October 31, 2001
Dear Fellow Members:
Today, the U.S. Treasury Department announced they are suspending issuance of the 30- year bond, with no auction of 30-year securities in February 2002 and no plan for auctions of either 30-year nominal or inflation-adjusted bonds. Rest assured, we have not stopped trading the 30-year at the CBOT, nor do we have any intention to. There remains a supply of 30-year bonds that continue to be supported by active trading, and we intend to provide the marketplace for that trade.
Our view on Treasury's decision has not changed from when I sent a letter on the subject to Treasury Secretary Paul O'Neill in February. We believe the economic impact of the war on terrorism in a time of recession and heightened uncertainty argues strongly for the Treasury to keep open and available all of its funding options, including funding at the long end of the maturity spectrum.
In times of crisis, a well-functioning Treasury bond market is critical to the stability of U.S. financial markets, both as a means for investors to shift long-term interest rate exposure and as a reliable means for market participants to assess the value of long-dated assets and liabilities that are less liquid and creditworthy. In the absence of Treasury securities, the U.S. financial market would be a much riskier place.
An active Treasury bond market also facilitates more direct and expeditious crisis response on the part of monetary policymakers. Though the Federal Reserve has potentially many asset classes to which it can resort in adjusting the stock of liquidity in the U.S. banking system, none of the alternatives affords the Fed as wide a tactical range and as few encumbrances as the Treasury securities market. That is why it has been our view that Treasury's wisest course would have been to continue to fund at least a portion of government debt with periodic new issuance of 30-year bonds and even consider increasing the size of the issuance.
However, we have been very active in recognizing Treasury's shift in governmentfinancing, and our 10-year Treasury note products have become a vital benchmark in the marketplace. We have been equally focused in the development of new products along the entire yield curve. That was demonstrated by the successful launch last week of our 10-year swaps futures contract, the best new product launch we have had in quite some time. This is the start of what will be a strong swaps complex that will add value to our diversified product mix that includes 10, 5 and 2-year Treasury note futures and options, 30-day Fed Funds futures, Municipal Bond Index futures, Mortgage-backed and Agency Note contracts.
The CBOT continues to provide global risk management opportunities for the full range of the yield curve, and we will continue to serve all markets, whatever the benchmark may be. Our members and management will continue to work together to provide fair, open and transparent markets backed by the strength of a AAA-rated clearinghouse, and we are committed to developing new products that reflect an economic benefit to our members and customers.
Sincerely,
Nickolas J. Neubauer
