End of 30-Year Bond Impact Debated
November 12, 2001
Now that the U.S. government has said it will discontinue issuing 30-year bonds, what impact will this have on those mutual funds that invest predominantly in U.S. government long bond securities?
For one, the profile and composition of future long-term U.S. government bond funds will need to shift to accommodate the change, especially if the Treasury's decision to refrain from issuing new 30-year bond offerings becomes a permanent decision, said managers.
On Oct. 31 the Treasury Department cancelled its Feb. 2 auction of 30-year bonds. These bonds have been issued by the U.S. government since 1977 as a means to provide funding for the U.S. budget deficit.
But it is not likely that the changes will happen in the short term, said fund industry analysts and portfolio managers. While there obviously won't be any new 30-year bond issues to invest in for the foreseeable future, the existing universe is large enough to handle the desire for long bonds, managers said.
A Fixed-Income Favorite
Thirty-year bonds have become the fixed-income favorite of many conservative investors seeking safety and higher yields than those available on shorter-term 10-year, five-year or two-year government bonds. They have also found a home in the portfolios of pension funds and are used by mutual fund managers as well as foreign governments, said Charles Van Vleet, a portfolio manager and director with Credit Suisse Asset Management in New York. Yet despite their popularity, the government feels that long bonds have effectively outlived their usefulness, he added.
"The goal of the Treasury is to find the cheapest, most effective way to provide funding for the deficit," Van Vleet said. To that goal, the Treasury has determined that it no longer needs to issue more expensive 30-year bonds, he added.
In making its announcement, the Treasury Department said that the markets in recent years have themselves been shifting focus away from 30-year bonds to the shorter 10-year bonds.
No Dearth of Investments
In Near Future
Will the discontinuance of 30-year bonds mean that fund managers of the 35 long-term government bond funds available will be faced with a dearth of investments?
Not a chance, said analysts and managers. "There's no fear that there will be a dearth of issues, and there will be no real impact on mutual funds," said Van Vleet of Credit Suisse. Moreover, the Treasury has hinted that it might reissue 30-year bonds at some point in the future, Van Vleet noted.
"There's still $290 billion of U.S. Treasurys out there for investments," said Andrew Clark, fixed-income research analyst at Lipper, Inc. of New York. "And the first batch that will mature won't do so for another six years."
As part of its Halloween announcement, the Treasury Department also announced that it is indefinitely suspending its buyback of previously issued 30-year bonds, a program that the Treasury first began last year, meaning that there will still be 30-year bonds available for investment, said analysts.
"It would have been a problem for managers if [the Treasury] had eliminated the long bond and at the same time stepped up buybacks," said George Schupp, director of fixed-income securities at U.S. Bancorp Piper Jaffray Asset Management in St. Louis, advisor to the First American Funds. Having to replace long-duration, high-quality securities would have definitely caused managers a headache. But that didn't happen, Schupp added.
Business as Usual
In the future, fund managers may look to fill any voids left by a dwindling supply of 30-year government bonds with U.S. agency bonds or even corporate bonds, said Dave McEwen, chief investment officer, fixed-income at American Century Investments' Mountain View, Calif. office. When a corporation such as IBM decides to build and finance a new office, it could decide that a 30-year debt offering isn't too long, he said. A flurry of new long-term corporate bonds could be possible.
American Century Takes Five
American Century manages more than $1 billion in six target term maturity portfolios which invest in long-term zero-coupon bonds, although the funds can also invest in bonds issued by agencies of the U.S. government. The funds are structured at five year-intervals and define themselves by the year in which they will mature and return investments to shareholders. Earlier this year American Century retired the American Century Target 2000 fund and then launched the Target 2030 fund.
"Five years from now, will we be able to open a Target 2035 fund? We may have a problem. We may have to open it with investments in agency debt or as a corporate structured fund," he said. But for the near term, it's business as usual.