The comeback of the 30-year Treasury bond could very well be aspirin for the headache that U.S. pension plan sponsors are suffering from today.
Although the amount of 30-year bonds that will be issued in February is expected to be relatively small, the reissuance could benefit pension plans in two ways: as a much-needed tool to align assets with liabilities; and a way to boost the allowed actuarial discount rate plan sponsors can apply to their pension liabilities.
"The reissuance of the 30-year bond first of all gives you more supply on the long end of the (yield) curve, which is sorely needed," said Daniel Vandivort, partner and co-head of fixed income at Weiss, Peck & Greer, New York. "In addition to greater supply, it also will bring liquidity to the long end of the curve. For example, in derivatives transactions, counterparties typically hedge their risk through Treasuries."
But Paul O'Brien, an executive director and fixed-income portfolio manager at Morgan Stanley Investment Management, New York, said that because the Treasury is expected to issue only $30 billion to $40 billion of 30-year bonds next year, it will take several years for the supply to meet demand from institutional investors. Most bond managers expect the auctions of the 30-year bond in 2006 to be oversubscribed.
"There is significant demand from private and public pension plans for assets to match liabilities," he said. "The reissuance is a positive step, but I don't think it will be a factor right away. If demand is sufficient, it could be that issuance could grow."