US - The US Treasury has decided to re-launch 30-year Treasury Bond auctions which were halted in October 2001, following demands from the pension industry.
The US Treasury Borrowing Advisory Committee is now confident that it can tap into demand from long-term DB plans and other long-term investment pools.
Despite poor returns, experts say the bond will be popular with investors, because of the current pressure from the White House budget proposal to begin mark to market accounting on Defined Benefit (DB) pension liabilities as it is currently done in Europe.
In mark to market accounting, DB pension liabilities must be shown on a company's balance sheet. This accounting system, introduced 18 months ago, is encouraging European pension trustees to pile into long dated bonds to match assets to liabilities sometimes at the expense of investment performance.
Henry Hunt, director of fixed income for global government bonds at F&C Asset Management, said: “The market expects US20-30bn worth of long dated paper to be made available in 2006.
“The first auction is expected in February 2006 of around $10-12bn worth of the bonds with a second auction in August 2006 for another $10-12bn worth.
“In terms of pricing, I expect these new offers to trade at a 10-15bp yield discount to the 2031 bond which was the last 30-year paper issued in 2001.
“This discount means that the US Treasury is able to borrow money in a cost effective way but conversely investors are not getting much extra return on long bonds given the current shape of the US Treasury yield curve.”
Hunt added: “It is more than coincidence that the 30-yr bond is being reissued as this pension accounting debate is ongoing. The amount outstanding of US long bonds has declined markedly since 2001.
“We might even venture to say that the US Treasury and Congress are exhibiting some joined-up thinking on this issue.”
Despite the pension demand and looming account reform, Hunt thinks it is also an attractive time for the US to issue long dated paper because 10-year/ 30-year spreads are very narrow.
Hunt added: “These narrow spreads mean that it is cheap for the US Treasury to launch a 30-year bond because they will only have to pay around 10 bps more to borrow money for 30 years than they are now paying to borrow money for 10 years.”
The decision to re-launch 30-year paper is also an indicator that the government will not return to a zero budget deficit or surplus as in 2001. Industry experts expect the 30-year bonds to be available for at least five years.
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