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 The last U.S. Treasury with a 10 percent coupon, issued 30 years ago
this week, is retiring as a government obligation in a matter of
days, leaving bond investors nostalgic for coupons five or 10 times
what they have to live with now.
As inflation runs below 2 percent, veteran bond managers say that
once this issue matures on Aug. 15, they do not expect to see
another 10 percent-plus treasury for the rest of their careers.
"As an old guy who had some 10 percent coupons mature in our
portfolio in the last few years, I am devastated by their absence,"
said Stewart Taylor, a 60-year old government bond fund manager at
Eaton Vance in Boston.
"The highest coupon treasury we own is a 7.5 percent."
For 30 years, like clockwork, CUSIP 912810DS4, the identifier for
$7.15 billion in bonds issued by the U.S. government in August 1985,
has paid out 10.625 percent in annual interest payments.
That easily outran many of its generation: Coca-Cola Co reverted to
its original formula after only 79 days, the Amiga was overtaken by
Apple Macs and Windows PCs, while wide-shouldered suits and
teased-up tresses soon fell out of fashion.
The Treasury has traveled nearly the entire trajectory of the
32-year long bull market in bonds. When it was issued in August
1985, U.S. President Ronald Reagan was in his second term and
Federal Reserve Chairman Paul Volcker was tamping down inflation
fears while fretting about keeping the fed funds rate below 8
percent.
A 30-year mortgage came with an interest rate around 12.4 percent
that year.
There is no 10 percent coupon coming down the pike anytime soon,
unless U.S. inflation suddenly shoots up to 1980s levels. In June,
for example, the Treasury Department auctioned $13 billion in
30-year bonds with a high yield of 3 percent.
FIRE SALE
With 30 years of hindsight, it seems strange there was ever a point
when investors voluntarily agreed to sell these bonds back to the
government.
But in March 2000, investors clamored to unload the 1985 issue.
Investors offered to sell $1.3 billion of the bonds during the U.S.
government's first debt buyback in 70 years.
The U.S. Treasury only accepted $352 million of the 1985 issue bonds
as part of about $1 billion in overall buybacks by the Clinton
administration to reduce the government's debt load.
Investors may have had their sights on bigger fish: the tech stock
boom. The Nasdaq Composite Index closed above 5,000 for the first
time the same month as the government's reverse bond auction.
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Three years later, however, in the wake of the dot.com bust, the
1985 issue Treasuries were being gobbled up by investors, noted Bill
Irving, who oversees about $33 billion in bond fund assets at
Fidelity Investments. The price of bonds with a par value of $100
surged to nearly $170 in May 2003, according to Thomson Reuters
data.
Irving calculates that there is only a 1 percent chance over the
next 10 years that a 10-year treasury with an interest rate of at
least 10 percent will return, according to what he sees in the bond
option market and from Monte Carlo probability simulations. And
there is only a 5 percent chance over the next 15 years, Irving
said.
"Over the past 100 years, we've only had three episodes of 10
percent-plus inflation: World War One, World War Two and the
inflation mistake of the 1970s," he said. "Many of the market-makers
on Wall Street were not working the last time rates were rising."
In October 2008, during the height of the credit crisis, the 1985
issue treasuries offered a safe haven for institutional investors.
Preston Hutchings, chief investment officer at Arch Capital Group
Ltd, said he bought about $500 million of the 1985 debt and similar
issues for his portfolios during that time.
"As far as double-digit yields are concerned, I have no confidence
we'll see them anytime soon," Hutchings said.
Today, only about $4 billion of the $7.1 billion in original 10.625
percent coupon debt issued remains outstanding, according to U.S.
Treasury data.
The biggest chunk of the outstanding debt is spending its last days
as a government obligation in obscurity in money market funds, where
it rubs shoulders with other U.S. government debt, many with measly
coupons of less than 1 percent.
For example, you can find $1.25 billion worth in treasury-oriented
money market funds run by Goldman Sachs Asset Management and $250
million in funds run by JPMorgan Investment Management, fund
disclosures show. JPMorgan and Goldman Sachs did not reply to
requests for comment.
(Reporting By Tim McLaughlin; Editing by Bill Rigby)
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