Treasury may create ‘ultra-long’ bonds,
Government looking into bonds with 50- or 100-year maturities
The Treasury Department is considering selling “ultra-long ” bonds and bonds with a 20-year maturity, giving the government more options in capturing currently low interest rates for debt securities that may be in demand by institutional investors and corporations.
The possibility of bonds with 50- or 100-year maturities has been discussed among government officials and bond traders for years. But Treasury Secretary Steven Mnuchin has formed a working group to further study the idea. In a Tuesday meeting, Treasury officials and financial industry executives discussed the topic and recommended that the Treasury consider tapping “potential demand from long-dura- tion investors,” according to a statement from the Treasury Department.
The industry officials, who are members of the Treasury Borrowing Advisory Committee, specifically recommended that the Treasury consider issuing a zerocoupon 50-year bond. A zerocoupon bond, typically a longterm bond, doesn’t pay interest and is traded at a discount, but allows investors to capture profit at maturity as it’s redeemed at full value.
The committee also recommended selling Treasury bonds with maturities between 10 and 30 years, preferably reviving the 20-year bond that was eliminated in 1986.
Long-term bonds are generally marketed to institutional investors — such as insurance companies and pension plans — that want safe investments to ensure their cash flow. But many consumers are beneficiaries of these insurance companies’ services and pension plans.
“Indirectly, (consumers) are going to be holding it,” says Krista Schwarz, a finance professor at the University of Pennsylvania. “Retail investors aren’t going to be big direct buyers of these securities.”
Currently, the Treasury Department sells various types of debt securities, with maturities ranging from less than a year to 30 years.
“Interest rates are very low right now. And locking in this debt, the government could print for 50 years,” Bill Baruch, IITrader’s chief market strategist, told Bloomberg News. “But ultimately, I don’t know if this is something they’re going to get done anytime soon.”
When asked by Bloomberg TV about the proposal in an inter- view, Mnuchin said ultra-long bonds “could absolutely make sense.”
Investors with long-term liabilities, such as insurance companies or pension plans, may be attracted to bonds with long maturities as their cash-flow management must account for payouts that occur decades later. “To match their liabilities, very long-duration Treasurys give them a good match on the asset side,” Schwarz says.
But long-term securities also have greater price volatility, which is risky for traders, Schwarz says. “If you’re going just buy and hold it, it may be attractive.”
The committee members also concluded that market demand for long-term bonds is still unclear and further research is needed “to get a better sense of where an ultra-long bond might price,” the Treasury’s statement said.
They also recommended against issuing a 100-year bond partly “due to limited pension or insurance cash flows beyond 50-years.”