Last October, Treasury Under Secretary for Domestic Finance Peter R. Fisher took a dramatic step. With barely any warning to the financial markets, Fisher announced that Treasury would no longer issue 30-year bonds--the so-called benchmark securities that had set the prices for the whole bond market. The rationale was that the government was paying too much in interest for the long bond. Besides, big budget surpluses had reduced the need for the 30-year.
How things have changed. The budget deficit is heading for 2% of gross domestic product in fiscal 2003. And the government's bond rates have fallen.
Treasury should reverse its decision--and start issuing new 30-year bonds. Doing so would help government finances, give investors a long-term, risk-free investment option, and allow corporations to more easily price long-term debt.
It wouldn't be the first time the government changed its policy on the long bond. From the 1950s through the middle of the 1970s, 30-year bonds were issued only sporadically. It was not until 1977 that Treasury started using large quantities of 30-year bonds to fund growing deficits.
Today, Treasury would gain by tapping into institutional and foreign investors that like the 30-year. More buyers means lower rates for the government. And a 30-year issue would lock in low rates for the next 30 years, holding down interest payments and reducing future deficits. Even though new 10-year notes cost the Treasury 0.8 percentage points less in interest than 30-year rates today, in a decade, they might have to be refinanced at higher rates. "The U.S. Treasury should be at least as smart as homeowners," notes David A. Wyss, chief economist at Standard & Poor's, a unit of The McGraw-Hill Companies.
Reissuing the 30-year bond would also offer risk-shy investors more choices, helping both institutional investors with a long-term investment horizon and individuals building a retirement portfolio. Correctly done, investing in a 30-year Treasury bond means that "people who are 35 or 40 years old who are saving for their retirement would know exactly what they're going to have in 30 years," says Wharton School economist Jeremy Siegel. While other long-term securities exist, none are truly risk-free.
Bringing back the long bond would also help pension funds, insurers, and corporate borrowers. Pension funds, hit hard by market volatility, could better protect returns by upping their long-term risk-free holdings. Insurers could better match long-term investment to long-term liabilities. And a reissued 30-year would help companies price their own long-term debt, attracting more investment.
It would be tough for Fisher and Treasury to reverse last fall's decision so quickly. To guarantee buyers sufficient liquidity, Treasury would have to commit itself to issuing 30-year bonds for several years, which makes sense only if deficits are going to persist--and that's something the Bush Administration isn't willing to admit yet.
Nevertheless, with one easy step, the feds could help investors and curb future budget deficits. That's too good an opportunity to miss.
Popper writes about financial markets from New York.
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