Go Long!

Please bring back the 30-year bond.

Should look more long term
Should look more long term

Bill Clinton isn’t coming back. Barry Sanders isn’t coming back. Jack Welch isn’t coming back. And the one ‘90s star that should come out of retirement—the 30-year bond—isn’t coming back either.

In October 2001, back when Federal Reserve Chairman Alan Greenspan was worried that massive government surpluses would force the repayment of all government debt (hah!), the U.S. Treasury stopped issuing the 30-year bond. And despite calls for its revival dating back to at least December 2002, when Mike Steinberger suggested bringing it back in this space, the Bush administration remains emphatically opposed to the long bond’s return. “We have no plans to issue 30-year bonds,” Timothy Bitsberger, the assistant treasury secretary for financial markets, told reporters on Wednesday.

A few years ago, phasing out the long bond made a certain amount of sense, since 30-year money is generally the most expensive cash a government can buy. Government must pay a higher interest rate to lock up cash for so many years. On the other hand, the bond smoothes out debt, bringing stability to fiscal planning. A series of developments—some obvious, some not so obvious—make the long bond’s return an excellent idea.

First, the obvious. The deficit is gigantic and won’t shrink much soon. Republican plans to make tax cuts permanent, fix the Alternative Minimum Tax, and modify Social Security require massive additional long-term borrowing in the coming decade. The 30-year bond would perform the same function it did in the prior deficit era: It would reduce volatility.

In the past few years, Treasury shifted to more short-term borrowing, the better to take advantage of the record-low interest rates engineered by Greenspan. But what the maestro giveth he also taketh away. Thanks to the string of interest-rate hikes—on Wednesday the Fed raised the federal funds target to 2.5 percent—short-term borrowing costs have been spiking. The December 2004 Monthly Treasury Statement suggests the interest bill for Fiscal 2005 will be $350 billion, up sharply from $320 billion in Fiscal 2004. For Fiscal 2006, which starts next October, the interest costs will be even higher. The unexpected increases in interest payments will more than outweigh any spending cuts President Bush proposes. The long bond could help insulate the federal balance sheet from such spikes.

Aside from cushioning budgeters from short-term interest-rate risk, there are other reasons to contemplate going long. Investors, companies, and institutions liked the 30-year bond because it paid higher interest rates, and because it allowed them to manage, plan, and invest for the long term. Given the amount of debt Treasury needs to push out the door in coming years, Treasury Secretary John Snow should be falling over himself to give his customers what they like.

There’s another, more obscure reason to consider bringing back the long bond. In January, Secretary of Labor Elaine Chao unveiled the administration’s proposal to strengthen the pension system. And if you read between the lines, as Morgan Stanley economists Richard Berner and Trevor Harris have done, her plan might cause pension managers to buy more long-term bonds and fewer stocks. If Chao’s proposed reforms become law, Berner and Harris conclude that public and private pension funds “could perhaps move $650 billion or more out of equities into fixed-income assets.” In other words, if the administration simultaneously alters the guidelines for managing pensions and starts firing up the 30-year production line, we wouldn’t have to rely entirely on Asian central banks and other foreigners to buy our debt.

Given these reasons for restoring the long bond, why is the Bush administration so opposed? Here are three reasons, in ascending order of probability.

1. The Treasury could simply be acting practically. It still costs more to borrow for 30 years than it does for 10, so reviving the long bond would have the effect of increasing the federal government’s interest costs in the short term, even if it smoothes costs in the long term.

2. It was probably stupid for the Treasury to remove the popular long bond from the shop window in 2001—precisely the time when it was going to have sell a lot of debt. Bringing back the long bond would require the admission of a mistake and thus undermine the administration’s doctrine of Presidential Infallibility.

3. Bush has decided to let his successor figure out how to manage the massive debt he’s building up.