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U.S. kills 30-year bond
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October 31, 2001: 3:07 p.m. ET
The Treasury says the long bond no longer meets its financing needs.
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NEW YORK (CNNmoney) - The U.S. government said Wednesday it no longer will issue 30-year Treasury bonds because they don't meet the government's cash needs and discontinuing them will save U.S. taxpayers money.
"We do not need the 30-year bond to meet the government's current financing needs, nor those that we expect to face in coming years," Peter Fisher, the Treasury Department's Under Secretary for Domestic Finance, said in prepared remarks.
Fisher said the decision would cut borrowing costs, since the government currently pays a higher interest rate for long-term bonds than for short-term bonds.
"They've been moving in this direction for a couple of years, reducing the size and frequency of 30-year auctions," said Bill Hornbarger, bond analyst at A.G. Edwards. "The big surprise is the timing, not the act itself. It happens in front of a couple of years where it looks like we'll be running deficits."
The price of the 30-year bond soared 5-10/32 points to 107-28/32 after the announcement, pushing its yield, which moves inversely to the price, down to 4.87 percent, the lowest in nearly three years, from 5.21 percent late Tuesday.
The announcement also contributed to a boost to U.S. stocks, which extended earlier gains after the news.
By driving up the price of 30-year bonds, the government may also be trying to drive down interest rates on other long-term debt, such as home mortgages. Though short-term rates have plunged after nine interest-rate cuts by the Federal Reserve, long-term bonds have been less pliable.
"It's a good move. It flattens the yield curve and brings long-term rates down," Hornbarger said.
On the other hand, while short-term bond rates are lower, it's also possible that issuing more of them will lower their price and raise their interest rate, somewhat defeating the government's purpose.
"They're going to be borrowing more money at the shorter part of the yield curve," Hornbarger said. "Is that going to push short-term rates higher? It's pretty fair to say that's going to happen."
Other observers pointed out that long-term debt offers more flexibility than short-term bonds, and some said the 30-year bond could make a comeback in the near future.
"If the government's so smart, then why haven't corporations done this a long time ago?" said John Lonski, senior economist and bond market analyst at Moody's Investors Service. "Corporations have actually stepped up 30-year bonds because they think they will minimize borrowing costs over time."
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The Treasury Department said the government's near-term cash needs are unexpectedly large, due to a weak U.S. economy and the aftershocks of the Sept. 11 terrorist attacks, and it could run a budget deficit - not seen since 1997 - in 2002 and 2003.
"But our expectation is that these heightened financing requirements will prove short-lived, as the economy eventually strengthens, and as the pressures for increased federal outlays stemming from the attacks of Sept. 11 subside," Treasury's Fisher said.
An eventual economic and budget recovery would make long-term borrowing unnecessary, and a quicker-than-expected recovery would make it even more unnecessary, Fisher said. If the economy doesn't recover as quickly as expected, then the government will still have saved money, and re-introducing the 30-year bond, if necessary, won't cost anything, Fisher said.
The government began selling 30-year bonds on a regular basis in 1977, issuing more than $600 billion of the bonds to the public. For a time it was the benchmark security against which others were judged, but demand for it has declined, diluting its effectiveness as a financing tool for the government.
The government said Monday that its 2001 budget surplus shrank to $127 billion from $237 billion in 2000, the first time since 1992 that the budget's bottom line hasn't improved. Most economists agree that a likely economic recession, commonly defined as two consecutive quarters of shrinking gross domestic product, and increased government spending in the wake of the Sept. 11 attacks will put the government's budget into the red next year.
The government is stepping up its short-term borrowing to meet needs in the wake of the attacks. Treasury plans to borrow $31 billion in the fourth quarter, a reversal from previous financing plans. Just three months ago, the government planned to pay down $36 billion of the national debt.
Fisher also announced that a government program to buy back a portion of the national debt, which was initiated in March 2000 after a 70-year lull, would be reviewed on a quarter-to-quarter basis. Fisher said the government plans to repurchase about $6.5 billion of debt in operations in November and December. But no buyback operations would be conducted in January 2002. 
-- from staff and wire reports
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