The U.S. government issues bonds both as a means of regulating the American dollar currency, but, as importantly, to raise money to finance the federal government budget during deficit years. In doing the latter, it is essentially no different than any other corporation or institution, but Treasury bonds are particularly important on the market because of the vast size of the government presence on the bond market, and because government bonds are generally considered a much less risky investment than other bonds. Until and throughout the Clinton administration, the bond with the longest term – the 30-year Treasury bond – tended to define the rest of the market. However, during the Bush administration sales of the 30-year bond were suspended as a result of federal budget surpluses and changing interests of major institutional investors. In 2006, the 30-year bonds were re-introduced as a result of climbing federal budget deficits, so that they are again a regular feature of the bond market landscape.
– About Treasury Bonds –
The Department of the Treasury raises funds and influences the bond market through several key debt instruments. Treasury bills, or T-bills, are the shortest-term bonds, which mature in less than one year (and as little as one month). Treasury notes, or T-notes, mature after one to ten years, and pay an annual interest rate throughout that time period. (In contrast, T-bills are sold at discount rates and do not pay interest.)
Treasury bonds, or T-bonds, are the longest-term U.S. government bonds. They mature after twenty years or more. The longest term available from a Treasury bond is thirty years, and it is this 30-year Treasury bond which was suspended temporarily during the Bush administration. Long-term Treasury bonds are actively bought and sold on the markets as traders and large investors weigh the risks and benefits of a stable but generally low rate of return from Treasury bonds against those of a more risky but potentially much greater rate of return from other bonds or from equities (stocks). When it was the dominant Treasury bond, tracking sales of the 30-year bond was considered the best way of estimating what the markets believed would happen to the U.S. dollar and to American interest rates over the long-term investing future.
– The Suspension of the 30-Year Bond –
In a sense, then, the decision to suspend the sale of new 30-year Treasury bonds in October 2001 came as something as a surprise. (This was even more so since the decision was taken after the terrorist attacks of 9/11, at a time when one would think maintaining the fiscal and monetary status quo would be more important than pursuing new reforms.) However, from a financial perspective, the U.S. government was simply adjusting to the new realities of what, at the time, seemed to be a promising future of budget surpluses.
During the Clinton administration, financial reforms which initially began in the 1980s finally began to pay off in terms of shrinking government deficits, and finally in the form of genuine budget surpluses. (This was the American component of a general trend toward budget surpluses also pursued under Liberal governments in Canada, Labour in Britain, and so on during the 1990s.) Initially, government bonds had been introduced to pay off government debts. During historical crises, like the world wars, bonds were particularly emphasized as patriotic ways of helping with monstrously high government deficits.
However, with budget surpluses becoming the order of the day, and with surplus money being used to pay off the federal debt, the government’s actual need for bonds began to fall. This led to a decline in demand and need for 30-year bonds, and the 10-year bond became a more standard means of measuring the market’s expectations of future interest rates. In 2001, anticipating that this trend would continue, the Treasury stopped selling 30-year bonds altogether.
– The Return of the 30-Year Bond –
The suspension of the 30-year bond, however, lasted only as long as it seemed feasible to expect that the federal government had no reason to continue acquiring long-term debt. By 2006, it was clear that it had been too optimistic to believe that the 30-year bond could be suspended more than temporarily. As a combined result of tax cuts and two foreign wars (Iraq and Afghanistan), the government’s budget surplus had declined and then been replaced, once again, by large deficits. These would have to be financed somehow.
At the same time as this occurred on the “sell side” of the government bond market, changes were also happening on the “buy” side. Major financial institutions had always been interested in government bonds, of course. Several foreign governments, particularly Communist China (currently the largest holder of U.S. Treasury bonds), continued to support the American government. However, pension funds and other very-long-term institutional investors had also become much more prominent players in the market, and were demanding longer-term investments with stable yields. As a result of these combined factors, in 2006 the Treasury began issuing 30-year bonds, and continues to do so as of 2010.