By Jonathan Weisman
Washington Post Staff Writer
Thursday, August 4, 2005
The Bush administration resurrected the 30-year Treasury bond yesterday after a four-year absence, giving the government a new tool to finance the expanding federal debt.
Treasury officials said the decision to revive the so-called long bond was driven by technical issues of debt management, not the federal deficit. The short-term deficit picture has brightened in recent months due to an unexpected surge in tax revenue.
But most bond-market analysts said the Treasury Department's move acknowledged the obvious: With the baby-boom generation nearing retirement, the long-term deficit picture remains bleak, and the government needs new ways to borrow.
"It's unfortunate that we're living in a time of significant, multi-hundred-billion-dollar deficits, but I do think Treasury is making the appropriate decision," said Gary Gensler, an undersecretary of the Treasury during the Clinton administration.
The Treasury announced in October 2001 that -- after four years of rising budget surpluses -- it would suspend issuing 30-year bonds. With the Sept. 11, 2001, attacks still fresh, the government's fiscal condition had already turned downward, but government forecasters expected that any dip into deficit would be short-lived. In January 2002, the nonpartisan Congressional Budget Office was still forecasting that the deficit would top out that year at $21 billion and that the 10-year surplus would total $1.6 trillion.
By dropping the long bond, the administration hoped to lower government borrowing costs, since bonds that mature in more than 10 years typically must offer higher interest rates to compensate buyers for the added risk.
Eliminating the 30-year bond would also push buyers to the 10-year Treasury bond. Because 30-year mortgages are tied closely to the 10-year bond, the added demand for that bond would drive down mortgage rates and help the economy.
But forecasted surpluses turned into deficits, which crested last year at $412 billion. For several years, the Bush administration resisted calls from Wall Street to bring back the long bond, in part, analysts say, because doing so would acknowledge long-term debt forecasts and carry political repercussions.
Yesterday, after a three-month study, the Treasury reversed course, announcing the first long-bond auction for February 2006. Next year's sale should raise $20 billion to $30 billion.
"Reintroducing bonds is not about the deficit picture," Timothy S. Bitsberger, assistant Treasury secretary for financial markets, said at a news conference. "This is about portfolio management. . . . It diversifies our borrowing costs. It brings in new investor groups. We just think it's a prudent thing to do."
Edward McKelvey, a budget analyst at Goldman Sachs, agreed -- to a point. The Treasury has been flooded with requests from bond dealers, indicating strong demand for long-term investments backed by the U.S. government.
The administration's decision was like that of a homeowner who is anxious about future interest rates and therefore locks in a 30-year, fixed-rate mortgage, even if the monthly payments become larger in the short run than they would be under five-year, adjustable-rate mortgages, former Treasury undersecretary Gensler said. With interest rates slowly rising, the government will be able to issue 30-year bonds, locking in today's relatively low interest payments for decades. That will give some certainty that the federal deficit will not explode with rising interest rates.
The administration also hopes to attract investors who had avoided shorter-term bonds or had gravitated to longer-term bonds issued by European governments, McKelvey said.
But none of these considerations would be relevant if the government's fiscal circumstances were the same as in 2001, he said.
The White House projected last month that the deficit would reach $333 billion this fiscal year, considerably less than the $427 billion deficit projected in February. The tide of red ink should recede to $170 billion by 2010. But even White House officials acknowledge the picture will deteriorate by the next decade unless Congress reins in spending on entitlements such as Medicare and Social Security.
The Treasury announcement was applauded on Wall Street and was strongly backed in Congress.
But not everyone thinks the move will save money. A July 27 report by the Government Accountability Office estimated that borrowing $30 billion in 30-year bonds rather than 10-year bonds could add $35 billion in interest costs. One bond trader, speaking on condition of anonymity, said the return of the 30-year bond would merely subsidize the bond-trading business.