BOND ISSUE BALANCE

Brokerages and bond traders are cheering, but the recent news that the Treasury Department is considering issuing 30-year bonds again could be bad for the average American. The move confirms that the United States will be running budget deficits for years to come and that interest rates are likely to soon rise. It may also mean that inflation is on the horizon.

The treasury stopped issuing 30-year bonds in 2001, when budget surpluses were huge, because the department said the bonds were too expensive and demand was weak. The department said the long-term bills were gone for good.

So what has changed?

Tax cuts and war, basically. The $1.6 billion in new tax cuts approved by Congress at President Bush’s behest decreased federal revenues. At the same time, spending continued to rise and more than $200 billion have been spent fighting wars in Iraq and Afghanistan. The result is record setting budget deficits. Paying for the transition to private accounts as part of Social Security, as the president has proposed, would also require long-term borrowing.

The deficits are financed, in part, by treasury securities. Thirty-year bonds allow the government to stretch out the repayment.

Treasury officials said thoughts of selling 30-year bonds are not tied to rising interest rate or inflation worries. However, the longer-term bonds are also a hedge against inflation. If inflation is 6 percent, the trillions of dollars owed now would be worth 6 percent less in real dollars while tax receipts would automatically grow by 6 percent. This would make repaying the federal debt much easier. A 30-year bond would allow the government to lock in current low interest rates, also easing repayment.

This could be bad news for prospective homeowners and those with a lot of credit card debt. If interest rates rise, they will have to pay more to borrow money. Inflation simply means they will have to pay more, period.

The weak dollar is another reason to bring back the 30-year bond. The large trade and budget deficits require the United States to sell lots of treasury bonds to foreign investors. If they are short-term bonds, the treasury department must continually sell new bonds and replace those are maturing so it needs a lot of willing buyers.

Investors like the 30-year bond, first introduced in 1977, because of its typically high rate of return. The government pays higher rates on long-term debt to compensate for the longer-term risk. Bloomberg, a financial news service, reports that the largest brokerages and investment banks would be the biggest winners if the treasury department re-introduces the long-term bond. Bond trading accounted for 35 percent of revenue in the last two years at the top five independent U.S. security firms, according to Bloomberg.

The earliest the bonds could be issued is next February.