The U.S. Treasury announced a return to selling 30-year Treasury bonds, beginning on Thursday when it will bring $14 billion of the long bonds to auction. Demand for the notes appears to be strong, with pension plans leading the search for long-term debt. The Treasury retired the long bond in 2001, favoring shorter-term debt in an effort to save borrowing costs amid consecutive federal budget surpluses. With that black ink very much a thing of the past, the government is bringing back the 30-year bond to help fund a 2006 federal budget deficit currently forecasted to total some $400 billion.

That government forecast would be a 25% increase from the $318 billion deficit in 2005, with the rise notably attributed to the growing costs of hurricane recovery and military operations in the Middle East. "The federal deficit only scares me a little bit because it's still a low percentage of gross domestic product," says David Wyss, chief economist at Standard & Poor's. "But what happens when the baby boomers retire and entitlement spending goes way up?" Pension funds are asking the same question and are making up most of the demand expected for the bond sale on Thursday. Under increasing pressure from the federal government to ensure the health of their assets, pension funds are looking for guaranteed long-term rates of return. "There is definitely demand for long duration assets," says Jabaz Mathai, a senior portfolio manager at Barclays Global Investors. "And most of the demand is pension funds."

But if the bond sale is good for defined benefit plans, the current federal deficit—$180 billion dollars alone for the year's first quarter—could prove to be a long-term liability. "The basic problem with the deficit is we're borrowing a lot of money, increasingly from people outside the U.S.," says Wyss. Foreign demand for current U.S. debt, especially from Asia, has helped push the yield curve to partial inversion, with the sixa-month treasury note yielding 4.60%, or three basis points more than the 10-year note.  The yield on the 20-year note is substantially higher at 4.77%. But Mathai doesn't see overwhelming foreign demand for the longest bonds: "Demand from Asia is unclear," he says. "From a pure valuation standpoint, the bonds do not look very attractive at this point."

With new 30-year bonds back on the market, some have wondered if Thursday's sale will affect the housing sector by pushing up mortgage interest rates. "I'm not sure that that's true," says Wyss. "The mortgage market correlates best with the 10-year Treasury because almost no one takes 30 years to pay off a mortgage. Everyone prepays. However, the 30-year bond is more correlated to the mortgage rates than the three- or five-year notes."