US 30-Year Bond is Back

The US Treasury announced earlier this week that it would begin to sell 30-year bonds again starting in the first part of 2006, and to offer $44 billion of 30-year bonds in next week’s refunding. The “long bond” had been a major benchmark in the debt markets for years, and then, thanks to budget surpluses, the US government quit selling them in October 2001. The return of the long bond has cheered some on Wall Street, but to economic patriots, this is unadulterated bad news.

A sudden increase in the supply of debt at the far end of the yield curve should, theoretically, affect interest rates, but in practice, it won’t. The volume of corporate bonds flooding the financial markets are vastly larger – companies are locking in low interest rates now in the expectation that current rates won’t last and that borrowing will become more expensive in the future. So while the supply of long-term debt will rise, it won’t rise enough to alter interest rates. Economic growth rates and trade deficits are much more likely to affect rates.

The real beneficiary here is the US government. Locking in low interest rates for the next 30-years on the debt makes it cheaper to borrow the money to fund government operations in the first place. The anti-tax crowd that compose part of the Bush contributors list should be able to talk their president into another round of tax cuts and use these savings as their excuse. However, these are the only folks made happy by this news.

The sale of 30-year bonds now to lock in rates suggests two things. First, as the entire world knows, the US government is living beyond its means. Second, by locking in low rates now, the government is suggesting that it will continue to do so for a great many more years. In other words, fiscal conservatism is dead in Washington.

Unlike corporations, Washington is not borrowing to invest; it is borrowing to spend. There will be no financial return on the money currently being flushed down the Baghdad biffy, no financial return on subsidies to oil companies and agribusiness, and no financial return on the boondoggles that the Energy and Transportation Bills are. Start-up companies talk about their “burn rate,” how quickly they go through cash, and some speak of the “Valley of Death” where the burn rate doesn’t give them time to realize revenues from their operations. The US government isn’t a business, but if it were, the financial managers should be fired for walking toward that valley so gladly.


© Copyright 2005 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.
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