Bad News for Taxpayers

Treasury’s expected announcement Wednesday that it will revive the 30-year bond may help a debt-burdened Uncle Sam cut borrowing costs, but the decision stands to affect taxpayers, investors and pensioners too.

Most people never owned 30-year Treasuries outright but have held them through mutual funds and less direct routes. Thirty-year Treasuries were and are popular with traditional pension plans and insurance companies that need to match long-term investments against their long-term liabilities as the nation’s population ages.

But the federal government stopped issuing new benchmark 30-year Treasuries four years ago, when it was in its fourth _ and what turned out to be its last _ year of budget surpluses.

The Treasury Department’s undersecretary at the time, Peter Fisher, reasoned that federal finances were sound and interest rates were falling, so government and taxpayers stood to save if Treasury issued cheaper short-term debt instead of 30-year bonds that pay higher interest.

But that was then; this is now. In between, $1.85 trillion in tax cuts, the war on terror and a recession that turned into a weak recovery combined to produce record federal deficits in 2003 and 2004.

And while the administration foresees the deficit falling to $333 billion for 2005, the national debt has soared from $5.8 trillion in 2001 to almost $7.9 trillion today _ debt that is held increasingly in 3- and 5-year Treasuries that will have to be redeemed sooner than 30-year bonds.

Wall Street investment bank Lehman Brothers, for one, estimates that Treasury’s annual refinancing burden will approach $950 billion by 2008 _ just as the first of 76 million baby boomers turn 62 and start collecting Social Security, further stressing federal finances.

The Federal Reserve has pushed up the rate that banks charge each other for overnight loans nine times in the last year, to 3.25 percent, with more rate hikes in the offing. But long-term interest rates have stayed low, although even Fed Chairman Alan Greenspan isn’t sure why.

If Treasury makes good Wednesday on its May 4 announcement that it may resume sales of its 30-year bond next year, it’s betting that long-term rates will stay low as younger boomers here and in Europe and Japan start saving in earnest for retirement through bond mutual funds and the like.

When “France successfully issued a 50-year bond, and Germany and the United Kingdom have said they will follow suit,” Stanford University economist Darrell Duffie predicts, “there is likely to be an unmet demand for long-term U.S. bonds.”

Should 30-year Treasuries help the Fed’s rate hikes stick, then borrowers could finally see higher consumer borrowing costs, starting with mortgages, even though they are geared to increases in short-term Treasury bill rates.

If Treasury announces the long bond’s return, as most Wall Streeters expect, Timothy Bitsberger, assistant Treasury secretary for financial markets, said the first auction will be held in February 2006 for $20 billion to $30 billion worth of debt.

This would not be the first time Washington reversed course on 30-year Treasuries.

They were issued occasionally during the heady growth days of the 1950s and ’60s, but it wasn’t until 1977, with the need to finance mushrooming deficits as federal spending outstripped tax revenues, that Treasury started issuing tens of billions of dollars’ worth of 30-year Treasuries on a regular basis.

(Contact Mary Deibel at DeibelM(at)