Earlier Wednesday, yields on 30-year Treasury bonds
touched a fresh all-time low while the spread between 2- and 10-year Treasury notes widened the most since 2007, indicating waning confidence in the longer-term outlook and drawing more attention to this closely-watched recession indicator.
He often tells his own story that started on the floor of the Chicago Board of Trade, where he traded 30-year Treasury bonds
. Things soured when the industry began trading electronically.
"You have duration risk." If a sponsor tries to match liabilities by investing in 30-year Treasury bonds
and interest rates subsequently rise, for instance, the value of employees' accounts rises due to the higher crediting rate, but the value of the 30-year Treasurys held as investments fell.
However, at longer maturities, correlations between the common components and the federal funds rate have decreased in the later period, with the correlations for 20-year and 30-year Treasury bonds
becoming slightly negative in the recent subsample.
The current small difference between the real interest rate on such bonds (2.1 percent for 30-year bonds) and the nominal interest rate on conventional 30-year Treasury bonds
(now 4.6 percent) implies that the market expects only about 2.5 percent inflation over the next three decades.
Even though the current coupon on existing 30-year Treasury bonds
is low and spreads among Treasury bonds of shorter maturities are tight, he says the 30-year Treasury is still an important investment tool for insurers.
For most companies, the only important component is the simplest one: for plan years beginning in 2004 and 2005, the interest rate for calculating current liability, the starting point for determining Pension Benefit Guaranty Corporation (PBGC) variable-rate premiums and whether a plan requires deficit-reduction contributions, will be based on a composite index of the yields on long-term, high-quality corporate bonds, rather than on 30-year Treasury bonds
. The IRS published the details of the new index almost immediately, in Notice 2004-34.
To finance this activity the Treasury should reinstate the issuance of 30-year Treasury bonds
, which were discontinued when we were afraid of uninvestable surpluses, something that is obviously no longer a concern.
Treasury announced that it would no longer issue 30-year Treasury bonds
, setting off a yield drop of more than 40 bp in the days that followed.
More recently, however, the supply of 30-year Treasury bonds
has been shrinking at an astounding rate, thanks to mounting Federal budget surpluses in 1998, 1999 and projected for 2000.
Long-Term's basic strategy was to bet on the eventual convergence between the prices of extremely similar assets (the archetypal case being 30-year Treasury bonds
issued today, "on the run," and the same bonds issued six months ago, "off the run").
The yields on the 30-year Treasury Bonds
began to turnaround in mid-February, right on the heels of the Federal Reserves last cut of a quarter percent in short term rates.