30-Year Bond Back, Auction Goes Well In 1st Sale Since ’01
Long Yield Ends Day At 4.5%
Gov’t is bleeding red ink, while pensions, insurers demand long-term assets
BY LAURA MANDARO INVESTOR'S BUSINESS DAILY
The Treasury Department auctioned off 30-year bonds for the first time in five years, as the government sought to finance its budget gap and meet pension fund demand for long-term debt.
Investors snapped up the $14 billion issue, which sold at a 4.53% yield, ending at 4.5%. Bids outnumbered bonds sold by 2.05 to 1.
This strong demand lifted prices and pushed down yields below almost every other Treasury bond. The new issue’s yield undercuts the 4.65% rate on the old 30-year bond, which matures in 25 years, as well as the 10-year, 2-year and 3-month yields. It matched the fed funds target rate.
Longer-dated bonds typically carry higher yields because they require investors to take more interest-rate risk.
When the curve inverts and investors are willing to lock in cash at a lower rate, that suggests a recession could be ahead. But perhaps not this time, say many economists, including former Federal Reserve chief Alan Greenspan.
Pension funds and insurers crave long-term government debt and are willing to accept a low yield. That was clear in the auction.
“Demand was solid,” said Steve Rodosky, senior vice president in portfolio management at bond manager PIMCO. “People aren’t motivated by the shape of the yield curve.”
The 30-year’s return illustrates how much the needs of the government and retirement managers have changed in the last five years.
The Treasury ceased issuing 30-year bonds in 2001 after years of budget surpluses prompted the government to trim its offerings.
But the recession, stock market crash and post-9-11 defense and security spending, along with tax cuts, quickly pushed the federal budget deep into the red.
The White House expects the fiscal 2006 deficit to widen to $423 billion from $318.3 billion in 2005.
At the same time, pension fund managers have seen their own projected returns shrink amid weak stock market performance.
So many company pension plans are far short of what they need to meet promises to current and future retirees. The Congressional Budget Office estimates plans insured by the Pension Benefit Guaranty Corp. are underfunded by $600 billion.
United Airlines and many troubled firms have sought help from the PBGC. IBM, Verizon and many healthy firms have made big changes to their plans.
“You have companies that have made promises to employees and they’re finding that they are very expensive to keep,” said John Cerra, a portfolio manager at TIAA-CREF, who helps manage $11 billion in bond funds.
The 30-year, while offering a low yield relative to historical stock returns, takes out some guesswork as to the portfolio’s future returns. |
