The government giveth, and taketh.
Taketh was front and center in October 2001, when the Treasury pulled the long bond from active duty. Yesterday, the 30-year Treasury was called back into active duty, with the first issue up for auction on August 8 at 1:00 pm New York time, according to yesterday’s statement from the Treasury. (Step right up, and no pushing—everyone will have a chance to lend money to Uncle Sam.)
The revival of the 30-year evokes a few thoughts, a bit of reflection, and some unanswered questions about whether buying the latest new-old innovation in debt is a wise move at this juncture.
It’s hard not to notice that the government cancelled the 30-year when interest rates were falling—correction: rates were virtually collapsing, courtesy of the folks at the central bank. Recall, dear reader, that the Fed funds rate exited 2000 at 6.5%; a year hence, at the close of 2001, Fed funds were a much-diminished 1.75%, eventually on their way to 1.0% by the middle of 2003.
The Federal Reserve was fighting deflation, real or imagined, back then. One of Treasury’s actions during the war was taking the 30-year bond out of circulation, thereby removing a security that was at the top of the capital-gains-manufacturing chain among Treasury debt issuance at the time.
Fast forward to August 2005 and interest rates are again on the rise, with Fed funds currently at 3.25%, and by many accounts set to rise again by 25 basis points to 3.5% when the Federal Open Market Committee meets again next week, on August 9.
It was only in the spring that the Treasury also decided to stop selling savings bonds with variable rates, which in the current climate translates into rising rates. Now we have a government willing to sell bonds with a fixed rate of three-decade maturities in an era that arguably will witness rising rates for the foreseeable future. All of which moves us to respond with a soberminded “Hmmm…”
But let’s not be cagey. The government’s relaunching the 30-year for reasons that have less to do with serving the public interest and more with financial necessity. The Federal government is an institution that’s broke? Or so one could assume by noting the pile of debt that constitutes the bottom line for the government’s books of late. The Federal budget deficit last year was -$412 billion, according to the Congressional Budget Office. And while CBO advises that the red ink’s projected to recede in coming years, deficits are nonetheless expected through 2011.
But negative cash flow needn’t cramp a government’s style, courtesy of having the usual advantages that come with the job of overseeing the people’s business and holding the purse strings along the way. Thus, a government’s budgetary stumbles can be “solved,” at least in the short term, with the ancient art of printing more money to keep the lights on and the rent paid. One means of printing money is selling bonds, and by favoring longer-term maturities the latest Treasury strategy also serves the useful function of deferring the return of capital further out in time. To which a prospective buyer must spend more time wondering what the rate of inflation will be in coming decades. Care to take a shot at guessing what inflation will be from here on out through, say, February 2036?
None of this will necessarily dampen enthusiasm for 30-year bonds. “There is a lot of demand for long-term assets out there,” David Wyss, chief economist at Standard & Poor’s tells the Chicago Tribune today. “It provides a safe, long-term guaranteed rate of return. The other point is that they are not as enamored with the stock market as they once were.”
Whether there’s demand or not for the “safe” long bond doesn’t change the swirl of financial and economic events that conspired to bring the 30-year back to life. In the same Tribune story Ed Peters, chief investment officer of PanAgora Asset Management in Boston, observes of the long bond’s restoration, and what the act says of the related decision making at the Treasury: “It is mostly a capitulation that deficits are going to be around for a while.”