FREE ESSAY ON 30-YEAR TREASURY BOND

30-YEAR TREASURY BOND

Once considered the linchpin of the government securities market, the United States
Treasury's 30-year bond is losing its place as the credit market's bellwether as traders
and investors shirt their attention to the shorter-term notes. The bond market is
struggling to establish what the new benchmark is, said Ward McCarthy at Stone & McCarthy
Research Associates in Princeton, NJ. The U.S. 30-year bond - known as the long bond
because of it's the Treasury with the longest maturity - was seen since 1977 as the key
gauge of expectations for U.S. inflation and economic growth, and a barometer of overall
borrowing rates for the federal government and corporations. Also, these bonds are often
used as a refuge by investors during turbulent times. Treasury bonds have lost their
luster in the 1990's as the government scaled back auctions of the securities, selling
them two or three times a year for most of the decade rather than quarterly as in the
1980s. Now, bond auctions are eclipsed by quarterly sales of 5 and 10 - year notes and
monthly sales of 2 - year notes. The most actively traded Treasury issue in recent months
has been the 2 - year note, which has attracted investors and traders seeking a haven
from stocks and other kinds of bonds. Because 2 - year notes are more sensitive to
changes in short - term interest rates than are longer than are longer maturities, demand
for them was boosted after the Fed cut short - term rates twice in the past month,
raising expectations for more rate cuts in coming months. Still, while many investors
don't consider the long bond the focal point of the market, it attracts people looking
for gains as they speculate on changes in the interest rates. 
Consider that despite the financial turmoil overseas, wage growth at home has quickened,
unemployment remains low and consumers continue to spend briskly - all ordinarily the
ingredients of rising inflation and interest rates. Yet, U.S. businesses are strikingly
unable to raise prices, and analysts increasingly talk of deflation, not inflation. At
the same time, bond prices are getting a lift in a classic case of supply and demand.
Nervous investors are fleeing risks in the volatile stock market for the world's safest
investment, treasury bonds - only to find the market tightening up, in part to the budget
surplus. 
When the government spends more than it takes in, it has to borrow from the public;
however, when it takes in more than it spends, it can retire outstanding bonds. This
creates a scarcity in bonds, which drives up the value. Another major reason for the debt
becoming more valuable is inflation has been falling. However, this poses no threat
because an economy can grow in a robust manner with low inflation. In fact, the U.S.
economy has been doing so for the last few years. But slower growth would almost
certainly cheer the bond markets further because inflation would be seen as far off. As
yields have decline, bond prices, which move in the opposite direction, will soar. 
Now, is it possible for long - term bond rates to fall even farther? Certainly says Brian
Westbury, chief economist for Griffin, Kubik, Stevens & Thompson, a Chicago research
firm. He points out that in January 1966, with inflation near current levels, the 10 -
year Treasury was yielding 4.6 %. The average 10 - year yield in 1961 was 3.9 %, or 1.6
percentage points lower than it is today. (The 30 - year treasury was introduced until
1977.)
As it currently stands, the new inflation-indexed securities issued by the Treasury is
paying a real interest rate of 3.7 % (7-30-98), plus a variable kicker. (More current
rates were unavailable at the time of composition). Compare that with the 5.009 %
(12-2-98) on a conventional Treasury bond and you find that the expected inflation rate
by investors will average 1.31 % for the next thirty years. Realistic? Doubtful investors
should consider laddering their bonds. Then, as they mature, you can buy new bonds. This
enables your new bonds to pay higher yields if the rates rise. 
While businesses are enjoying lower raw material prices, they're paying higher wages. And
because very few companies can raise their prices without the fear of losing customers,
they face the enigma of squeezed profits. This could hurt stock prices and, in a worst
case scenario, trigger layoffs if companies try to maintain profit margins. However, for
the time being, many experts say moderating prices are likely to drive the economy. The
immediate force behind moderating prices is the Asian financial crisis. The values of
most Southeast Asian currencies have slumped dramatically against the dollar. That means
exports to the United States are suddenly 40 or 50 percent cheaper. To combat this, many
of these countries are flooding the U.S. market with a variety of cheaply priced
products. This forces companies with in the U.S. to keep their own prices in check to
compete with the foreign goods. 
But as big a role as Asia plays, it is only one of the several long-term factors that
have long been pushing prices down. The biggest yet has been the opening of the global
marketplace in the past decade, including those in China and Eastern Europe, that have
given U.S. companies access to cheaper labor as well as new venues in which to market
their products. Technology and the strong markets have enabled companies to cut back on
costs and reinvest in more plants and factories.
As attractive as disinflation is for may people, the slide into outright deflation could
be very harmful. When it turns from a low and stable inflation to a general decline in
prices, or deflation, then you've got a problem, said William Dudley, chief U.S.
economist at Goldman, Sachs & Co. 
It is in my conclusion that I posit my predicted interest rate for the conventional 30 -
year Treasury bond on the date of December 31,1999: 4.55 %. It is through my research
that I derived this number coupled with the fact that I don't foresee the Asian and
Russian financial crisis halting any time in the near future. The United States
government does not want to risk our economy falling into somewhat of a recession. This
is precisely why the interest rates were slashed just recently. With an economy that is
headed in the right direction, the U.S. government is simply safeguarding itself from a
potentially harmful calamity. 
Bibliography
Works Cited
The Bond Jungle, Chip Norton. Business Week; New York; November 9, 1998.
Goodbye Inflation, hello deflation, Walter Hamilton. Florida Times Union; Jacksonville,
Florida; January 7, 1998.
Bond Trend Positive, Staff and Wire Report. Tampa Tribune; Tampa, Florida; July 23,
1998.
Low inflation helped to drop mortgage rates to historic lows, Kathleen Howley. Boston
Globe; Boston, Mass; September 20, 1998.
Why U.S. inflation bonds are a steal, Carolyn T Geer. Fortune; New York; December 7,
1998.