Did ya miss me, baby?
Market chatter this week would suggest that Wall Street did indeed miss the long bond – the 30-year Treasury debt last issued in 2001 and due for a triumphant return in a $14bn sale next week.
Triumphant perhaps for bond traders, who were left bereft by the bond’s suspension and who have petitioned for it to be brought back. I should perhaps declare a sneaky feeling of success; the first of these columns that I wrote, last April, argued for the return of the long bond.
It is, however, arguably less of a triumph for the government, which cancelled it when surpluses were projected, on the basis that it was costly and unnecessary. Bringing it back is read as an admission that today’s deficits are going to be with us for some time.
Since the Treasury this week confirmed the amount on offer, trading has already been brisk in the “when issued” (WI) market – a sort of “pre” market which exists after a security has been authorised but not yet issued.
“There’s definitely a buzz,” said one long-time market participant.
Yields on the WI 2036 paper are currently about 11 basis points lower than those on the February 2031, which has held the “on the run” status of the last issued paper since 2001.
The next thing to work out is how the sale will go. Demand for longer-dated paper is strong, but will fund managers try and get paper in the auction itself or wait to see how it settles in the secondary market?
Primary dealers – a Federal Reserve designation for banks that meet certain criteria, including participating actively in Treasury auctions – are consulting traders, strategists and clients to gauge how they should bid in the sale.
Investment bankers are discussing whether corporate borrowers might be encouraged to issue more longer-dated bonds now that there is a new benchmark to anchor the long end of the yield curve.
Will corporate bonds currently referenced to the last 30-year issue (which now has a maturity of less than 26 years) be immediately switched to
the new on-the-run issue?
On LaSalle Street in Chicago, futures traders at the Chicago Board of Trade are wondering what the return of a liquid benchmark bond will do to the CBOT’s long bond futures. The contracts were the benchmark until 2001, and still trade actively, although benchmark status has since passed to the 10-year contracts.
And the Treasury seems keen to be of assistance. In its quarterly refunding presentation this week, when details of the bond were announced, officials added that they were considering requests to expand the current half-yearly sales to a quarterly schedule from 2007 to help facilitate the Strips market, where Wall Street strips apart the principal and interest payments to form new instruments.
Whatever the volatility surrounding the auction and its settlement, there seems little doubt that the long bond will be a roaring success for the market in terms of a new instrument to trade.
Putting aside the politics of backtracking on the Treasury’s 2001 stance, the bonds also seem destined to be a success for the government in terms of achieving relatively cheap financing, given the extraordinary levels of demand for long-dated paper recorded elsewhere.
This week dealers in the UK called for more issuance in the ultra-long end of the curve, which was established last year with the sale of 50-year paper.
The talk in the UK is of a “crisis” for pension funds struggling to match assets with liabilities in a situation made worse by an inverted yield curve and the resulting fantastically low yields on long-dated gilts (50-year paper yields 3.74 per cent) against which the value of their liabilities are calculated.
The US yield curve is already virtually flat and many are predicting it too will fully invert. Pension reforms, which should boost appetite for longer-dated paper, are expected this year – though at least the US is building up its longer-dated supply before any reforms really bite, unlike in the UK.
But just in case, how about some 50-year T-Bonds? The extreme demand seen in the UK is not expected here and Wall Street traders will tell you it’s not necessary and wouldn’t make economic sense. That is, not necessary yet.
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