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a tricky temptation for Trump

A club of top bankers, investors and Treasury officials will this week meet at the venerable Hay-Adams hotel in downtown Washington to discuss the US government’s borrowing plans. It could be a blockbuster meeting.

The Treasury Borrowing Advisory Committee meets quarterly to discuss with senior government officials the best way for the US to finance its budget deficit. It is made up of senior executives from hedge funds such as Brevan Howard and Citadel, banks including JPMorgan and Goldman Sachs and big investment groups such as BlackRock and Prudential.

This week they will almost certainly deliberate issuing “ultra-long” dated US government debt. The Treasury last month asked its “primary dealers” — banks that underwrite the government’s debt sales — to gauge the appetite for bonds that mature in 40, 50 or even 100 years.

Initially, a 50-year Treasury is considered the most likely new maturity, given anything shorter would risk cannibalising too much of the demand for the 30-year Treasury debt, and a “century bond” is a bigger and more complicated step. However, many investors, analysts and bankers remain sceptical that ultra-long debt sales will ultimately materialise — at least for a long time.

“At the end of the day it’s the Treasury secretary’s decision. It’s splashy and it’s a low-hanging fruit, so they might do it. . . [But] there are a lot of tough questions, and none of the answers are really in favour of doing it,” says Amar Reganti, a strategist at GMO, the Boston-based asset manager and the former deputy head of Treasury’s Office of Debt Management.

On the face of it, issuing ultra-long dated bonds makes sense. Long-term government borrowing costs are exceptionally subdued, and a batch of European countries have already issued such debt in recent years to lock in low rates.

The 30-year Treasury yield — the longest US maturity — yields less than 3 per cent, compared with its long-run average of 6.8 per cent. Ultra-long bonds would probably only cost slightly more, with analysts predicting that a 50-year Treasury would yield roughly about 3 per cent to 3.25 per cent.

“If I was the government I would want to issue it,” says Karyn Cavanaugh, a market strategist at Voya. They can secure low rates and “be laughing all the way to the bank, paying it for 50 years”.

It would also increase the average maturity of the US government’s debt stock, which is among the lowest in the developed world. The weighted-average maturity of the Treasury market is just 5.7 years, while Japan’s government bond market, the only one nearly as big as US Treasuries, is 6.8 years. The average gilt market maturity is nearly 15 years.

Longer-dated US government bonds could also be a boon to corporate America, which could use the yields as a price reference for their own long-term borrowing programmes. Institutional investors such as pension funds and insurers might also welcome more ultra-long bonds that better match the lengthy nature of their liabilities.

There are, though, many obstacles. The US Treasury is a conservative institution, and its debt management officials take US government bond’s status as a predictable cornerstone of the global financial system very seriously. Most other countries that have issued bonds maturing beyond 30 years have done so opportunistically — an anathema to Treasury officials.

“It would be out of keeping with longstanding Treasury principles,” David Mericle, a senior economist at Goldman Sachs, noted.

The Treasury is only likely to start issuing ultra-long bonds, analysts say, if it is convinced that there is strong and durable appetite for “regular and predictable” sales of sufficient size. And that remains uncertain.

The question of whether to issue ultra-long bonds has been debated at least three times at the Treasury since 2009, most recently in 2014. But nothing came of it, on concerns that investor demand would prove fickle and costs to the taxpayers would outweigh the benefits. Little has really changed since then, fixed-income strategists say.

Moreover, the chief impetus for the Trump administration to break with Treasury convention appears to be to finance an infrastructure spending spree. However, that now looks less likely, with the administration’s focus shifting more towards incentivising private sector infrastructure investment through tax benefits, and the questionable Congressional support for a budget-busting government plan.

Still, starting an ultra-long government bond sale programme would constitute a small but easy win for an administration short of achievements in its first 100 days in office. If Treasury secretary Steven Mnuchin is determined to push it through then any staff misgivings will be swallowed.

“The staff will make a recommendation, but then it’s up to the Treasury secretary what he wants to do, and then staff will implement it,” GMO’s Mr Reganti says.

Even then it will probably take a lot longer to come to fruition than the administration envisages. The US only issued its first floating rate note in 2014, but it took several years of deliberations. While long-maturity Treasury issuance is less complicated, the work involved would strain a department that continues to be severely understaffed, with several key positions still unfilled.

“I do not see this happening quickly because of the considerable time and preparation required,” said Ajay Rajadhyaksha, head of macro research at Barclays and Treasury Borrowing Advisory Committee member.

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