Is it time to call Methuselah? U.S. Treasury Secretary Steven Mnuchin is pondering issuing ultra-long term debt maturities as a new way to finance the government’s agenda. Treasury is revisiting the idea as long-term yields have breached record lows. Mnuchin had floated a similar notion in 2017, when it was set aside after receiving a cold reception from Wall Street investors and the borrowing committee of bond dealers that meets quarterly with Treasury to advise it on debt management. In some ways the question comes down to this: In the long run, will the government save the most money by borrowing as cheaply as it can, or as predictably?
1. How long is long?
Right now the longest duration security the Treasury sells is the 30-year bond. The most likely new ultra-long term bond appears could be a 50- or 100-year maturity, though a 2017 Treasury survey of primary dealers also asked for feedback on 40- and 100-year bonds.
2. How would they help?
Think about the government’s debt like a mortgage. Since the government rolls over much of its debt, selling short-term debt like 2-year bonds is like having a variable rate mortgage. A 30-year bond locks in a rate for a generation. But with rates hovering near their record low, why not lock them in for even longer? The savings could be looked at as the difference between the interest rate a 50-year bond sells for now and what the government would have to spend to roll over debt in the 20 years after a 30-year bond matures.
3. Would this add to the federal debt?
No. How much the government spends, taxes and borrows is up to Congress, not the Treasury. Mnuchin is talking about changing the mix of bonds the government issues, not the total. But to the extent that ultra-long bonds reduce the cost of borrowing even more, they may add to the logic of those who argue in favor of a big infrastructure or stimulus package to take advantage of the current low rates.
4. How would ultra-long bonds work?
Probably like regular bonds. That is, most bond strategists think that a 50- year Treasury, for instance, would be structured in the same fashion as current offerings, with interest paid twice a year and the principal paid as a lump at maturity. Peter Fisher, a former Treasury Undersecretary who’s been a supporter of ultra-long bonds, has said they could be made more appealing by having their principal amortized over part or the entire life of the bonds, as mortgage loans do.
5. Who wants to do this?
During a Bloomberg interview in Washington on Aug. 28, 2019, Mnuchin said that issuing ultra-long U.S. bonds was “under very serious consideration.” Back in May 2017 he told Bloomberg that these debt securities “could absolutely make sense” to help finance the government. President Donald Trump’s former top economic advisor Gary Cohn had said during his tenure that there was enormous amount of demand for this debt and that it could help finance spending on infrastructure.
6. Who would buy them?
Pension funds and insurance companies often prefer parking their cash in debt with long durations (or high tenors, as they’re known). They have long-term liabilities, so long-term bonds help them invest in a way that reduces the risk that they might have a liquidity crunch in the future. For investors who trade bonds rather than sit on them, the longer bonds could have two drawbacks: the limited supply of the bonds and limited interest by buyers could make them harder to buy or sell. Plus, the longer the duration, the greater the risk that changes in interest rates could damage their value.
7. Are there people who think this is a bad idea?
Yes, and some of them are the dealers the Treasury would need to make it work. The Treasury Department relies on a small group of what are known as primary dealers to purchase government debt and sell it on the secondary market. They’ve been pessimistic about the idea of ultra-longs. The Treasury Borrowing Advisory Committee, which is made up of investors as well as primary dealers, has indicated that demand for ultra-long bonds wouldn’t be sufficient to sustain regular and predictable - and consistent - sales over time. When Barack Obama was president, the Treasury analyzed the idea of adding long-duration bonds several times, yet chose not to in part out of concerns that demand wouldn’t be consistent beyond the first few sales.
8. Have these bonds worked before?
A number of European governments, including France, Belgium and Spain have successfully issued 50-year bonds in recent years. Belgium and Ireland have sold 100-year bonds, as did Austria at a yield of 1.171%. Their primary goal has also been to take advantage of the low rates. The U.K. has also issued 50-year bonds, many of which were bought by pension funds there. The U.S. did issue a series of bonds with up to 40-years to maturity between 1955 and 1963, and sold 50-year bonds in 1911 to fund the construction of the Panama Canal. But they haven’t been offered since Treasury began to follow a self-imposed goal in the 1970s of keeping its debt issuance regular and predictable, a key reason why America’s about $16 trillion bond market is the deepest and most liquid and the world’s benchmark.
9. What else might the Treasury do?
The advisory committee suggested that the Treasury might issue more 10- and 30-year bonds instead, or consider reviving a 20-year bond. While they recommended against a 100-year bond, they said the government could consider selling 50-year zero-coupon bonds, which make no interest payments and return only principal at maturity.
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