Bonds can be fun. And educational, too. No, I haven't lost my mind or joined a bond-trading desk. Rather, I'm looking at Uncle Sam's ever-changing relationship with his longest-term financial commitment: the 30-year Treasury bond. Back in the golden days of 2001, when the government felt its finances were in great shape, the Treasury stunned financial markets by announcing it would stop selling 30-year bonds. The markets reeled, the price of existing 30-year bonds soared, on fears they'd become scarce.
What a difference a few years can make. Earlier this month, the Treasury announced it would start selling 30-year bonds again in February of 2006. This is not only a big deal for investors, but it's a reminder of how fast fortunes can shift, especially when your vision of the future turns out to be totally wrong.
The major reason Uncle Sam abandoned the 30-year bond was the prospect of a huge budget surplus. Uncle expected to be buying back hundreds of billions of dollars of bonds from investors. So why sell new 30-year bonds, which carry the highest interest rate of any Treasury security?
Oops. The prediction of huge surpluses hasn't turned out too well, has it? Instead of record surpluses, we've got record deficits. Rather than buying back bonds by the bushel, the Treasury is selling them by the boatload, depending on large foreign purchases to keep interest rates from going to the moon. In hindsight, we would have done well to sell tons of 30-year bonds when rates were far lower than they are now. But until recently, the Treasury insisted that selling three sets of 10-year bonds 10 years apart was cheaper for taxpayers than selling 30-year bonds.
Most borrowers who go deeper into debt every day, like Uncle Sam does, would want to lock in at least some of their borrowings for as long as possible. That way, they know what their interest cost will be and don't run the risk of being unable to borrow money to roll over debts that are coming due. But the federal government's not a normal borrower. Uncle Sam -- at least in theory -- doesn't have to worry about being able to roll over his existing debt because Treasury securities are free of default risk and someone will always buy them. (I say "at least in theory" because when you're as dependent as we are on foreign lenders, anything can happen.)
In search of perspective, I called Peter Fisher, the former Treasury undersecretary for domestic finance who killed off the 30-year bond in 2001. Fisher, now a managing director at the BlackRock money management firm, insisted that he made the right decision four years ago even though the forecast budget surpluses never appeared. "I always thought the [difference between the 30-year rate and the 10-year rate] was too high," he said, and that selling three sets of 10-year notes is a better deal for taxpayers. Fisher declined to discuss the resumption of 30-year bond sales.
The Treasury, which told me last year that selling 30-year bonds would be a bad idea, now says that the world has changed since 2001 -- or even since 2004. "Canceling it was the right decision, and bringing it back was the right decision," a spokeswoman said.
Unlike corporations, which can borrow money opportunistically, the Treasury announces its plans long in advance. For instance, it said in early November that it will sell 30-year bonds next February. As this article went to press, the interest differential between 10-year Treasury notes and the longest-maturity T-bond was two-tenths of a percentage point. That would make selling 30-year securities attractive, compared with selling three sets of 10-year securities. What will the difference be when February's bond sale rolls around? Who can say?
And there's a lot of volatility in the spread between the 10- and 30-year rates. On June 13, 2003, the 30-year rate was a whopping 1.06 points higher than the 10-year rate. I'm picking that date because that's when Federal Reserve chairman-designate Ben S. Bernanke, then a member of the Fed board of governors, tried to drive down long-term rates by threatening to have the Fed print money to buy up Treasury bonds. That would have been a terrible time to sell 30-year securities rather than 10-year ones -- but the government would have had no choice but to issue them had it scheduled a sale. Two years later, the difference was just 28 hundredths of a point.
The bottom line: Given how much we've got to borrow to cover our enormous budget deficits, we need all the bond buyers we can find. To me, the question isn't whether we should be selling 30-year bonds. That was long overdue. My question is whether we'll see 50- or 100-year Treasury bonds appear one of these days. Stay tuned.
Sloan is Newsweek's Wall Street editor. His e-mail is firstname.lastname@example.org.