By Clyde Noel
Town Crier Correspondent
The U.S. Treasury stunned financial markets last week when it announced it will halt selling 30-year bonds.
That unexpected move should produce lower credit costs that will add additional stimulus to the economy, especially in housing and business investment in new plants and equipment.
Since it was introduced in 1977, the price of the long bond was a key gauge of financial-market performance. In times of trouble, money managers around the world would sell stocks and buy the 30-year bond because the interest and principal payments were guaranteed by the U.S. government. As a haven, the long bond was as good as gold.
Aside from security, the long bond provided the highest interest rate or yield of any government bond. As an investor, you might think it was a sad day when it was discontinued.
Not so. The 30-year bond is no longer the benchmark issue it once was. Activity and attention have shifted to the 10-year bonds. When yields on the 10-year note fall, rates on mortgages and other loans tend to fall as well.
Mortgage rates will now be pegged to the 10-year T-note, so new home buyers or those refinancing their loans may reap a bonanza if mortgage rates decline in tandem in the next few days or weeks.
The bottom line here is mortgage rates are near record lows of around 6.3 percent. They might go lower as bond investors turn to the 10-year note to replace the 30-year note.
The 30-year bond appealed to money managers and rich people. That’s not a game for small investors because there is a risk that prevailing rates will rise, causing bond prices to plummet. Small investors avoid that risk by holding bonds until they mature and the guaranteed principal repayment is remade.
Last Friday, the 10-year note yielded 4.3 percent and the 30 year 4.89 percent. A sharp investor will not tie up his money for 30 years for that slight difference. The 10-year note makes more sense.
When risk and yield are considered, the small investor does best with bonds maturing in two to six years.
So there’s no need to mourn the passing of the 30-year-long bond.
