The new 30-year Treasury bonds may play a bigger role in life insurance company investment portfolios than in defined benefit pension plan calculations.[@@]
The U.S. Treasury Department today announced a decision to bring back the 30-year bonds in 2006.
Treasury began issuing the so-called “long bonds” in 1977, and it stopped in October 2001, when the government seemed to be ready to enter an era of big budget surpluses. Since then, a sluggish economy, national security problems and changes in tax laws have led to a series of budget deficits.
Treasury has decided to revive the 30-year bond based on “our commitment to prudent debt management and our desire to maintain cost-effective and diversified portfolios,” Treasury Secretary John Snow says in a statement about the move.
Treasury now hopes to issue between $20 billion to $30 billion in 30-year bonds per year, according to Timothy Bitsberger, the department’s assistant secretary for financial markets. Treasury hopes to auction off the new 30-year bonds twice a year.
Many of the buyers are likely to be insurers.
“Insurers were large purchasers of these instruments before they were eliminated a couple of years ago,” says Jack Dolan of the American Council of Life Insurers, Washington. “We anticipate that they will be large purchasers now that they are available again.”
Access to a fresh supply of 30-year bonds will give insurers a good tool for matching assets and liabilities, says Kevin Ahearn, a director at Standard & Poor’s, New York.
“It will just provide more funding alternatives to issuers, specifically if they have longer-dated liabilities, like a structured settlement,” Ahearn says.
Other buyers of 30-year bonds could include life insurers trying to back policies with 30-year level-premium terms or disability insurers trying to fund benefits for long-term disability claimants with life expectancies of 30 years or more.
In theory, the return of the 30-year bond also could be bringing joy to sponsors of defined benefit pension plans.