U.S. to End 30-Year Bond Sales

The U.S. Treasury stunned financial markets Wednesday by announcing it will halt new sales of 30-year bonds, a decision that triggered a near-record plunge in long-term interest rates that should help boost the struggling economy.

The unexpected move should translate into lower credit costs that will add further stimulus to key sectors of the economy, particularly housing and business investment in new plant and equipment, analysts said.

“This puts money right into the pockets of consumers,” said Dave MacEwen, chief investment officer for fixed-income at American Century Funds in Mountain View, Calif. “And corporations can issue new bonds at even lower rates,” he said.

The Treasury action comes as the Bush administration has expressed frustration over its inability to get the Senate to agree to the economic stimulus package passed by the House.

Treasury officials, for their part, denied that Wednesday’s action was a backdoor attempt to bolster the economy.

Rather, Peter R. Fisher, Treasury undersecretary for domestic finance, framed the move strictly in the context of trying to save taxpayers money by shifting government borrowing to shorter-term debt--the rates on which are at 40-year lows of 2% to 3.5% in the wake of the Federal Reserve’s unprecedented credit-easing moves this year.

Treasury Secretary Paul H. O’Neill said in an interview on CNBC that pushing long-term market rates lower was not the goal, but “if that was a collateral benefit, then we are willing to accept it.”

The government in recent years had discussed dropping the 30-year bond as federal budget surpluses mounted and Treasury borrowing needs overall declined.

However, although 30-year bond sales have been less frequent, the idea of killing the bond entirely appeared to be off the table.

When the news hit the market Wednesday--at first via a posting on the Treasury’s Web site--investors scrambled to buy longer-term Treasuries, on fears that such securities will be increasingly difficult to find.

Wild bidding for Treasury bonds sparked the biggest one-day drop in long-term yields since the 1987 stock market crash.

The yield on the most recently sold 30-year T-bond tumbled to 4.87% from 5.21% on Tuesday.

The yield on the 10-year Treasury note plummeted to a three-year low of 4.23% from 4.41% on Tuesday.

The Treasury’s bold stroke seemed to accomplish in one day a goal that has eluded the Federal Reserve for months: how to translate a series of nine straight short-term interest rate cuts into meaningful reductions in the longer rates that matter most to consumers and businesses.

Despite official demurrals, many analysts said the bond decision had less to do with the arcane issues of federal debt structure than the desire to add further stimulus to key sectors of the economy--housing and business investment.

Mortgage rates are pegged to the 10-year T-note, so new home buyers or people looking to refinance their loans may reap a bonanza if mortgage rates decline in tandem in the next few days or weeks.

“This was definitely an attempt by Treasury to affect the market,” said Brian S. Wesbury, economist at Griffin, Kubik, Stephens & Thompson, a Chicago investment bank.

Neal Soss, chief economist for Credit Suisse First Boston and a former Federal Reserve official, said Washington traditionally takes steps in times of war to ensure that long-term borrowing costs will be as low as possible. It did so during both World Wars and the Vietnam war, he said. The Treasury’s action also appears designed to calm fears that the package of tax cuts the Bush administration wants to include in its next stimulus package could hurt the economy over the long haul by increasing the government’s borrowing needs.

Despite expectations that the government will need to borrow more in 2002 to pay for the war effort and economic stimulus plans, Treasury officials said those needs can be adequately covered by shorter-term borrowing.

In effect, the government was putting its money behind its assurances that any budget deficits caused by the war and the weak economy will be a one-or two-year blip before a return to surpluses.

“By stopping the issuance of long-term debt, this is a signal from the administration that the fiscal stimulus is short-term, therefore you don’t need long-term financing,” Soss said.

But the shift to shorter-term borrowing also is a big gamble for the Treasury: If the economy begins to rebound next year, shorter-term interest rates could whiplash, raising the government’s cost of borrowing money.

That risk could be lessened, however, if the Federal Reserve--keeps those rates low for an extended period, even if the economy revives.

Economist Henry Kaufman, a longtime Fed watcher, applauded the Treasury’s bond move and said it could well put more pressure on the Fed to hold rates down.

Many Wall Street analysts have been saying for months that long-term rates were too high, given the weakness of the economy, relatively low inflation and the huge tumble in short-term rates.

When the Fed began its credit-easing campaign Jan. 3, its key rate target for overnight, bank-to-bank loans stood at 6.5%. The central bank has since pushed that rate to 2.5% and is expected to slash it at least to 2.25% and more likely to 2% when policymakers gather for their next meeting Tuesday.

Over that same period, by contrast, the yield on the 30-year T-bond fell only to 5.2% from 5.5%--until Wednesday, that is.

In recent months, as the Sept. 11 terrorist attacks hurt the already flagging economy and the federal budget suddenly lurched toward deficit, “the thought of them eliminating the 30-year started to seem really farfetched,” said MacEwen of American Century.

Just as the market had talked itself out of the idea, Treasury acted.

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Times staff writer Warren Vieth in Washington contributed to this report.