Treasury says may reintroduce 30-yr bond

Treasury says may reintroduce 30-yr bond

Wed May 4, 6:10 PM ET

WASHINGTON (Reuters) - The U.S. Treasury, faced with large budget deficits, said in a surprise move on Wednesday it is considering regular sales of 30-year bonds, which were suspended in 2001.

Markets, which had clamored for the bond's return, were nevertheless caught off guard. Long-term debt prices tumbled on the prospect of an increased supply of longer-dated securities, as Bush administration officials had said until recently they believed U.S. debt issuance was varied enough to satisfy appetite for longer-dated securities.

The 30-year bond slipped almost 2 points to yield 4.59 percent. The 10-year Treasury note lost 5/32, lifting yields to 4.19 percent.

Long-dated British gilts and gilt futures tumbled and June German Bund futures also slipped.

"It's a complete shock," said Sadakichi Robbins, head of global fixed income trading at Bank Julius Baer in New York.

"TIMES HAVE CHANGED"

But the Treasury Department said the timing was appropriate because it would give the government the ability to borrow across a range of maturities to help prepare for an anticipated maturing of short- and medium-term debt.

The share of 10-year or longer securities in the overall debt stock fell to 31 percent last year from 40 percent in 2001, according to a study by economists Nouriel Roubini of New York University and Brad Setser of University College, Oxford.

"We're doing this, really, because times have changed," Treasury Assistant Secretary Timothy Bitsberger told reporters. "Our debt portfolio has changed and we believe now we have the flexibility to issue bonds and maintain liquid issuance in all our other securities."

The Bond Market Association's Treasury borrowing advisory committee told Treasury Secretary John Snow in a report released on Wednesday they believed issuing the longer-dated security would help cushion risks associated with the large number of securities maturing in coming years.

DECISION IN AUGUST

Analysts said the record $412 billion budget deficit in fiscal 2004 and ambitious plans to overhaul the Social Security program must have played a role in the administration's decision.

"In order to fund the deficit more readily and a little more easily, they have to extend the duration of the debt that they issue," said Gemma Wright a market strategist, at Barclays Capital in New York. "You compound that with both pension fund reform and potential Social Security reform, the demand for long duration assets really would rise fairly dramatically."

But Bitsberger denied the deficit was behind the contemplated move.

"This is about more prudent management of our debt liabilities," he said. "This is a decision independent of what our deficits are."

At the same time, he acknowledged the growth in U.S. debt makes the move possible.

"We have more debt outstanding than we did in 2001," he said. "We're not here to rewrite three years of history but we do face that we have seen average maturity of our debt shorten up."

Bitsberger also defended the surprise announcement, saying the Treasury's quarterly refunding is a widely known venue for the government to declare borrowing plans. Treasury will unveil its decision on the 30-year bond at its next refunding announcement on Aug. 3.

Long-term debt prices tumbled after the Treasury said it was considering twice-annual auctions of between $10 billion to $15 billion in a 30-year nominal security, beginning February 2006. Bond prices also slid in Europe, where many countries have or are considering longer-dated debt.

The Bush administration scrapped the long-dated security in late 2001 as a cost-saving move, saying it no longer needed the bond for the government's borrowing needs. The move also came during the fourth consecutive year of budget surpluses.

Many bond dealers were stunned by that decision, which some viewed as a move to lower long-term interest rates, although Treasury officials said that was not the case.

But after years of mounting budget deficits -- fueled by recession, a stock market collapse, the costs of war and tax cuts -- bond dealers began lobbying for reintroduction of the security to support the long end of the market.

Bitsberger acknowledged that Treasury knows some investors, such as pension funds, want longer debt maturities to match the duration of their liabilities, but said that was not directly behind the government's decision.

"We're always in consultation with the marketplace and we're aware that there are some changes going on structurally in the demand for Treasury securities," he said.

"But we would be considering this regardless of pension reform," he added.