Primary dealers have warned of obstacles to the US Treasury introducing very long-dated bonds, despite some early support for the plans.
This week Steven Mnuchin, Treasury secretary, said his staff had begun to look into issuing US government debt with maturities of as long as 50 or 100 years.
Such a move would be a historic shift in policy for the $14tn Treasury market, which has resisted issuing debt of longer than 30 years, even as Belgium, France, the UK, Austria and Mexico have sold at longer maturities.
Changes in US government bond issuance have previously been explored in depth with the Treasury consulting with investors and dealers, placing an emphasis on regular and predictable issuance to minimise financing costs. It took nearly three years for the Treasury to introduce floating-rate notes, first sold in 2014.
The Treasury Borrowing Advisory Committee, a group of industry participants that advises on government debt issuance, is looking at issuance models and noted in minutes from its meeting on January 31 that longer-term strategies had historically performed better amid rising interest rates. The bond market expects the Federal Reserve will raise interest rates this summer and later this year.
Some primary dealers, which underwrite Treasury debt sales, have offered support for the idea but highlighted potential stumbling blocks.
Thomas Pluta, co-head of global rates trading at JPMorgan, said gauging how much long-dated debt to issue would be “a tricky balancing act” for the Treasury. Selling too much ran the risk of overwhelming the market while a small sale would not create a liquid secondary market.
But he added: “We’ll trade it. It will be nice to have another point along the yield curve to trade.”
Tom Hartnett, head of fixed income sales and trading at Mizuho, said there was interest but called for “a fundamental assessment of the trade-offs from both the public and private sector’s perspective”, including “whether there is sufficient demand to support the issuance”.
Analysts at BMO Capital Markets cited several challenges, including how liquid such a new security would be and whether it would materially extend the average maturity of the US Treasury debt profile.
“We’re not as confident as the market that such a discussion will lead to an eventual issuance of a very long bond,’’ said the bank. “We’d also argue that the mechanics of trading such securities, as well as the fact that they are likely to be an extraordinarily low liquidity instrument, make their issuance less likely in an already liquidity-restrained environment.”
Mr Mnuchin stressed that he was not making any “formal announcement” on whether the Treasury would issue longer-dated bonds but he had “begun to talk to staff” about it.
In comments before he took office he had indicated that he was open to the idea.
The Treasury’s borrowing costs have risen since Donald Trump was elected president on November 8, with the 30-year yield rising from 2.6 per cent to 3 per cent on Thursday.
Mr Mnuchin reiterated that he expected low interest rates to remain for a long period and that “an engine of growth” would not materialise until next year.
“We’ll reach out to the market, investors, different people, but I think it’s . . . a very serious issue of whether we should explore whether we can raise 50 or 100-year money at a very slight premium,” he told CNBC on Thursday. “That’s something that makes sense for Treasury to look at.”
