The Return of Uncle Sam's 30-Year Bond

Nearly five years after offering its last issue of 30-year bonds to individual and institutional investors — causing some to warn of a bond shortage — the U.S. Treasury has returned to the market place with a $14 billion issue of its longest maturity, perhaps leading you to ask yourself whether you should consider adding some to your portfolio.

The likely answer? Probably not.

To be sure, U.S. Treasury securities have the highest credit quality of all private and public sector U.S. debt issues, given that the Federal Government could always tax or borrow to repay principal and pay interest on time — a meaningful reassurance if you're lending your money to somebody for as long as 30 years. Moreover, being available in denominations of only $1,000, they are easily affordable for most investors.

But, bearing 4.5 percent coupons, the new bonds provide little compensation in both absolute and relative terms for lending money to the Treasury — or anybody else — until February 2036:

Because marketable bonds' prices — and thus their yields — fluctuate continually during the maturation process, it is quite possible that those who have to sell them before maturity may lose money on them despite the Treasury's high credit quality. (As if to underscore that point, interest rates in general crept up slightly before they were a week old—and, thus, their prices drifted slightly lower.)

So why did the Treasury resume issuing 30-year bonds?

To “diversify (its) funding options and expand its investor base”…”finance the government's borrowing needs at the lowest cost over time”… and ”stabilize the average maturity of the public debt,” it said in statements.

That is to say:

Of $4.1 trillion of the Treasury's total marketable debt held by the public at the end of fiscal 2005, as much as $500 billion was accounted for by long-term bonds. Short-and intermediate-term Treasury notes, ranging from 2 to 10 years, accounted for $2.3 trillion (and about three-fourths of the increase in total publicly held marketable debt from $2.9 trillion at the end of fiscal year 2001). Treasury bills and Treasury inflation-protected securities (TIPS) made up the rest.

Although the Treasury stopped selling new 30-year bonds in 2001, its 30-year issues had not disappeared, as some may have thought last August, when it announced that it would re-introduce them in semi-annual auctions beginning this month. Talk with your financial adviser today about whether 30-year bonds are right for your portfolio.

March 2006 - This column is produced by the Financial Planning Association, a membership organization for the financial planning community, and is provided by Terry Green, CFP, AIF, a local member of the FPA.