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Today's Commentary: 08.04.05
The Long Overdue Return of the Long Bond

Back in the day, as my teen is found of calling the recent past, when retiring Justice Sandra Day O'Connor was casting the deciding vote in the 2000 election, America was awash in cash. The surplus, seen as the stockpile to solve more than a few of this nation's shaky economic future problems including Social Security and Medicare, was unbeknownst to her and the rest of the nation, about to disappear. The new party of power had a different view of those burgeoning coffers. They saw it as an overtaxation of the American populous.

While those flush years unwound with a variety of tax cuts and surprisingly poor economic policies, one single thing was assured. Deficits.

As President Bush began his first term, he decided to give those excess funds back to the tax payer - remember that $300 appeasement check and the flack that was raised as the wealthiest in the nation became the least taxed -

When the 30 year long bond was pulled from the market, it forced Treasury buyers to purchase the next best thing, the ten-year note. It is important to remember two things before we go too much further.

When we sell Treasuries to customers, we are borrowing money as a nation. By eliminating the 30-year long bond at just the moment when deficits were not only planned but deemed politically correct, we effectively kept our money relatively inexpensive to borrow. The move by the administration was designed to not only deplete the surplus but achieve debt in the name of fiscal responsibility. These are the bonds that our Asian benefactors (and not a few hedge funds) have stockpiled in their coffers.

By offering the 30 year long bond again, the Treasury hopes to show the global economy that we will be around for at least that long and of course, able to repay the debt. The hope is that the yield on these notes will be attractive enough to switch investors into the longer obligations.

But suppose the Treasury gave an auction and nobody came? The waning interest in the ten-year and the irregularly scheduled auctions left much of the world speculating on our borrowing habits. While we are convincingly over the $340 billion deficit mark, we are still not convincingly far enough from becoming a banana republic.

Unfortunately, the disappearance of this long bond sent too many pension funds into death spirals forcing many corporate entitlement programs out of existence. While this may have been an unintended effect of the business friendly White House, it still created financial havoc among the populous. Although that havoc was visited upon us indirectly, it will hurt the middle class taxpayer nonetheless. The Pension Guaranty Benefit Corporation, the pension insurance firm that guards these pensions when they default and picks up pensioners who would have otherwise been sent to the curb, received a a coffer-busting amount of new pensions to fund since the disappearance of the 30-year long bond.

It is hard to blame the Treasury for the fiasco in pensions. Much of that blame has already been thrust on enthusiastic managers who chased enormous returns, failed to actuarialize their plans, and skimmed the profits to beef up their profit and loss statements.

Homeowners, however should take note of this realize that the days of low mortgage rates are quickly coming to end. Early next year, investors in fixed income investments will have a new choice on the block and this will push long term home rates higher almost in tandem with the rates on the newest old Treasury offering. Of course the loans that will be hardest hit are those whose mortgages were done based on low adjustable rates.

And wouldnąt you know it, these are exactly the type of loans that have helped fuel the housing boom of late. Take away low the rates, and, well, do I need to paint you a picture?

BlueMoney Report

The Blue Money Report
Financial Commentary covering a wide range of topics concerning money, investing, and how it effects the average investor and their financial health.

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