Mnuchin to Wall Street: U.S. Is Serious About Ultra-Long Bonds
(Bloomberg) -- From the moment that Steven Mnuchin first hinted back in November that the Trump administration would entertain the idea of selling ultra-long bonds, the consensus across Wall Street was pretty clear: Don’t do it. There’d be no easy way to lure a steady stream of buyers, the skeptics said, and the initiative could prove costly to U.S. taxpayers.
But it seems Mnuchin has different ideas. Since taking office as Treasury Secretary in February, he’s repeatedly indicated that ultra-long issuance was something the administration was looking at. Last month, he had his staff query bond dealers about how they might structure and price maturities beyond the current 30-year limit. And on Monday, Mnuchin provided the clearest signal yet, saying on Bloomberg TV that it “could absolutely make sense.”
Suddenly, the buzz on Wall Street is that, financial considerations aside, the administration’s ambitious, pro-growth agenda could make ultra-long bonds a reality in the Treasury market.
The Treasury seems “committed to the idea that we are going to issue debt that is greater than 30 years,” said Jim Bianco, the Chicago-based founder of Bianco Research, who has been following the U.S. bond market for nearly four decades. “It’s a change in the calculus from the previous administration.”
Of course, the idea has always seemed like a long shot -- not only on Wall Street but inside the U.S. Treasury Department itself, which over the years has repeatedly passed up on the opportunity. But after Mnuchin’s most recent comments, bond traders are taking notice.
Yields on longer-term Treasuries jumped, with the gap between five- and 30-year yields reaching the widest since February. Long bonds ended at 3 percent on Monday.
For Mnuchin, the attraction of issuing ultra-long bonds at today’s historically low interest rates isn’t hard to understand. It would allow the government to borrow vast amounts of money that wouldn’t have to be paid back for a half-century or more, and help fulfill two of President Donald Trump’s biggest campaign promises: fix the nation’s aging infrastructure with a trillion-dollar spending program and cut taxes at the same time.
It’s not without precedent. In 1911, the U.S. sold 50-year bonds to fund the construction of the Panama Canal -- the most expensive construction project in American history at that time. Gary Cohn, Trump’s top economic adviser, talked up in an interview on CNBC the “enormous amount” of ultra-long bonds the government could issue to finance spending on infrastructure, an area of chronic under-investment for decades.
“It’s a reasonable probability that the Treasury will issue these bonds,” said Scott Mather, chief investment officer for core strategies at Pimco, which oversees $1.5 trillion. The argument is that the U.S. “won’t have to pay much to gain more certainty and the ability to lock-in low rates for a long time.”
A number of Democrats are on board as well. Last year, Mark Warner, the ranking Democratic member of the securities, insurance and investment subcommittee of the Senate Banking Committee, pushed then-Treasury counselor Antonio Weiss on why the U.S. wasn’t selling ultra-longs. He hasn’t changed his tune.
“If there is an appetite for long-term debt in foreign markets and with U.S. corporations and universities, there would be sufficient appetite to market the debt of the world’s safe-haven and reserve currency,” Warner said in an emailed reply to questions.
For the naysayers, the case against ultra-longs rests on two basic concerns: liquidity and cost. Regular and predictable auctions have been a pillar of the Treasury’s debt management since the 1970s, and a key reason the U.S. bond market has become the deepest and most important in the world.
Finding enough demand to issue 50-year bonds on a regular basis and move the needle in the $13.9 trillion market could be a challenge and potentially cost taxpayers billions of dollars. Insurers and pensions, the most likely buyers, are prone to hold to maturity, which means the securities may not be readily available to trade. If anything, many say issuing ultra-longs makes more sense politically than it does financially or structurally.
A 50-year bond would likely yield about 0.2 percentage points more than 30-year Treasuries, according to JPMorgan Chase, whose analysts said such sales aren’t a good idea.
David Mericle, an economist at Goldman Sachs, said in a report last week that he doesn’t expect the Treasury to sell ultra-long term debt partly because it’s “likely to again receive skeptical feedback from dealers.” Nomura also said the Treasury needs to do a “deep and comprehensive analysis” before trying such sales because it isn’t clear whether the benefits would outweigh the costs. Morgan Stanley warned in an April 21 report that “investor demand for ultra-long issuance will not be robust enough.”
Such criticisms have become more muted as the odds increase that the administration will issue ultra-long bonds. While a number of dealers, ex-Treasury officials and former members of the Treasury Borrowing Advisory Committee still voice concerns off the record, few would do so publicly. Most say the Treasury will probably sell the debt anyway.
Whatever the case, big Treasury decisions are often political decisions. Under Larry Summers, the department introduced inflation-linked bonds, known as TIPS, in 1997 to provide policy makers a market-based gauge of inflation expectations, even though studies have shown they ended up costing taxpayers billions in extra interest. Former Treasury Undersecretary Peter Fisher ended sales of the 30-year bond in 2001, only to see it revived in 2006 as the war in Iraq and the Bush administration’s tax cuts caused record budget deficits.
Ultra-long bond sales “may make sense, though it may be challenging to fit into Treasury’s rubric of regular and predictable issuance,” said Amar Reganti, a fixed-income strategist at GMO’s asset-allocation group, and a former deputy director of the Treasury’s Office of Debt Management.
Mary Miller, the Treasury’s former undersecretary for domestic finance, says while it’s prudent to adjust debt offerings at times, there are diminishing returns from extending debt beyond 50 years. She helped engineer the 2014 launch of the floating-rate note, the Treasury’s first new security since TIPS.
“In my experience of considering longer-term debt, it doesn’t make a lot of sense past a 50-year maturity,” she said.
That hasn’t stopped a number of other countries from issuing ultra-long bonds in recent years to take advantage of low interest rates. Nations including Canada, France, Mexico, Switzerland and the U.K. have all sold debt maturing from 40 years to 100 years, though few have done so on a regular basis. Several companies have also issued century bonds.
Fisher, who is now a senior lecturer at Dartmouth College, says a good argument for the U.S. government to consider issuing ultra-long bonds is that it would help push financing needs past the droves of baby boomers who are currently retiring and drawing Social Security.
“I had hoped to come back and eventually issue 60- or 100-year maturities, but we didn’t get around to it,” he said, referring to his tenure at the Treasury.
Gemma Wright-Casparius, a senior money manager at Vanguard, says one feasible approach would be for the Treasury to cut the size of its 30-year bond sales to make room for a 50-year bond. She said Vanguard, which oversees $4.1 trillion, would be buyers if the ultra-longs are included in benchmark bond indexes -- as long as the price is right.
“I don’t see any reason why not,” she said. “For Treasury, anything is possible, as long as they do their due diligence.”