Reviving 30-year bond, U.S. signals more deficits likely

Locking in lower rates expected to save billions

August 04, 2005|By Joel Havemann and Tom Petruno | Joel Havemann and Tom Petruno,LOS ANGELES TIMES

WASHINGTON - Four years ago, the federal government was running such big budget surpluses that it quit selling 30-year Treasury bonds, its longest-term securities. It was seen as a step toward the day when Uncle Sam would be totally debt-free.

Yesterday, the Treasury Department announced that it would resume selling those bonds in February. It was an unmistakable sign that the era of red ink has returned, that the U.S. government has accepted that it will run budget deficits for the foreseeable future, and that it needs every available tool to finance its debt.

The Treasury announcement met with almost universal approval.

Treasury officials said the move would diversify their arsenal of money-raising instruments. Bond dealers welcomed a new instrument they could sell. For pension funds and other large potential buyers, and for baby boomers on the brink of retirement, the 30-year-bond will offer a way to lock in a guaranteed income stream over a long period.

Although the Treasury carefully did not say so, 30-year bonds could also save the government billions of dollars by locking in today's low interest rates through 2036.

"Implicitly, there is a potential that interest rates will move higher," said Jack Malvey, chief global fixed-income strategist for Lehman Brothers.

The longest Treasury securities now on the market, which come due in 2031, carry historically low rates of about 4.6 percent. That is scarcely more than the 4.4 percent available on 10-year Treasuries, or even the 4 percent on securities that come due in two years.

Malvey played down the economic significance of the Treasury's announcement.

"It's an interesting small part of the technical working of federal finances," he said, "But it won't make any difference for unemployment or inflation or economic growth or the price of crude oil."

Timothy S. Bitsberger, assistant Treasury secretary for financial markets, said the department expected to sell between $20 billion and $30 billion a year in 30-year bonds in semiannual sales in February and August.

Malvey said that if the sale next February were for $12 billion, that would expand the share of 25-year-plus securities available in the marketplace from 3.07 percent of all fixed-income securities to 3.21 percent - hardly a striking increase.

The Bond Market Association, which has been working to reinstate the 30-year bond ever since it was discontinued in 2001, applauded the move as good news for the government and for investors.

Resumption of the so-called long bond "is likely to provide Treasury with greater flexibility in managing its debt portfolio and make it better able to lower its borrowing costs in the long term, thus saving money for U.S. taxpayers," Micah Green, president of the association, said in a statement. "Investors are also showing strong interest in a 30-year bond."

Green did not mention the additional business the bond dealers, who are the members of his association, hope to get from the new security.

"The market is happy to have more securities to trade," said David MacEwen, chief investment officer for fixed income at American Century Investments in Mountain View, Calif.

Pension funds in particular are expected to have a strong appetite for the bonds, because they allow the funds to lock in a set return for three decades. That can help them better plan for their long-term commitments to retirees.

Because U.S. pension funds and other domestic investors are expected to be primary buyers of 30-year bonds, analysts say the government will gain some protection against the possibility that foreign investors - who now own about 53 percent of marketable Treasury securities - might lose interest in taking on more, thus driving up U.S. interest rates and driving down the dollar's value.

"If there were a dramatic shift in foreigners' appetite [for U.S. bonds], this is one outlet the government has created for itself," said Steve Rodosky, head of the Treasury desk at Newport Beach, Calif.-based Pacific Investment Management Co., one of the world's largest bond investment firms.

The United States enjoyed a record budget surplus of $236.9 billion in 2000 and ran another surplus in 2001. But the deficit returned in 2002, and swelled to a record $412.5 billion last year. The national debt is now $7.8 trillion.

Havemann reported from Washington and Petruno from Los Angeles. The Los Angeles Times is a Tribune Publishing newspaper.

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