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What if Treasury Stops Issuing 30 Year Bonds Again?
Posted: Fri Sep 24, 2010 2:15 am
by MiniB
I dont know the specifics of why or when exactly they stopped issuing them in the recent past, but I know Harry Browne in his radio show discussed that they weren't available for a period of time.
My question is what happens to ETF and Mutual Fund holdings if these no longer are available? What happens to TLT if it cant buy new treasuries of the appropriate maturity? I haven't read through the prospectus, but I imagine it must be in there? Does it change it's average maturity based on whats available? Or does it liquidate assets and return to investors?
I wonder if another reason it's superior to hold bonds directly is if the treasury stops issuing 30 year bonds, at least you have some on hand to hold you over for 5 or 10 years in hopes of them re-issuing.
Re: What if Treasury Stops Issuing 30 Year Bonds Again?
Posted: Fri Sep 24, 2010 8:45 am
by MediumTex
I would say that we shouldn't worry about this scenario until it happens.
It seems to me more likely that an even longer duration bond than 30 years will be issued in the future.
Re: What if Treasury Stops Issuing 30 Year Bonds Again?
Posted: Fri Sep 24, 2010 11:57 am
by Wonk
MiniB wrote:
I dont know the specifics of why or when exactly they stopped issuing them in the recent past, but I know Harry Browne in his radio show discussed that they weren't available for a period of time.
My question is what happens to ETF and Mutual Fund holdings if these no longer are available? What happens to TLT if it cant buy new treasuries of the appropriate maturity? I haven't read through the prospectus, but I imagine it must be in there? Does it change it's average maturity based on whats available? Or does it liquidate assets and return to investors?
I wonder if another reason it's superior to hold bonds directly is if the treasury stops issuing 30 year bonds, at least you have some on hand to hold you over for 5 or 10 years in hopes of them re-issuing.
In the 70 pg PP discussion on bogleheads.org, I asked someone to give me data on Japan during the 90s and 00s. Prior to (I believe) 2000, the longest bond duration you could get was 10yr in Japan. Long story short, data indicates similar results could be achieved with a 50% 10 yr as with a 25% cash, 25% 30 year. Of course, the latter is preferable for several reasons, but if the Treasury decided to cut 30 yrs, you could probably alter accordingly.
Re: What if Treasury Stops Issuing 30 Year Bonds Again?
Posted: Fri Sep 24, 2010 5:14 pm
by Pkg Man
The reason the Treasury discontinued the 30 years was that at the time we had a budget surplus (including the SS shenanigans, of course). Since we are FAR away from seeing those times again I agree with MediumTex that we don't have to worry about this happening again any time soon.
Re: What if Treasury Stops Issuing 30 Year Bonds Again?
Posted: Fri Sep 24, 2010 8:16 pm
by MiniB
My primary point of the point has been missed so far.
What happens to the ETFs and Mutual funds (EDV, VUSTX, TLT) if the treasury stops issuing long bonds?
TLT holds 28 years maturity bonds. If treasury stops issuing new 30 years for 5 years, then TLT wont be able to hold 28 years maturity bonds anymore. What happens to those in the PP who are holding 25% TLT?
Will TLT crash? Will TLT liquidate and return assets to investors? Will TLT be allowed to hold the longest bonds available on the market? I haven't read the prospectus.
This seems like a thought that those considering using these ETFs/Funds as a large portion of their holdings should consider.
Re: What if Treasury Stops Issuing 30 Year Bonds Again?
Posted: Sat Sep 25, 2010 12:19 am
by Wonk
MiniB wrote:
My primary point of the point has been missed so far.
What happens to the ETFs and Mutual funds (EDV, VUSTX, TLT) if the treasury stops issuing long bonds?
TLT holds 28 years maturity bonds. If treasury stops issuing new 30 years for 5 years, then TLT wont be able to hold 28 years maturity bonds anymore. What happens to those in the PP who are holding 25% TLT?
Will TLT crash? Will TLT liquidate and return assets to investors? Will TLT be allowed to hold the longest bonds available on the market? I haven't read the prospectus.
This seems like a thought that those considering using these ETFs/Funds as a large portion of their holdings should consider.
TLT hasn't made a decision regarding that scenario because it doesn't currently exist. Highest probabilities lie with a decision to close the fund and liquidate accordingly under such a scenario.
Re: What if Treasury Stops Issuing 30 Year Bonds Again?
Posted: Sat Sep 25, 2010 12:29 am
by craigr
The odds of the Treasury not issuing long term bonds any more is very small. At least at current interest rates. Maybe if we see rates above 10% we could possibly see it. Or at least issuing bonds with call provisions inserted as they did in the early 1980s when interest rates spiked.
In any case, you'd just buy the longest bonds available. If they stopped issuing longer bonds due to very high interest rates you'd still have powerful deflation protection in shorter bonds with higher yields. They would have a lot lower to fall if deflation kicked in so maybe we wouldn't miss the longer bonds that much in that scenario.