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Portfolio > Investment VIPs

30-Year Treasury Welcomed Back After 4-Year Absence

By Jim Connolly

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Statisticalstory

Steve, Treasury last issued a 30-year in August 2001 but made the announcement in October 2001 which explains the different dates in the story.

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Banner–Data Insights

The return of the 30-year Treasury bond in February 2006 will be important for insurers in rounding out their investment bond holdings, according to interviews and statutory financial filings.

An examination of data culled from the NAIC Annual Statement Database via National Underwriter Insurance Data Services/Highline Data, indicated that in 2004, U.S. government bonds with maturities of over 20 years make up an important part of insurers’ investment portfolios. Holdings in this category totaled $15.8 billion, 20% of a total $78 billion in U.S. government issuer obligations.

The data examined uses total U.S. government holdings for the current year 2004 as a starting point and then breaks out holdings by maturity. While maturities of 20+ years were not the largest category for the top 50, it did represent a significant fifth of all U.S. government issuer obligations.

Holdings of between 10-20 years represented the biggest group with a 27% share of $20.1 billion followed by the 5-10 year maturities with a 24% share. Government securities with 1-5 year maturities comprised 22% in 2004 and holdings of 1 year or less, a smaller 7% share.

Maturities of 20 or more years represented 18% of all bond holdings from 1999 through 2004 with the exception of 2002 when the ratio was 17%.

But for U.S. government holdings, longer term maturities represented a larger portion of companies’ investments. In the 20+ year category results were as follows: 20% in 2004; 22% in 2003; 21% in 2002; 24% in 2001; 20% in 2000; and, 18% in 1999. It is unclear whether the spike in 2001 was related to the Treasury Department’s decision in October 2001 to stop issuing 30-year bonds and insurers’ decisions to add to their portfolios while these securities were still available.

In a statement, the American Council of Life Insurers, Washington, notes that “Insurers were large purchasers of these instruments before they were eliminated a couple of years ago. We anticipate they will be large purchasers now that they are available again.”

Steven A. Kandarian, executive vice president and chief investment officer of MetLife, Inc., New York, says that the 30-year Treasury is important for a number of reasons.

The re-advent of the 30-year Treasury “will certainly help matching long-term liabilities with long-term assets,” he says.

Even though the current coupon on existing 30-year Treasuries is low and spreads among Treasuries of shorter maturities are tight, he says that the 30-year Treasury is still an important investment tool for insurers.

As of Aug. 30, a 2-year Treasury note had a 4% coupon; a 5-year note, a 4.125% coupon; a 10-year note, a 4.25% coupon; and, an existing 30-year Treasury bond, a 5.375% coupon, according to data from Bloomberg.com.

Reasons that Kandarian cites include matching assets and liabilities as well as creating a benchmark against which insurers can compare corporate securities. Having such a benchmark provides good informational value, he adds.

A Treasury bond is a good way to match liabilities because, unlike a corporate bond, it cannot be called, he explains.

“New York Life views the return of the 30-year Treasury bond as a favorable development for the fixed income markets,” says William Werfelman, a New York Life spokesman. “Not only will it provide an additional long dated investment alternative, but it will also serve as a benchmark that may encourage additional long dated issuance,” he continues.

“Insurance companies have long-term liabilities and an increase in the availability of long duration assets increases investment alternatives and allows for improved portfolio diversification,” Werfelman adds.

“Prior to the announced re-entry of the Treasury into the 30-year part of the curve we managed our long-dated liabilities with available long duration assets, including long-dated corporate bonds,” he says. “And despite the Treasuries absence in issuing a 30-year since August 15, 2001, the Treasury 5.375 of 2/15/2031 has served as a reasonably liquid benchmark.”

‘The 30-year Treasury provides insurers with some additional flexibility to match assets to long-term liabilities.’

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