The US Treasury department dropped an atomic bomb this morning when
assistant Secretary for Financial Markets Timothy Bitsberger said Treasury would "examine if we have flexibility to issue 30-year bonds while maintaining deep and liquid markets in our other securities and determine if nominal bond issuance is cost effective.".

The lack of supply of new 30-year bonds since 2001 has kept their price artificially high (and interest rates artificially low). Moreover, the re-issuing of 30-year debt by the US will have an effect on the steepness of the yield curve, which has been flattening recently even if the Fed keeps increasing short term interest rates.

This is the way the US 30-year bond market reacted to the news:

 
The price of the future contract dropped by two full points in a matter of minutes.
Considering the enormous leverage of these contracts, this is like a stock market crash. The following picture shows what happened to the yield of the US 30-year bond as the price of the contract was changing. It briefly touched 5.05% before settling around 4.6% as I write this.

 

Categories: bond market, interest rates