US in Debt Forever

The Treasury Department said the first auction of the 30-year bond will take place in the first quarter of 2006, with auctions held twice a year.

"We believe this is a prudent debt management step that will continue to allow Treasury to finance the government's borrowing needs at the lowest cost over time," said Randal Quarles, the department's undersecretary for domestic finance.

Treasury Secretary John Snow said the move should help stabilize the average maturity of U.S. Treasury debt. "The decision is based on our commitment to prudent debt management and our desire to maintain a cost effective and diversified portfolio," Mr. Snow told reporters traveling with him on a visit to Brazil.

Wall Street has been lobbying for a return of the 30-year bond. When Mr. Snow visited a Chicago exchange during last fall's presidential campaign, traders greeted him with chants of "30, 30, 30." But the Treasury Department refused to publicly consider the matter until early May, when, in a sudden reversal, it said it would consider a resurrection.

The Treasury stopped selling new 30-year bonds in 2001, at a time when the government expected to be running budget surpluses and reducing the national debt. As a result, the market no longer has any true 30-year government securities: The "longest" Treasury bond -- the last one sold in 2001 -- now matures in 26 years.

The reissuance of the 30-year Treasury will restore a familiar benchmark -- a sort of anchor that defines the safest possible long-term rate of return investors can earn. That rate helps the market figure out how much interest to charge other, riskier borrowers, from companies to foreign governments. With the benchmark back in place, professional investors and traders will be able to make bets that mightn't otherwise have been possible. In a recent survey conducted by the Bond Market Association, a trade group, almost all of the 91 investors polled said they would be more likely to trade long-term securities if the Treasury brought back the 30-year bond.

Treasury's reinstatement of the 30-year bond is also due in part to the increased rollover risk it faces as the average maturity of outstanding marketable Treasury debt has fallen to close to 55 months from around 70 months five years ago. In recent years, Treasury has relied on short-term debt issuance to finance record budget deficits, but that debt has to be refinanced sooner than longer-term debt, exposing the government to potentially higher borrowing costs.

"Resuming issuance of the 30-year bond would reduce the government's interest rate rollover risk," the Bond Market Association recently wrote to the Treasury. By selling 30-year debt, Treasury "is able to lock in a particular rate for a longer period of time," the BMA wrote, urging Treasury to begin selling 30-year bonds again.

Federal Reserve policy makers last month said 30-year-bond sales would "presumably slow or arrest" the downtrend in the average maturity of marketable Treasury debt.

Treasury said its decision means that it "must re-examine the current security offering calendar" to accommodate 30-year-bond issuance. "We seek advice from market participants on how to fit the 30-year bond into the auction calendar and welcome any comments and suggestions," said U.S. Assistant Treasury Secretary for Financial Markets Timothy Bitsberger. "We will provide a calendar decision at the November 2005 refunding."

Treasury also reaffirmed earlier guidance that it plans to sell $20 billion to $30 billion in 30-year bonds each year beginning in 2006.

In recent months Treasury has sold less debt across the board as surging tax receipts lowered its borrowing needs and as it has started to make room for the 30-year bond in its issuance calendar. Treasury's $44 billion refunding package this quarter is down from the $51 billion it has offered in each of the four previous quarters.

Treasury will soon face greater borrowing needs as three-year notes start to mature next year and five-year notes in 2008. Another factor that is expected to boost borrowing needs early next year is the cost of the Medicare prescription-drug benefit. Some bond dealers look for a deficit of between $350 billion to $400 billion next year, which would be up from the $324 billion deficit bond dealers project this year.