NCPA - National Center for Policy Analysis

Shortening the Debt

November 12, 2001

The U.S. Treasury Department is being accused of attempting to manipulate the bond market, according to Bruce Bartlett.

Treasury bonds, which are issued for a fixed period and interest rate, rise and fall in price, and are bought and sold like stocks. This vast $3 trillion market is magnified by the many trades in the futures markets, where bond buyers need only put up a fraction of the price.

Bartlett explains:

  • On October 31, the Treasury made the surprise announcement that it would no longer sell 30-year bonds, whereas the markets were expecting about $4 billion in new 30-year bonds.
  • This increased demand for previously issued 30-year bonds, and short sellers (those anticipating the sale) were caught flatfooted.
  • Some accused the Treasury of manipulating the bond market to bring down long-term interest rates.
  • However, short-term interest rates tend to be lower than long-term rates, so refinancing debt on a shorter term usually saves borrowers money.

That appears to be the case now.

Economist Brian Wesbury of Griffin, Kubic, Stephens and Thompson in Chicago thinks the Treasury was just doing what made sense under the circumstances.

  • He notes that the normal spread between 10-year bonds and 30-year bonds is about 35 basis points (0.35 percent), but had lately risen to 75 basis points.
  • Had the Treasury gone ahead and issued $4 billion of new 30-year bonds, therefore, it would have cost taxpayers about $500 million in additional interest over the life of the bonds.

Today, the Treasury is doing what the Clinton administration did: shortening the debt, leading to significant interest savings for taxpayers.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, November 12, 2001.


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