The Bonds That Bind Us

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 under secretary 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.