Treasury Department Stops Issuing 30-Year Bonds

Chart of the Week for November 9-15, 2001

Last Wednesday, the Treasury Department surprised the bond market by announcing it would discontinue issuing 30-year Treasury Bonds, commonly referred to as the “long bond.” 30-year bond prices immediately rose, sending yields to their lowest level in three years. Though there are no guarantees, the possible economic effects of the decision could be significant. The federal government may save billions in interest costs, consumers can borrow more cheaply, and stocks may even benefit as they become more attractive versus long-term bond yields. However, the most important impact could be on mortgage rates. A robust housing market and consumer spending have been pillars of strength, but each has shown signs of weakening in recent months. Mortgage rates are closely tied to 10-year bonds, which now have lower yields thanks to decreased supply of longer term bonds. Lower mortgage rates could buttress the housing market and consumer spending, bolstering the economy until the effects of other stimulus measures work their way into the economy.

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