10-year Treasury note new standard

The government's buyback of 30-year bonds has reduced the issues' effectiveness as a gauge of interest rates.

Personal Finance editor HELEN HUNTLEY E-mail: Click here Archive

By HELEN HUNTLEY

© St. Petersburg Times, published May 16, 2000

The bond market is getting a new benchmark.

Today, the St. Petersburg Times is replacing the 30-year Treasury bond with the 10-year Treasury note as our primary gauge for tracking interest rates in the financial markets. The change will be reflected in the economic indicators that run across the top of this page on Tuesdays through Saturdays.

Thanks to changes in the federal government's borrowing patterns, the 30-year bond is no longer the bellwether it used to be.

"We've gone from deficits to surpluses, and the government is now paying down debt," said Scott Brown, economist at Raymond James & Associates Inc. in St. Petersburg. "At some point, we expect them to discontinue offering 30-year securities entirely."

The government still owes $5.7-trillion, but that's about $100-billion less than it did at the end of December. There are plans to eliminate the debt by 2013, although what actually happens will depend on changes in the economy and congressional decisions on taxes and spending. The National Debt Clock, created by a New York developer more than a decade ago to draw attention to the growing debt, is expected to shut down later this year, its mission accomplished.

But it isn't just the reduction in debt that is shaping the bond market. The government also is restructuring its remaining debt to shorten maturities by issuing more short-term securities while buying back long-term securities. This strategy has reduced borrowing costs for the government but has disrupted the balance of supply and demand for long-term Treasuries.

In the face of shrinking supply, investors have snapped up 30-year bonds, pushing prices higher than they would be otherwise. This has made the bonds less representative as a market indicator and created a quandary for investors in other types of bonds that traditionally have been priced in relationship to the 30-year Treasury.

"The whole idea of making that comparison was because the 30-year Treasury was the most liquid item in the world," said Greg Ghodsi, senior vice president at Robert W. Baird & Co. in Tampa. "Now you don't have that liquidity."

Many investors in corporate, government agency and municipal bonds turned to the 10-year Treasury as a substitute benchmark, although its No. 1 status could be short-lived if the government continues reducing outstanding debt. Ghodsi said the eventual replacement might be a 10-year bond issued by a government agency such as Fannie Mae.

The Wall Street Journal switched to the 10-year Treasury note as its primary bond benchmark two weeks ago.

The 30-year Treasury's benchmark status dates back to 1977 when the Treasury Department began regular auctions of 30-year debt. Sales of the bonds peaked in 1991 when $47-billion were issued. This year, about $15-billion are expected to be issued.

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