First Sale of 30-Year Bond Offers Lowest Yield Ever

Bloomberg reports that the $14 billion of bonds scheduled for sale on February 9 yielded 4.52% in pre-auction trading on February 3, compared with 5.52% at the August 9, 2001, sale. The decline suggests the government will save $10 million in annual interest on each $1 billion sold.

The Treasury may get bids for as much as three times the amount it will sell, said Michael Pond, an interest-rate strategist in New York at Barclays Capital, in the news report.   Demand for long bonds may rise as the first of 76 million US baby boomers will turn 65 in 2010. The Treasury Department decided to resume sales of 30-year bonds in part because of pension fund demand, Randal Quarles, undersecretary for domestic finance, said in a December 7 interview in Washington.

The UK, France and Poland last year sold 50-year bonds to satisfy pension demand. Russia and Mexico also announced plans for their first 30-year domestic government bonds.

“If inflation starts to become more problematic, or if people expect that it’s going to become more problematic, you wouldn’t want to be holding a 30-year Treasury security at these levels,” Thomas Girard, who helps manage $11 billion of bonds as co-head of fixed income at Weiss, Peck & Greer in New York, said in a February 2 interview.   Girard expects pension fund demand to overwhelm supply.