Ultra-Long Treasury Bonds: Taking Buy and Hold to a Whole New Level
Two years ago Treasury Secretary Steve Mnuchin took a look at the possibility of issuing ultra-long Treasury bonds with maturities between 50 and 100 years. The reason was to take advantage of the low-interest-rate environment and lock in extremely low borrowing costs. There wasn’t much appetite among the 24 Primary Dealers who are responsible for making sure that treasury auctions are successful by being market makers for Treasury bond issues. However, according to an article by the editorial board of the Wall Street Journal which appeared on August 22, 2019;
“Treasury posted a note on its website last Friday saying that it will conduct “broad outreach to refresh its understanding of market appetite” for 50- or 100-year bonds.”
Current Interest in Ultra-Long Treasury Bonds
Additionally, one of the Primary Dealers, JP Morgan, surveyed their investor clients about the idea back in 2017. Again, there wasn’t much interest from them. However, they recently polled them again, and nearly half of their investor clients expressed interest in the idea. Resulting in a 27% increase from two years ago. Of those expressing interest, insurers were the most interested.
Treasury’s Borrowing Advisory Committee on Ultra-Long Treasury Bonds
The Treasury’s Borrowing Advisory Committee had the task of determining demand and potential pricing for ultra-long debt by the Treasury back in 2017. The committee includes large financial institutions and broker-dealers. Their response was memorialized in the Office of Debt Management F.Y. 2017 Q2 Report in which they pointed out that;
“We do not currently see evidence of notably strong or sustainable demand for ultra-longs in the U.S. market. However, issuing more longer-term debt could be warranted if the Treasury wanted to raise its overall borrowing capacity.”
Are Ultra-Long Treasury Bonds Sustainable?
It’s the word sustainable that Treasury will need to address before it makes any decision to issue ultra-long treasury bonds. Without sustainable demand, Primary Dealers carry a lot of additional risks. They’ll be required to pick up the slack in the auction of these bonds and may have no need or appetite for 50 to 100-year maturities in their inventory. In the Office of Debt Management F.Y. 2017 Q2 Report, the TBAC also points out that there may be better, more efficient, and readily accepted alternatives to the ultra-long bonds in question.
“We recommend considering points between 10 and 30-year benchmarks, such as a return of the 20-year bond, in addition to increased issuance in 10 and 30 years.
A reintroduction of the 20-year will have the broadest demand, highest certainty of initial pricing, and quickest market acceptance.
It fills a hole in the curve and offers the best certainty of establishing another maturity.
Expect significant demand from insurers and annuity providers for 20-year corporates which will benefit Treasury issuance cost.”
Other Considerations for Ultra-Long Treasury Bonds
Other considerations must be addressed though, as the Wall Street Journal article mentioned above points out. According to the Wall Street Journal, “the average interest rate on federal debt hovered between 5% and 6.5%” in the 2000s before the recession. The article continues:
“Monetary policy has significantly eased since then around the world, but interest rates won’t stay low forever.
The U.S. has a debt of $15.7 trillion held by the public—the kind it has to repay on pain of default—and won’t be able to continue ringing up trillion-dollar deficits without investors demanding a heftier premium for the risk. The Congressional Budget Office forecasts that federal government debt as a share of GDP will grow to 144% by 2049 from 78% today and interest costs will go to 5.7% of GDP from 1.8%.
Budget prognosticators aren’t clairvoyant, but 50- or 100-year bonds would almost certainly reduce the government’s financing costs over the long term. The Trump Treasury can do taxpayers a favor by gradually stretching out the average duration of federal debt and reducing the chances of steep future tax increases.”
We’ll Be Watching Closely
It will be interesting to watch as this plays itself out over the next few months. There’s almost no doubt the Treasury is going to take some action to ensure that our debt service costs remain as low as possible for as long as possible. There’s also no doubt whatever they decide to do is going to cause fluctuations in the Treasury Bond Yield Curve. Bond buyers may be enthusiastic about ultra-long Treasury bonds when yields are high, which they’re not today. However, in economic downturns when the Federal Reserve is cutting interest rates, (there was a rate cut in July) demand could evaporate. No one wants to loan money for 50 to 100 years and not be rewarded for that risk.
We’ll be keeping an eye on this issue, and keeping you updated, as it unfolds.
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The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.