- The Washington Times - Wednesday, May 4, 2005

The Treasury Department yesterday opened the door to resuming sales of 30-year bonds to finance the ballooning national debt in the strongest sign to date that huge budget deficits are here to stay.

Sales of Treasury’s longest-dated bonds were discontinued in 2001 amid great fanfare. A brief era of surpluses had raised the prospect that Washington for the first time in its history might wipe out the $4 trillion national debt.

But the re-emergence of deficits in the $400 billion range — and projections of decades more of mounting debt to come — means Treasury is having to multiply its auctions with a flood of debt that economists warn will drive up interest rates.

“We are doing this because times have changed, and our debt portfolio has changed,” said Timothy Bitsberger, Treasury’s assistant secretary for financial markets, in announcing the possible resurrection of the “long” bond. A final decision will be made Aug. 3.

“This is a decision independent of what our deficits are,” he said.

More bond sales in particular would raise the rates on long-term debt such as 30-year mortgages, the most popular instrument for financing home sales, analysts say.

The yields on 30-year bonds and 10-year notes rose sharply yesterday in the expectation that Treasury will resume long-bond auctions next year.

“If they reissue the 30-year, that means there is less chance of regaining our budget surplus,” said Michael Cheah, a bond fund manager at AIG SunAmerica Asset Management. “The perception of long-term deficit is now there until proven otherwise.”

Mark Vitner, senior economist at Wachovia Securities, said the Treasury’s move might “catch an unbelievable amount of political flak” because President Bush has proposed adding another $2 trillion of debt on top of today’s deficits to finance his Social Security plan.

A sharply negative reaction from political critics and the markets might force Treasury to drop the plan, he said. But like most Wall Street analysts, Mr. Vitner endorsed the idea of selling 30-year bonds again and said it will save taxpayers money.

Demand for such long-dated securities has been strong among pension funds, insurance companies and other big money managers because they are needed to balance out their portfolios.

Much of that demand has been satisfied in recent years by purchases of 10-year Treasuries — one of several reasons why long-term interest rates have fallen to the lowest levels in a generation.

“Treasury is missing a great opportunity to lock in low interest rates,” and that is the reason it changed its mind about selling 30-year bonds, Mr. Vitner said. “In short, the Treasury is missing the market.”

While 30-year mortgage rates are likely to rise under the plan, it could benefit the millions of homeowners who financed house purchases with adjustable-rate mortgages linked to the rates on one-year Treasury bills, he said.

The Mortgage Bankers Association yesterday reported that adjustable-rate mortgages and interest-only mortgages accounted for 63 percent of all mortgage originations in the second half of last year.

With the Treasury issuing more long bonds, it is likely to issue fewer one-year Treasuries, easing the rates on those securities and lowering the cost of adjustable-rate mortgages tied to them, Mr. Vitner said.

By causing this shift in interest rates, the proposal also might help to resolve a “conundrum” Federal Reserve Chairman Alan Greenspan noted earlier this year. He said it is a mystery why long-term rates have not risen in tandem with short-term rates in response to the Fed’s rate-raising campaign.

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