Treasury Sets Stage for 20-Year Bond Reboot to Start in May
(Bloomberg) -- U.S. President Donald Trump used Tuesday’s State of the Union to boast about a booming economy, but the federal deficit under his watch is ballooning -- forcing his Treasury Department to keep debt-sales above the financial crisis-era peak and bring back 20-year bonds.
Treasury is rebooting issuance of the 20-year bond as it seeks to lock-in historically low interest rates to help contain taxpayer cost on its growing pile of debt. The budget shortfall is set to swell to $1 trillion annually over the next 10 years as the government spends more money than it takes in to support tax cuts, increase defense outlays and an aging American population.
As a result, the agency kept the sizes of debt issuance steady at a record $84 billion for a fifth straight quarter in its quarterly refunding announcement released Wednesday in Washington. That surpasses levels last seen when the nation was digging out of its worst economic crisis since the Great Depression.
Treasury Secretary Steven Mnuchin is reviewing ultra-long bonds as one way to contain the cost to service America’s debt pile. Last month he announced plans to issue 20-year bonds as part of that plan.
With financing needs projected to rise, Treasury’s advisory committee made up of investors and banks supports the new issue.
“A regular and predictable issuance strategy is critical to achieving the lowest cost to the taxpayer over time,“ the group said in its report to Mnuchin on Tuesday, and therefore advised no alterations to debt issued with two years or more.
Mike Schumacher, a strategist at Wells Fargo & Co., agrees that it’s best to leave the size of existing coupon auctions steady when the new 20-year bond is added.
“We do not think it makes sense to cut coupon auction sizes now, simply to raise them again 6-12 months down the road,” Schumacher and his colleagues said Wednesday in a note.
The Congressional Budget Office projected that the deficit is set to widen to $1 trillion by fiscal year 2020, two years earlier than previously estimated. It could swell even further if Democrats win the presidential election in November, as leading candidates are pitching voters with spending plans that would add billions more.
Trump championed the strength of the U.S. economy during his state of the union speech, without drawing attention to the rising debt.
“Jobs are booming, incomes are soaring, poverty is plummeting, crime is falling, confidence is surging, and our country is thriving,” the president said. “America’s future is blazing bright.”
Trump has previously expressed frustration at the Federal Reserve for not pushing interest rates even lower to boost his economy.
Treasury said the 20-year bond will follow a similar structure to 10- and 30-year issuance and reiterated it will be debuted in the first half of the year. The department Wednesday set the stage for the 20-year to be rebooted, after it removed from the lineup in 1986, to start in May when it will announce the timing and auction sizes.
Twenty-year bonds will, however, be sold in the week following 10- and 30-year auctions, as Treasury Inflation Protected Securities are. The bonds will have a maturity, coupon and dates that align with the 15th of the mid-quarter refunding months -- which are February, May, August and November of each year.
The Treasury Borrowing Advisory Committee recommended the department launch the 20-year in May. It also supported dealers’ recommendations that new issue auctions for the bond should be $10 billion to $13 billion in size, with each reopening sized at $8 billion to $11 billion.
The Treasury signaled plans to issue a request for information on Secured Overnight Financing Rate-linked debt, as the department continues to investigate adding the security to its arsenal to fund the federal deficit. Also called SOFR, it’s the heir presumptive to Libor as a benchmark for dollar rates.
The government will sell $38 billion in three-year notes on Feb. 11, $27 billion of 10-year notes on Feb. 12, and $19 billion of 30-year bonds on Feb. 13. The $84 billion in planned sales match the amount sold in each of the last four quarters and will raise new cash of about $13.5 billion.
Treasury notes and bonds maintained their declines Wednesday following the refunding announcement. There was little change to the yield curve, with the 5-year to 30-year gap remaining slightly narrower on the day.
“In light of seasonal borrowing needs, total bill supply is anticipated to increase modestly over the next several weeks” from the recent peak of $90 billion, Treasury debt managers said in the statement Wednesday. The increase will peak in mid- to late-March and drop in April, the agency said.
Cash-management bills “may be a component of our financing strategy over this period,” it said.
“Most primary dealers did not expect Treasury to cut other coupon issuance sizes when introducing the 20-year bond,” according to minutes released from the agency’s borrowing committee meeting on Tuesday.
The Treasury Department also announced plans to publicly release trading volume statistics next month. The decision follows a years-long review of transparency in bond market. Wednesday’s announcement didn’t mention the on-going review of 50- and 100-year bonds. Mnuchin in January told Bloomberg News that plans to issue ultra-long bonds is “no longer in the near term” as his team focuses on the 20-year bond.
©2020 Bloomberg L.P.