Return of the

(August 4, 2005) The U.S. Treasury Department has opted to re-introduce the 30-year bond, starting in 2006. The last 30-year U.S. bond was launched in 2001, the same year the Clinton administration balanced the budget.

Those balanced budgets are long gone though, as the U.S. funds military operation in both Iraq and Afghanistan, while cutting taxes at home. The re-introduction of the 30-year Treasury bond will provide Washington with access to additional capital at a favourable interest rate.

The U.S. government is taking advantage of the small differential between short and long-term yields, which makes the cost of long-term borrowing very similar to short-term debt.

“It’s been bandied about for a little while in the marketplace, so it didn’t come as a huge surprise,” says Eric Takaha, senior vice president, director of high yield bonds, Franklin Advisers. “If you look at the marketplace on the day of the announcement, you actually saw a bit of a rally in the longer end of the curve, which may be indicative of the market pricing that in already.”

The launch of the new 30-year bonds is slated for mid-February 2006 and Takaha says the market is anticipating a smaller offering than those of the past. He says there was strong demand from institutional investors for the new 30-year bond, which allows them to better match investment returns to their long term liabilities.

“From an investment standpoint, it’s not a huge difference,” he says. “We still evaluate longer-dated securities relative to shorter-dated Treasury bonds to see if there’s good value there. On the margin, you get increased supply and that will be a larger portion of the market going forward, but I don’t think it changes the way we look at the attractiveness of long-term securities.”

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com