Why Treasury won’t go ultralong
▶ Other countries are issuing bonds that mature in 40 to 100 years ▶ “The Treasury likes to see large, liquid markets”
The Department of the Treasury has a chance to grab a bargain. The U.S. government is the world’s biggest debtor, and its cost of borrowing is incredibly low. At the most recent auction, it had to pay only 2.6 percent on a 30-year Treasury bond. But that’s the longest-maturity debt the U.S. sells—why not lock in low interest rates for even longer?
Since 2014, Belgium, Canada, France, Mexico, Spain, Switzerland, and the U.K. have all sold debt maturing in 40 to 100 years. In 2015, Microsoft and Verizon Communications sold bonds with 40-year maturities, and the University of California issued 100-year obligations. “If rates go up, it’s a historic missed opportunity by the U.S.,” says Campbell Harvey, a finance professor at Duke University.
The Treasury sees things differently. Since the 1970s, it’s pursued a policy of predictable, regular bond issuance. The Treasury wants to make sure the market for its $13.4 trillion in bonds remains reliable and easy for investors around the globe to trade in. To the extent investors reward reliability with lower interest rates, the policy may save taxpayers money. A longer-maturity bond might be issued sporadically, when rates are attractive and there are enough buyers for such an unusual security.
Senator Mark Warner, the ranking member of the Banking, Housing, and Urban Affairs Subcommittee on Securities, Insurance, and Investment, nonetheless argues that longer-term issuance is worth a shot. “This is an academic discussion until we try it,” the Virginia Democrat says. Issuing longer-term bonds doesn’t reduce the debt burden, he says, “but it does remove some of the risk from interest rate spikes.”
“Treasuries are different,” said Antonio Weiss, a counselor to the secretary of the Treasury, in testimony to the Senate subcommittee in April. “We
don’t introduce new instruments and then withdraw them.” He said the government was nonetheless moving to extend maturities by changing the mix of bonds it issues. The average lifespan of its debt is about 69 months, up from 49 in December 2008.
Most countries selling ultra-long debt don’t do it on any regular schedule. France has issued 50-year bonds only three times since 2005, and the 50-year security Belgium sold in April was its first of that maturity. Spain’s sale was its second foray into the ultralong market. In contrast, even Treasury Inflation-protected Securities—the leastfrequently auctioned U.S. debt—are offered at least three times a year. And the government is slow to add products. After the creation of TIPS in 1997, its next addition didn’t come until 2014, when it introduced floating-rate notes.
The Treasury has also gotten pushback against ultra-long bonds from the Wall Street banks that act as dealers, stepping into the market to make sure there’s always a buyer or a seller. The list of investors who’d want a bond that doesn’t mature for 40 or 50 years is relatively short, says Jason Sable, a trader at Mizuho Securities USA. The likely primary buyers—pensions and insurers—tend to prefer higheryielding corporate debt. Other investors may deem ultra-long bonds as perilous, because their value on the secondary market could fall sharply if interest rates subsequently rose.
If eager buyers dried up, dealers could potentially get stuck with unsold bonds on their books, Sable says. The Treasury’s Borrowing Advisory Committee, which includes some dealers, voiced that concern in 2011, the last time the department asked it to consider ultra-long bonds.
“The Treasury likes to see large, liquid markets,” says James Moore, head of investment solutions at Pacific Investment Management, one of the world’s biggest bond managers. “And something like a 50-year bond is not going to be particularly liquid.”
The bottom line Treasury wants to keep the market for its bonds orderly and predictable, and it’s willing to pass up some opportunities to do so.