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The Argument for a 30-Year Bond
April 2005
J. Darrell Duffie, James Irvin Miller Professor of Finance, has been suggesting the revival of the 30-year bond for some time. Here are some remarks he provided months before the Treasury's May 3 announcement that it may indeed bring back the long bond.
STANFORD GRADUATE SCHOOL OF BUSINESS—At the recommendation of then Undersecretary Peter R. Fisher, the U.S. Treasury eliminated its 30-year "long" bond in October 2001. The longest maturity Treasury since that time has been the 10-year note. When the elimination of the 30-year bond was being considered, the U.S. government was running a budget surplus, and therefore issuing less debt. There was a case to be made that, given the liquidity advantages of large bond issues, the United States would reduce its interest expense by focusing on bigger issues at shorter maturities. In my view, the case for eliminating the 30-year bond was thin at that time.
At this point, with annual federal deficits in excess of $400 billion, it is easy to make the case for reintroducing the 30-year bond. France, which issues far less government debt than does the United States, periodically issues more and more 30-year bonds in order to offer the marketplace long-term bonds and at the same time garner the liquidity advantage of large issues. [In February] France successfully issued a 50-year bond; Germany and the United Kingdom have said that they will follow suit. There is likely to be a large unmet demand for long-term U.S. nominal bonds, particularly in order to hedge long-term liabilities, such as pension benefits or insurance claims. In my opinion, it would benefit the U.S. Treasury as well as a large range of investors to reintroduce a long-maturity Treasury bond.
