Dealers Speak Up for 30-Year Bond

The “long bond” may not be long gone after all.

Wall Street bond dealers said this week they oppose scrapping the 30-year Treasury bond, dimming bets that government debt pay-downs will make the so-called long bond a scarce commodity.

Primary dealers--firms that trade directly with the Federal Reserve in Treasury markets--issued a position paper under the auspices of the Bond Market Assn. late Monday arguing the government should continue to issue new 30-year Treasury bonds to minimize the short-term cost of buying back older issues.

The Treasury Borrowing Advisory Committee, a separate committee made up primarily of investors, last week had recommended that August’s semiannual 30-year bond auction should be the last.

“It’s not as clear-cut as it was last week. Now the BMA feel incumbent to talk about the merits of the bond, and now people are saying, well, maybe there will be a [30-year] bond,” said Joe LaVorgna, senior U.S. economist at Deutsche Bank.

The Treasury is under no obligation to follow either recommendation.

The news pushed down bond prices, which have rallied in anticipation of diminishing supplies. The yield on the 30-year bond--which moves in the opposite direction of its price--rose to 5.50% from 5.49% Monday. The yield on the 10-year note--which has replaced the long bond as the market benchmark--rose to 5.18% from 5.16%.

The BMA’s Primary Dealers Committee said the 30-year bond filled a unique public need as the instrument of choice in economic crises. The BMA added that for many longer-term investors there were few alternatives to bonds.

The back-and-forth over the fate of the long bond filled a void in a week with little fundamental economic news and ahead of this week’s auctions of $32 billion in government paper.

“I think there is more noise than anything right now. This [down move] is corrective in nature,” said Sadakichi Robbins, head of global fixed-income trading at Bank Julius Baer in New York.

Fresh supply of debt--there is also a flood of new debt issuance lined up from corporates and federally chartered agencies--tends to weigh on prices of existing issues as dealers clear the decks to accommodate the new paper.

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Sliding Yield

The yield on the 30-year Treasury bond has fallen during the last year, partly on expectations of dwindling supply.

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30-year Treasury bond yield, monthly closes and latest

Tuesday: 5.50%, up 0.01

Source: Bloomberg News