(Aug 29): Treasury Secretary Steven Mnuchin said issuing ultra-long US bonds is “under very serious consideration” in the Trump administration, possibly setting up a move that would mark a historic revamp of the US$16 trillion ($22 trillion) Treasuries market.
“If the conditions are right, then I would anticipate we’ll take advantage of long-term borrowing and execute on that,” Mnuchin said Wednesday in a Bloomberg News interview in Washington. He said officials held a meeting earlier in the day to review the possibility.
The concept of issuing 50 or 100-year bonds dates to at least 2009 and has recently gained traction within Treasury. For the Trump administration, issuing extremely long-term debt would limit the cost to taxpayers of plugging a budget deficit that’s headed to US$1 trillion annually. Pension funds would enjoy a few extra points of returns amid falling yields.
Mnuchin said his renewed interest in long bonds was unrelated to the drop in yields on shorter-term US debt. The yield on 30-year Treasuries recently plunged below 2% for the first time, and they continued their drop to a new record 1.90% on Wednesday.
“It would be premature for me to comment on what our conclusion is,” Mnuchin said, adding that the department is “actively revisiting it, and it is something that is under very serious consideration.”
Following Mnuchin’s comments, the gap between five- and 30-year Treasury yields widened to 59 basis points from 56 basis points. Mnuchin’s comments also drove the 30-year bond’s yield up to 1.97%, reversing the decline earlier in the day.
Record-low interest rates make this an opportune time for the Treasury to revisit a proposal it’s shelved in the past. Some observers see a window for the US to issue extremely long-term debt instruments, even though the idea has been met with a cool reception on Wall Street.
Mnuchin studied the issue when he first took office in 2017, but put the idea to rest following a thorough review with the agency’s group of market consultants, called the Treasury Borrowing Advisory Committee, or TBAC.
Treasury’s announcement last Friday after markets closed stirred some confusion among investors who questioned whether the renewed interest was a result of prompting from the TBAC or its primary dealers -- or from President Donald Trump.
The decision to make the announcement came after a meeting between Mnuchin and White House economic adviser Larry Kudlow, according to people familiar with the matter. It was not the result of fresh information from market participants, the people said.
Among the risks of the ultra-long bond is the ebb and flow of demand over the course of an economic cycle. Buyers may be enthusiastic when yields are high, but in downturns, when the Federal Reserve is cutting rates, demand could evaporate, pushing government borrowing costs higher across different maturities.
“The determination we made at the time was that there was definitely some interest in it but it was not necessarily at the size and scale that we thought made sense to pursue,” Mnuchin said Wednesday. “Some time went by and I thought it made sense that we revisit this.”
The Treasury Department has examined the possibility of issuing long bonds about four times in the past decade. The TBAC has been unenthusiastic on the prospect of an ultra-long issue since it emerged.
Investors have snapped up 100-year bonds issued by the likes of Austria, although recent experiences in Argentina and Germany underscore some of the potential pitfalls of buying such long-maturity debt.
Alarms sounded in the Treasuries market earlier this month after 10-year Treasury yields dipped below two-year yields, an event considered a harbinger of a US economic recession in the next 18 months.
The move caught Trump’s attention, who on Aug. 14 tweeted about the “CRAZY INVERTED YIELD CURVE!” and blamed the Fed for any negative effects.
“There are people who think that the yield curve can predict a recession -- I don’t believe that,” Mnuchin said Wednesday. “The answer is: In environments when the market thinks that the Fed is going to lower short-term rates, and that’s built into the market expectation, people end up buying longer-term securities, and that’s what can lead to a flat or inverted yield curve. The market adjusts quicker than the Fed.”
