Few things from 1985 achieved lasting fame and universal acclaim. One of them is the highest-paying US government bond, which easily outlasted 'new Coke," Commodore's Amiga computer, power suits and big hair. The last US 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 August 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 US 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, US 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 US 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 US government's first debt buyback in 70 years.
The US 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.
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 US 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 US 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 J.P. Morgan Investment Management, fund disclosures show. J.P. Morgan and Goldman Sachs did not reply to requests for comment.
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