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Research paper topic: 30year Treasury Bond - 1120 words
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30-Year Treasury Bond Once considered the linchpin of the government securities market, the United States Treasurys 30-year bond is losing its place as the credit markets bellwether as traders and investors shirt their attention to the shorter-term notes. The bond market is struggling to establish what the new benchmark is, said Ward McCarthy at Stone & McCarthy Research Associates in Princeton, NJ. The U.S. 30-year bond known as the long bond because of its the Treasury with the longest maturity was seen since 1977 as the key gauge of expectations for U.S. inflation and economic growth, and a barometer of overall borrowing rates for the federal government and corporations.
Also, these bonds are often used as a refuge by investors during turbulent times. Treasury bonds have lost their luster in the 1990s as the government scaled back auctions of the securities, selling them two or three times a year for most of the decade rather than quarterly as in the 1980s. Now, bond auctions are eclipsed by quarterly sales of 5 and 10 year notes and monthly sales of 2 year notes. The most actively traded Treasury issue in recent months has been the 2 year note, which has attracted investors and traders seeking a haven from stocks and other kinds of bonds. Because 2 year notes are more sensitive to changes in short term interest rates than are longer than are longer maturities, demand for them was boosted after the Fed cut short term rates twice in the past month, raising expectations for more rate cuts in coming months. Still, while many investors dont consider the long bond the focal point of the market, it attracts people looking for gains as they speculate on changes in the interest rates. Consider that despite the financial turmoil overseas, wage growth at home has quickened, unemployment remains low and consumers continue to spend briskly all ordinarily the ingredients of rising inflation and interest rates.
Yet, U.S. businesses are strikingly unable to raise prices, and analysts increasingly talk of deflation, not inflation. At the same time, bond prices are getting a lift in a classic case of supply and demand. Nervous investors are fleeing risks in the volatile stock market for the worlds safest investment, treasury bonds only to find the market tightening up, in part to the budget surplus. When the government spends more than it takes in, it has to borrow from the public; however, when it takes in more than it spends, it can retire outstanding bonds. This creates a scarcity in bonds, which drives up the value.
Another major reason for the debt becoming more valuable is inflation has been falling. However, this poses no threat because an economy can grow in a robust manner with low inflation. In fact, the U.S. economy has been doing so for the last few years. But slower growth would almost certainly cheer the bond markets further because inflation would be seen as far off.
As yields have decline, bond prices, which move in the opposite direction, will soar. Now, is it possible for long term bond rates to fall even farther? Certainly says Brian Westbury, chief economist for Griffin, Kubik, Stevens & Thompson, a Chicago research firm. He points out that in January 1966, with inflation near current levels, the 10 year Treasury was yielding 4.6 %. The average 10 year yield in 1961 was 3.9 %, or 1.6 percentage points lower than it is today. (The 30 year treasury was introduced until 1977.) As it currently stands, the new inflation-indexed securities issued by the Treasury is paying a real interest rate of 3.7 % (7-30-98), plus a variable kicker.
(More current rates were unavailable at the time of composition). Compare that with the 5.009 % (12-2-98) on a conventional Treasury bond and you find that the expected inflation rate by investors will average 1.31 % for the next thirty years. Realistic? Doubtful investors should consider laddering their bonds. Then, as they mature, you can buy new bonds. This enables your new bonds to pay higher yields if the rates rise. While businesses are enjoying lower raw material prices, theyre paying higher wages.
And because very few companies can raise their prices without the fear of losing customers, they face the enigma of squeezed profits. This could hurt stock prices and, in a worst case scenario, trigger layoffs if companies try to maintain profit margins. However, for the time being, many experts say moderating prices are likely to drive the economy. The immediate force behind moderating prices is the Asian financial crisis. The values of most Southeast Asian currencies have slumped dramatically against the dollar.
That means exports to the United States are suddenly 40 or 50 percent cheaper. To combat this, many of these countries are flooding the U.S. market with a variety of cheaply priced products. This forces companies with in the U.S. to keep their own prices in check to compete with the foreign goods. But as big a role as Asia plays, it is only one of the several long-term factors that have long been pushing prices down.
The biggest yet has been the opening of the global marketplace in the past decade, including those in China and Eastern Europe, that have given U.S. companies access to cheaper labor as well as new venues in which to market their products. Technology and the strong markets have enabled companies to cut back on costs and reinvest in more plants and factories. As attractive as disinflation is for may people, the slide into outright deflation could be very harmful. When it turns from a low and stable inflation to a general decline in prices, or deflation, then youve got a problem, said William Dudley, chief U.S. economist at Goldman, Sachs & Co.
It is in my conclusion that I posit my predicted interest rate for the conventional 30 year Treasury bond on the date of December 31,1999: 4.55 %. It is through my research that I derived this number coupled with the fact that I dont foresee the Asian and Russian financial crisis halting any time in the near future. The United States government does not want to risk our economy falling into somewhat of a recession. This is precisely why the interest rates were slashed just recently. With an economy that is headed in the right direction, the U.S.
government is simply safeguarding itself from a potentially harmful calamity. Bibliography Works Cited The Bond Jungle, Chip Norton. Business Week; New York; November 9, 1998. Goodbye Inflation, hello deflation, Walter Hamilton. Florida Times Union; Jacksonville, Florida; January 7, 1998.
Bond Trend Positive, Staff and Wire Report. Tampa Tribune; Tampa, Florida; July 23, 1998. Low inflation helped to drop mortgage rates to historic lows, Kathleen Howley. Boston Globe; Boston, Mass; September 20, 1998. Why U.S.
inflation bonds are a steal, Carolyn T Geer. Fortune; New York; December 7, 1998. Economics Essays.
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