What Is a 30-Year Treasury Bond?

The 30-year United States Government Treasury Bond is a safe, high-quality bond. It is the longest maturity bond of government issue, having been removed from issuance for a four and one-half year period earlier in the century. The bond is considered the bellwether of maturity for inflation expectations.

The Role of the 30-Year Bond for Traders

Investors use the 30-year bond for several purposes. The bond completes the range of Treasury investments from the 90-day Treasury bill to the 30-year bond. There is no issuance between 10 and 30 years. The bond is often used by traders as a trading vehicle because small swings in interest rates create large movements in the price of the bond.

Trading the Strip Coupon

Investors in IRA accounts use the 30-year bond to lock in a rate of interest for retirement. They can receive coupon payments for 30 years or purchase a 30-year bond resold as a zero coupon bond. The investor will pay a set price up front at a certain interest rate. The investor receives no coupon that has to be reinvested at higher or lower rates. This rate is guaranteed to maturity because the reinvestment rate of the bond is computed at the time of purchase. The bond is issued at a deep discount. Investors today know the exact amount they will receive in 30 years at the time of purchase.

The 30-Year Bond is a Benchmark

The 30-year bond is a benchmark for long corporate bond issues. Long corporate debt is priced at a spread from the 30-year bond. If the current 30-year yield is 5 percent, then a new AAA corporate bond might be priced at 125 over, the AA bond at 150 over and the A-rated bond 180 over. In other words, 6.25 percent, 6.5 percent and 6.8 percent would be the applicable yields. Corporate bonds never trade at a lower yield than the 30-year Treasury rate.

30-Year Bonds Are Used for Treasuries

Thirty-year bonds are an important way for corporate bond traders to hedge their risk with new corporate issuance. If the bond trader is bringing a $200 million dollar issue to market, the trader might hedge the issue or reduce the risk of market risk while the issue is being marketed. Thus, he would purchase the corporate issue from the issuer and short the $200 million issue. As he sells the corporate issue, he buys back an equal number of shorted 30-year bonds. The cost shorting and buying of the 30-year issue adds liquidity to the market.

The 30-Year Bond is a Gauge of Inflation Expectations

The 30-year bond is greatly affected by inflation expectations. If the current rate of the 30-year is 5 percent, but inflation rates of 9 percent are expected, the bond will quickly move to a 9 percent yield. This can cause a deterioration in the price of the bond of as much as 30 percent. Traders watch the rate movement of the 30-year bond to gauge investor expectations of inflation. The 30-year yield will also affect stock market investors who begin to see attractive stock-like yields in the 30-year bond without stock market risk.

References

• Definition of the 30-year Treasury bond
• Treasury yield curve data

Resources

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