Wall Street Journal Changes Its Measure to 10-Year Note
By GREGORY ZUCKERMAN
Staff Reporter of THE WALL STREET JOURNAL
May 3, 2000
Make way for a new king of the bond market.
For more than 20 years, it has been easy to figure out how the U.S. bond market is doing -- just look at the 30-year Treasury bond. When the price of these 30-year bonds issued by the Treasury Department (known among bond aficionados as the "long bond") was up, the rest of the bond market, including corporate bonds, was usually climbing along with it. When the 30-year bond was falling, the market was suffering.
But the reign of the 30-year Treasury as the $14.7 trillion U.S. bond market's benchmark is quickly ending, thanks largely to the government's aggressive effort to shrink its long-term debt, which has reduced the supply of 30-year paper.
And so traders and investors are leading a new cheer: Long live the 10-year Treasury note -- the 30-year bond's precocious sibling. It is the 10-year note, already the basis for the rate that is charged on most home mortgages, that is increasingly scrutinized by the world's stock and bond investors alike as the market's benchmark.
As a result of this shift, The Wall Street Journal effective Wednesday will use the 10-year note as its main gauge of the U.S. bond market in both news articles and statistical packages.
The Journal, for several weeks, has already been including the performance of the 10-year Treasury note in its routine markets coverage and had stopped calling the 30-year bond a "benchmark." Starting Wednesday, it will replace the 30-year chart with a 10-year chart in the daily Markets Diary on the cover of the Money & Investing section.
"The Journal's decision to emphasize the 10-year note in our coverage reflects a trend that has been building in the bond market: The 10-year note is quickly replacing the 30-year bond as a benchmark," said Paul E. Steiger, managing editor of the Journal. "It doesn't mean we'll stop covering the 30-year; on the contrary, it is still one of the most important financial instruments in the world, but its importance is declining as the U.S. government reduces its long-term debt."
Yields for key Treasury maturities also appear daily in the Journal's Bond Market Data Bank inside the paper.
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In many ways, the U.S. bond market is just catching up to the rest of the world -- the bulk of the bonds sold by most foreign governments are in 10-year maturities. Already, most U.S. mortgages and many corporate bonds are priced in relation to the 10-year Treasury note. Federal Reserve Board Chairman Alan Greenspan has spoken of how he looks at the performance of 10-year corporate bonds rather than 30-year bonds as a guide to market interest rates.
Not everyone is on the 10-year bandwagon. Some members of the bond market still view the 30-year Treasury as the bond market's bellwether, while others say a combination of Treasurys, corporate bonds and "agency" securities from Fannie Mae and the like will emerge as the benchmark for bonds in the U.S. But within the Treasury market specifically, the 10-year's stature is clear.
Why does it matter what the bond market uses for its benchmark security? Well, just as the stock market has the Dow Jones Industrial Average and the Nasdaq Composite Index, a bond-market benchmark helps to provide a reliable gauge of the performance of bonds, not to mention expectations about inflation and future interest-rate policy of the Fed.
But it is more than that: When any investor makes a decision to buy or sell an investment, from a stock to a junk bond, he or she compares it with the return of a risk-free investment. Even the hottest technology stock may not look attractive if there's a risk-free investment promising an annual return of 20%, for example. A risk-free return of 5%, though, may make the stock more attractive.
Treasury securities, backed by the full faith and credit of the U.S. government, have been viewed a risk-free investment with no peer. Sure, the price on the Treasury security could fall if, say, inflation flares up. But as long as an investor holds the bond to maturity, he or she is all but guaranteed to get the money back.
By the way, the 10-year security is called a "note" in Wall Street parlance because it has a maturity of 10 years or less. Maturities above 10 years are called bonds, and one year and less are "bills." But in general, all Treasury securities can be lumped together as "bonds" in most broad references.
To some investors, the 30-year bond seemed an untouchable institution. But its reign was actually relatively recent. For much of the century, members of the bond market used a collection of top-notch corporate bonds, such as telephone bonds or railroad bonds, as their benchmark. Various Treasury securities were also used, such as the 20-year Treasury bond.
In 1977, it all changed: The Treasury Department began regularly auctioning 30-year bonds, as the U.S. government's debt exploded. Because it usually carried a higher interest rate than other Treasurys and was more volatile than other Treasurys, investors and traders began viewing the 30-year Treasury as their guidepost. Calling into the office from vacation, hoping to get a sense of how the market is doing, the bond trader had a single question: "What's the bond doing?" It was understood that "the bond" was the 30-year.
"It hit its zenith in the mid-1980s when the 30-year bond was as important as Microsoft is today," says James Bianco, president of Bianco Research LLC of Barrington, Ill. When oil prices collapsed in 1985, the long bond jumped a whopping 50% in value in a single year, cementing its prominence.
Helping the 30-year bond gain stature: a jump in sales of these bonds by the Treasury Department. In 1991, as much as $47 billion of 30-year bonds was auctioned off by the U.S. government, the most of any kind of bond, according to Stone & McCarthy Research.
But suddenly, the supply of Treasurys is dwindling, thanks to the growing U.S. budget surplus and a reduced need to sell new debt. Last year, just $20 billion of 30-year bonds were sold; this year the figure is expected to slip to a paltry $15 billion. Ten-year sales are stronger but also easing, coming in at $44 billion last year and expected to decline to $35 billion this year. The U.S. government is trying to phase out long-term bonds sporting the highest interest rates, starting first with 30-year bonds.
Already, futures contracts on 10-year Treasurys garner more "open interest" (or contracts outstanding) than contracts on 30-year bonds, a sign of the increased relative interest in 10-year notes.
The ascendance of the 10-year note moved into high gear in February, when the U.S. government began making plans to phase out the entire U.S. debt by 2013. Investors, worried that long-term bonds like the 30-year bond would be the first eliminated, began scrambling to buy these bonds, sending their price higher, and their yield (which moves in the opposite direction) lower.
As a result, trading in the 30-year bond in recent months has started to reflect this charged supply-and-demand dynamic, rather than usual fundamental concerns of bonds -- a big reason investors are now focusing on the 10-year note. Indeed, for the first time in more than a decade, the 30-year bond's roughly 6% yield is actually less than the yield on most other Treasurys, including the approximately 6.3% yield on the 10-year note.
"The 30-year has become its own little universe, it seems to at times trade off fundamentals and at times doesn't," says Mr. Bianco.
Tuesday, for example, the 30-year bond fell sharply in the morning even as the rest of the Treasury market was flat. The 30-year issue was down 15/32 point, or $4.6875 per $1,000 bond, by the end of the day, at 103 7/32 to yield 6.017%; the 10-year note fell just 9/32 to 101 12/32 to yield 6.308%. The rest of the Treasury market was down just slightly.
Could the 30-year bond re-emerge as the heavyweight of the market? Yes. If the economy slows or government spending surges, the U.S. will have to start selling more debt again, and the 30-year bond could again move to the forefront.
But "today the 10-year is just a better reflection of what's going on in the market," says Ray Stone of Stone & McCarthy. "At some point, a formal decision will have to be made by the Treasury that the 10-year is the benchmark and to stop issuing 30-year bonds.''
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footnote: I'll believe that the US gets rid of it's Debt
when I see it. |
