Wall Street: US serious about ultralong bonds

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 sceptics said, and the initiative could prove costly to US 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 US 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 US 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 three per cent 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 ageing infrastructure with a trillion- dollar spending programme and cut taxes at the same time.

It’s not without precedent. In 1911, the US 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 ultralong 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 US$ 1.5 trillion. The argument is that the US “won’t have to pay much to gain more certainty and the ability to lockin 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 counsellor Antonio Weiss on why the US wasn’t selling ultra-longs. He hasn’t changed his tune.

“If there is an appetite for longterm debt in foreign markets and with US 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 US bond market has become the deepest and most important in the world. — WP-Bloomberg

The Treasury seems committed to the idea that we are going to issue debt that is greater than 30 years. Jim Bianco, the Chicago-based founder of Bianco Research