Wall St. happy to see 30-year bond return

If you think a 4.5 percent annual interest yield is a great return, Uncle Sam has a deal for you: a guarantee of that rate for the next 30 years.

The government today will sell $14 billion in 30-year bonds, the first such offering in more than four years. The yield, or interest rate, on the bonds is expected to be about 4.5 percent.

The Treasury's revival of the 30-year security — the so-called long bond — is a sign of the government's burgeoning cash needs as the budget deficit swells again. The bond was discontinued in 2001 amid budget surpluses.

But Wall Street also has been clamoring for 30-year bonds because of a perceived strong appetite among pension funds and insurance companies for long-term, fixed-rate securities. Since 2001, the longest-term conventional bond issued by the Treasury has been the 10-year T-note.

By locking in a government-guaranteed return for three decades, pension plans may be able to better match up their portfolio returns with what they'll owe retirees over time, analysts say.

"There's a perception of not so much a desire to buy as a need to buy" on the part of pension funds, said Scott Gewirtz, head of Treasury note and bond trading at Lehman Bros.

Demand appears to be robust. In "when-issued" trading — presale transactions in which investors effectively bet on the interest rate the government will pay — the indicated yield on the bond has been about 4.5 percent in recent days.

For some investors, that return is too low considering the risk that inflation could rise over time, eroding the value of fixed returns. What's more, investors can earn higher returns on shorter-term securities, including the 10-year T-note, which had a market yield of 4.57 percent Tuesday.

For Uncle Sam, the revival of the 30-year bond provides the Treasury with more flexibility in its financing as it projects heavy borrowing for years to come. The White House on Monday said it expected a budget deficit of $423 billion this year. It estimated the deficit would gradually decline but would be $183 billion in 2010.

In the United States, long-term Treasury bond yields are lower than shorter-term yields, a relatively unusual event. The annualized yield on six-month T-bills, for example, was 4.66 percent Tuesday.

Normally, long-term bond yields are higher than shorter-term yields to compensate investors for the added risk in tying up their funds.

But as the Federal Reserve has pushed up short-term rates in the past year, some investors say they expect the economy to slow sharply in 2006.

As for inflation risk, a large camp on Wall Street think that the forces of economic globalization will subdue inflation pressures far into the future.

But some bond-market pros aren't convinced 4.5 percent on a 30-year bond is enough of a return to offset the risk that inflation could resurge or that interest rates could rise for other reasons.

"If you were looking for something to tuck away for 30 years, this would not be it," said Lehman's Gewirtz.