Fed ends 30-year bond sales

Associated Press

WASHINGTON — The government announced Wednesday it was eliminating sales of new 30-year bonds and will instead rely on securities with a shorter maturity to finance the national debt.

Demand for 30-year bonds in circulation soared as investors rushed to snap up a product that offers a government-guaranteed interest rate for such a long period.

The higher demand by investors willing to pay more for the 30-year bonds in circulation pushed their yield down to 4.87 percent, the lowest since October 1998.

The move to eliminate new sales will not change the amount of 30-year bonds already in circulation, although the level will dwindle as the bonds mature or if the government redeems some of the debt before maturity.

The change is part of a process begun during the Clinton administration to readjust the government’s debt offerings to lower the cost of financing the $3.3 trillion of the publicly held debt.

By eliminating the 30-year bond and moving to shorter-term maturities, which generally pay lower interest rates, the government is betting that it can save millions of dollars in borrowing costs.

More than $565 billion of the 30-year bonds have been sold since they were first offered by the government in 1977.

Economist Richard Yamarone of Argus Research Corp. saw both pros and cons in ditching the 30-year bond.

"It would push investors looking to lock in long-term maturities to corporate bonds, which would enhance the ability of companies, which have been hard hit by the economic slump, to invest in future projects — and that’s a good thing," Yamarone said.

On the other hand, it would eliminate an option for investors to park money in a U.S. government security, considered the world’s safest investment, he added.

Mark Zandi, chief economist with Economy.com, didn’t believe the 30-year bond’s demise would have "any significant economic or financial implications." Big institutional investors, he said, were planning for the change, which had been under consideration for some time.

Over the last four years, the government has run budget surpluses, something that it had not accomplished for such a long stretch since the 1930s. That allowed Treasury to buy back some existing debt and rearrange its debt holdings to save on borrowing costs.

Even as the government was eliminating the 30-year bond, Peter Fisher, the Treasury Department’s undersecretary of domestic finance, said the slumping economy and rising spending resulting from the Sept. 11 terror attacks could push the government’s finances back into deficit for the next two budget years.

"Management of the Treasury’s marketable debt needs to anticipate the possibility of a unified budget deficit for this fiscal year, and perhaps the following fiscal year as well," Fisher said. "However, even if this happens, we expect that the federal government will return to surpluses in the coming years."

The government said Monday that after nearly a decade of an improving bottom line, the budget surplus shrank to $127 billion for 2001, about half the previous year’s record $237 billion.