US welcomes back 30-year long bonds (Futher inverting the yield curve)

US welcomes back 30-year long bonds
By Jennifer Hughes in New York
Published: February 10 2006 02:00 | Last updated: February 10 2006 02:00. Copyright by the Financial Times

The US Treasury's 30-year long-term bonds were welcomed back by Wall Street yesterday.

Strong demand for their first sale in more than four years helped push yields below those on two-year bonds - extending the yield curve inversion that some economists have warned could herald a recession.

Traders had feared a number of big fund managers and hedge funds would stay out of the auction, preferring to buy the bonds in the secondary market. But the Treasury reported that it received bids worth 2.05 times the paper on offer, with the size of the sale $14bn.

Jason Evans, co-head of Treasury trading at Deutsche Bank in New York, said: "There's no question that it was stronger than we expected."

John Roberts, managing director for rates at Barclays Capital, said: "It went incredibly well - better than most people on the Street were expecting it to go."

The bonds carried a coupon of 4.5 per cent - compared with the 5.375 per cent coupon carried by bonds issued in August 2001. The new bonds should take over from the August 2001 bonds as the benchmark by the time payment is settled next week.

A trader described yesterday's bidding as "incredibly aggressive". Soon after the sale, the when-issued market indicated a yield of 4.53 per cent on the bonds - more than 0.1 of a percentage point below two-year notes, which yielded 4.655 per cent. An inverted yield curve, where yields on longer-dated bonds trade below shorter-dated yields, is rare as lenders usually demand higher interest rates for longer loans. If investors accept lower returns for long-term borrowing, it implies they expect growth and inflation will be low, and that interest rates will fall.

Thirty-year bonds were a staple of US Treasury borrowing from the late 1970s until it suspended issuance in 2001.

The Treasury had faced calls from Wall Street for their reinstatement which have grown louder as the government's budget deficit worsened. Long bond advocates had also grown more vocal ahead of pension reforms which are expected this year. Any reform is expected to raise demand for longer-dated bonds which fit pension managers' liabilities more closely than stock investments do.

David Boberski, analyst at Bear Stearns, said: "The fact long bonds refused to become irrelevant hints at the role they may once again play."