The Treasury's 30-year bond has outlived its usefulness as a barometer of the overall market, and the 10-year note is steadily emerging as the bellwether issue, market participants say.
The most compelling reason for the switch is that many major industrialized countries, including Japan, Germany, and France, use their 10-year bonds as benchmarks. As fixed-income markets have increasingly become global in scope, Treasury market observers say, the 10-year note is the logical choice for the U.S. bond market.
In addition, many U.S. mortgage rates follow 10-year notes more closely than they track the 30-year bond.
The debate comes against the backdrop of the Treasury's announcement in May that it would sell 30-year bonds twice yearly instead of four times and cut-back on the volume of issuance. In doing this, the government expects to lower its long-term borrowing costs and allow for long-term interest rates to move lower.
But what the government has also done is raise speculation that the 30-year bond will finally be edged out of its place of prominence in the market. Observers say that the shortage of 30-year bonds will reduce activity in the issue, thus making it less volatile and less indicative of the overall market.
|More Logical Choice'
"The 10-year is the more logical choice for the benchmark because it better indicates the trend of the market and it matches best with long issues from other countries," said Donald Fine. chief market analyst at Chase Securities.
"And now that the bond is coming every six months, it doesn't come with the frequency you need for it to be a benchmark."
10-year Note More Versatile
The 30-year issue, said Mr. Fine, tends to appeal to select groups of investors, such as money managers and pension funds, whereas the 10-year note is a more universally traded instrument.
Brian S. Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson Inc., agreed, citing the often independent nature of trading in the 30-year bond.
Mr. Wesbury asserted that recent price action proves his point. The 30-year has traded in its own world in the last few weeks, outperforming the rest of the Treasury issues, which posted more moderate gains.
"The bond has recently taken on a life of its own and left the rest of the market behind," he said. "If you want to pick an issue in the market that is a better proxy for illustrating all issues, it's definitely not the bond. The 10-year is the clear choice."
Market analysts hold a similar view for mortgage-related securities. Because of refinancings, the average life of a 30-year mortgage is about 10 years, so most analysts believe that the 10-year note would allow for easier comparisons to be drawn between the two markets.
"I already use the 10-year as my benchmark," said David Lereah, chief economist at the Mortgage Bankers Association. "The 10-year note is more closely tied to mortgages, and I look at it to see what the mortgage market will do in the future."
Though agreeing that the 30-year issue has become a dinosaur in a still-evolving market, some believe that the five-year note may also be a contender for benchmark status.
A Vote for 5-Year Note
Joseph Liro, chief economist at S.G. Warburg & Co., said the five-year would be an ideal benchmark because of the frequency with which the issue hits the market and its tendency to lead the market in times of heavy trading.
"The five-year note gets auctioned monthly, and if you look at most big market moves, they have been led by the five-year," Mr. Liro said.
Shift to the Front
And the Treasury has shifted the bulk of its debt to the front end of the market, he said, noting that the average duration of a bank portfolio is around five years. Both of those factors make the five-year a logical candidate for benchmark, he said.
Still other analysts believe market dynamics have already forced a move away from the 30-year bond as participants monitor the issues that best match their investment goals.
Steven R. Ricchiuto, chief economist at Barclays de Zoete Wedd Securities, said that increasingly segmented investors are focusing on different issues.
A Number of Candidates
"There has been over time the emergence of a number of issues which could be considered benchmarks," Mr. Ricchiuto said, noting that large funds tend to watch the 30-year issue, while foreign investors use 10-year notes. Banks, he said, tend to follow the five-year note.
Market observers agree that it will take some time before the market fully embraces a new benchmark. "The question isn't if the market will accept a new benchmark, it's more a question of when," Mr. Wesbury said.