The US Treasury today decided to re-launch the 30-year Treasury Bond auctions which were halted in October 2001. The first auction is expected in February 2006 of around $10-12 billion worth of the bonds with a second auction in August 2006 for another $10-12 billion.
“The market expects $20-30bn worth of long dated paper to be made available in 2006,” says Henry Hunt, director of fixed income for global government bonds at F&C Asset Management in London. “In terms of pricing, I expect these new offers to trade at a 10-15bp yield discount to the 2031 bond which was the last 30-year paper issued in 2001. This discount means that the US Treasury is able to borrow money in a cost effective way but conversely investors are not getting much extra return on long bonds given the current shape of the US Treasury yield curve.”
Hunt says one reason the long bonds will be popular with investors, despite poor returns, is the current pressure in the US to mark to market Defined Benefit (DB) pension liabilities as s now done in Europe. In mark to market accounting, DB pension liabilities must be shown on a company’s balance sheet.
“This accounting system, introduced 18 months ago, is encouraging European pension trustees to pile into long dated bonds to match assets to liabilities sometimes at the expense of investment performance,” says Hunt. “It is more than coincidence that the 30-yr bond is being reissued as this pension accounting debate is ongoing. The amount outstanding of US long bonds has declined markedly since 2001. We might even venture to say that the US Treasury and Congress are exhibiting some joined-up thinking on this issue.”
Despite the pension demand and looming account reform, Hunt thinks it is also an attractive time for the US to issue long dated paper because 10-year/ 30-year spreads are very narrow. Hunt says: “These narrow spreads mean that it is cheap for the US Treasury to launch a 30-year bond because they will only have to pay around 10 bps more to borrow money for 30 years than they are now paying to borrow money for 10 years.”
The decision to re-launch 30-year paper is also an indicator that the government will not return to a zero budget deficit or surplus as in 2001. Hunt expects the 30-year bonds to be available for at least five years. “The US is running a budget deficit of $300-350bn per year and the 30-year bond is likely to be a regular feature of deficit financing again,” explains Hunt. “In recent years, the Treasury has also been launching 20-year TIPS (Treasury Inflation Protected Securities), in other words – index-linked bonds. The US Treasury may eventually re-launch 30-year TIPS, but there wasn’t anything mentioned about them today.”