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”

Bloomberg Businessweek (North America) - - Contents - �El­iza Ron­alds-han­non and Liz Capo Mccormick Edited by Pat Reg­nier Bloomberg.com

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.

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