Before 2001, the United States Treasury sold its 30-year bond as the longest duration bond of the United States. It was used to finance the budget deficit of the U.S. government and was sold everywhere from U.S. Pension Funds to the Chinese government. This bond also set the high rate of the yield curve. It had the highest rate because it had the longest date to maturity. Investors usually want to be paid more interest if they have to wait longer for the bond to mature. Only recently are the 30-year bonds being sold be the Fed. This reversed the government’s earlier decision to cancel the bonds, which was made for a couple of reasons.
First, the government stopped selling 30-year Treasury Bonds because budget deficit had been turned to a surplus during the Clinton Administration. Therefore, the U.S. Treasury decided they could cut some of their bond offerings without hurting the government’s budget. The Treasury felt the 2001 budget problem would be short-term and they only needed to sell short-term bonds to cover the costs. However, the problem wasn’t short-term and the government missed a great time to sell long-term bonds for a low rate.
Second, the government wanted to lower the average maturity of its Treasury Bonds. Because of the budget surplus, they felt they had the opportunity to lower the average maturity. It did work, with the average rate of going from 5.8 years in 2001 to 4.6 years in 2005. This also lowered the average interest rate as the highest rate was cut. That rate went from 5.9% in August 2001 to 4.5% in May 2005. This lowered the amount of interest the government had to pay on its debt, even though the amount of debt increased.
Third, by 2001 most of the major financial countries had their longest-maturity bond set at 10 years. These countries pressured the U.S. to get rid of the 30-year bond and use the 10-year bond as the highest on the yield curve. This would make it easier for investors to compare interest rates between different countries. Only recently has France and Great Britain gone back to issuing long-term debt.
Recently the 30-year Treasury bond has been reinstated by the U.S. Treasury to help pay for the War on Terror and the war in Iraq. This follows France and Great Britain issuing 50-year bonds to help pay different costs their governments are facing. Now is also a good time to issuing more Treasury Bonds as interest rates are low from the recent credit crisis.