Commentary: Who Needs the Long Bond?
By Rich Miller
When Treasury Under Secretary Peter R. Fisher abruptly announced in the fall of 2001 that the government would no longer issue 30-year bonds, he argued that in the new era of budget surpluses the so-called "long bond" was a relic of the past. So, with the federal deficit now projected to hit a record $455 billion this year -- and rise even higher in 2004 -- does that mean it's time to bring back the 30?
Probably not. Plainly put, it costs the Treasury more money in interest expense to issue 30-year bonds than it does to borrow via shorter-term notes. Judging by today's rates, Uncle Sam would have to pay roughly 5% interest on 30-year bonds vs. just 4% for 10-year notes. And with the deficit back, the last thing the Treasury wants to do is further add to its borrowing costs. "Issuance of the 30-year is not consistent with our objective of the lowest-cost financing," Fisher says.
Nevertheless, there's a growing chorus on Wall Street and Capitol Hill calling for the return of the bond. The bond's faithful got a boost on July 16 when Federal Reserve Chairman Alan Greenspan told lawmakers that "times have changed" and that the decision to scrap the 30-year needed to be reconsidered. With Fisher, the architect of the 30's demise, leaving the Treasury in October, they hope that his successor will repeal his move.
So what's the case for bringing back the long bond? Proponents claim that over time it would lower the government's borrowing costs. After all, the Treasury, like homeowners, could refinance part of its debt at rates near 45-year lows. And by shifting more borrowing from 10-year notes to 30s, Treasury could defuse some of the upward pressure on mortgage rates, which are priced off of 10-year Treasuries.
The reintroduction of the 30-year bond also would help Corporate America by allowing companies to use it as a benchmark to issue long-term debt at potentially lower rates. Moreover, pension funds and insurers would use the 30-year bond to better match up their assets with liabilities. "The reissuance of 30-year bonds would be positive in a whole host of ways for financial markets," says Senator Jon S. Corzine (D-N.J.).
Treasury officials aren't convinced and insist that Fisher's departure won't change the department's stance. Yes, it would be great if the Treasury could lock in today's low rates through a one-time issue of 30-year bonds. But that's not possible. The Treasury isn't your ordinary borrower. As the biggest issuer of debt in the U.S., it could wreak havoc in the markets if it tried to time its borrowing to get the lowest rates.
That means that the Treasury can't just issue one or two slugs of 30-year bonds to lock in today's low rates and then withdraw from the long end of the market. If it wants to bring back the 30, it has to commit to issuing a steady stream of them for the foreseeable future, even if rates rise. That means it would keep paying higher rates on 30s than it would on 10s in any given year.
What's more, it's doubtful that the Treasury could ease much upward pressure on mortgage rates by shifting to 30-year bonds. Even proponents admit the impact will be minimal and would be swamped by other factors, such as the inflation outlook.
As for the proponents' belief that reintroducing the long bond would benefit corporate borrowers, they may be right -- but why should the government subsidize that? If pension funds and insurers are so eager to buy long bonds to better match their assets with their long-term liabilities, why aren't they snapping up the old ones that are still trading?
There's no doubt that the drumbeat in favor of bringing back the long bond is getting louder. But so far, the arguments have produced more noise than substance.
Miller covers economic policy from Washington.