

To contact the reporter on this story: Kevin Carmichael in Washington kcarmichael@bloomberg.net; Simon Kennedy in Washington skennedy4@bloomberg.net

Last Updated: May 4, 2005 14:00 EDT