CME Group announced this week that they would launch a new 30-year bond futures contract, one that would be nearly identical to the contract traded at the Chicago Board of Trade for more than 30 years except that deliverable securities for the new Long-Term Bond future will comprise cash Treasury bonds with at least 25 years of remaining term to maturity. The benchmark 30-year contract accepts deliverables with at least 15 years remaining to maturity. The so called “Ultra” Treasury bond will begin trading in the first quarter 2010.
And here I thought a 30-year bond future was a 30-year bond future — and I worked on that floor for 10 years!
It provides an interesting bookend to the current decade. The last dramatic shift to the 30-year came on Halloween 2001 when the Treasury decided it no longer needed to offer 30-year bonds. If that decision had come six months earlier it would not have been a surprise. The Clinton administration has actually put forward a balanced budget and there were budget surpluses projected for several years.
Many analysts suggested abandoning the 30-year as we no longer needed it. However, when President Bush came into office he offered large tax cuts, increased spending and abandoned the “pay as go” or paygo budget discipline passed under the first President Bush. We learned that the economy had fallen into recession in 2000 and then came 9/11 and war. The short era of budget surpluses had officially ended.
Why the Treasury chose that moment to abandon the flexibility of offering long-term debt is unknown. Perhaps they were trying to reassure us that we were not returning to the days of massive budget deficits and would not need the 30-year despite a temporary spike in deficit spending.
We now know that we were returning to an era of massive budget deficits and the Treasury several years later would once again need to offer 30-year debt.
By the end of 2007 we entered another, much more serious, recession brought on by the ongoing credit crisis. The Federal Reserve was creating new funding facilities weekly to prop up banking institutions and a year ago Congress passed a massive $700 billion bailout package named TARP (Troubled Asset Relief Program).
The printing presses were still humming from TARP when the new Administration would pass a stimulus package piling on nearly another $1 trillion of spending.
Perhaps the new Administration will decide to issue 50-year bonds as some have suggested or even 100-year bonds.
I don’t know if that would be a good thing or a bad thing but at least it would be an acknowledgement of the debt that is piling up.
”The Long-Term Treasury Bond futures are being launched in response to strong customer demand for a contract that mimics the duration of a 30-year Treasury bond,” said Robin Ross, CME Group Managing Director of Interest Rate Products in a press release. “The Ultra Bond contract will complement our existing benchmark U.S. Treasury complex and expand the range of risk management and trading opportunities for market participants.”
The need for such an instrument is probably due to the multi-year gap where no new long bonds were offered.
I try to make it a habit not to predict the success or failure of new contracts but this seems likely to be a winner. Many traders will line up to arb the new and old 30-year and the Treasury won’t be contemplating eliminating the long bond for some time to come.
Tags: CME Group, Federal Reserve, TARP
