30-Year T Bond Marked for Extinction

October 31, 2001(PLANSPONSOR.com) - The Treasury has announced plans to eliminate the 30-year Treasury bond, citing its loss of benchmark status and decline in demand -a decline that has diluted the bond's effectiveness as a fiscal financing tool.

The Treasury Department, which began selling the 30-year bond regularly in 1977 and has issued more than $600 billion in these bonds, will no longer put them up for auction.

According to the Treasury, the bond “no longer maintains a position of significance in the financial markets. Its role and its liquidity have been significantly impaired by the substantial reduction of issuance that has occurred over the last decade.”

In the Red

The elimination of the bond comes at a time when the fiscal surplus has shrunk to $127 billion from last year’s record $237 billion and economist expect it to deteriorate further.

The Congressional Budget Office (CBO)’s latest forecast sees a $176 billion surplus for the current fiscal year, however, CBO officials recently told Congress that a smaller surplus of between $36 billion and $56 billion was expected- and many economists expect that number to be revised downwards and reach a the first deficit in 2002.

Borrowing Requirement

The government is increasing its short-term borrowing efforts to come up with the cash necessary to repair the damage to the economy caused by the terrorist attacks.

It plans to borrow $31 billion in the fourth quarter, a reversal from it position in the previous quarter, when it planned to pay down $36 billion of the national debt.

By scrapping the 30-year bond, Treasury officials expect the government to see some savings -just how much remains to be seen.

The 30-year bond soared on the news. In morning trading, it rose 3 17/32 point, or $35.31 per $1,000 in face value, to yield 4.98%, down from 5.20% yesterday.

Funding Gap

The 30-year Treasury bond is currently the subject of much debate in plan sponsor circles. Its appropriateness as the measure for determining a pension plan’s funding requirement has recently been called into question.

Its low rate of return, compared with other long-term bonds, has lead to artificially high funding requirements for many pension plans, placing undue financial stress on many cash-strapped firms.