Mnuchin to Wall Street: U.S. Serious About Ultra-Long Bonds

(Bloomberg) —
Mnuchin, Wall Street, U.S., Bonds
Steve Mnuchin, U.S. Treasury Secretary, speaks during the Milken Institute Global Conference in Beverly Hills, California, U.S. (Reuters/Mike Blake)

From the moment that Steven Mnuchin first hinted back in November that the Trump administration would entertain the idea of selling ultra-long bonds, the consensus across Wall Street was pretty clear: Don’t do it. There’d be no easy way to lure a steady stream of buyers, the skeptics said, and the initiative could prove costly to U.S. taxpayers.

But it seems Mnuchin has different ideas. Since taking office as Treasury Secretary in February, he’s repeatedly indicated that ultra-long issuance was something the administration was looking at.

Last month, he had his staff query bond dealers about how they might structure and price maturities beyond the current 30-year limit. And on Monday, Mnuchin provided the clearest signal yet, saying on Bloomberg that it “could absolutely make sense.”

Suddenly, the buzz on Wall Street is that, financial considerations aside, the administration’s ambitious, pro-growth agenda could make ultra-long bonds a reality in the Treasury market.

The Treasury seems “committed to the idea that we are going to issue debt that is greater than 30 years,” said Jim Bianco, the Chicago-based founder of Bianco Research, who has been following the U.S. bond market for nearly four decades. “It’s a change in the calculus from the previous administration.”

Of course, the idea has always seemed like a long shot — not only on Wall Street but inside the U.S. Treasury Department itself, which over the years has repeatedly passed up on the opportunity. But after Mnuchin’s most recent comments, bond traders are taking notice.

Yields on longer-term Treasuries jumped, with the gap between five- and 30-year yields reaching the widest since February. Long bonds ended at 3 percent on Monday.

For Mnuchin, the attraction of issuing ultra-long bonds at today’s historically low interest rates isn’t hard to understand. It would allow the government to borrow vast amounts of money that wouldn’t have to be paid back for a half-century or more, and help fulfill two of President Donald Trump’s biggest campaign promises: fix the nation’s aging infrastructure with a trillion-dollar spending program and cut taxes at the same time.

It’s not without precedent. In 1911, the U.S. sold 50-year bonds to fund the construction of the Panama Canal — the most expensive construction project in American history at that time. Gary Cohn, Mr. Trump’s top economic adviser, talked up in an interview on CNBC the “enormous amount” of ultra-long bonds the government could issue to finance spending on infrastructure, an area of chronic under-investment for decades.

“It’s a reasonable probability that the Treasury will issue these bonds,” said Scott Mather, chief investment officer for core strategies at Pimco, which oversees $1.5 trillion. The argument is that the U.S. “won’t have to pay much to gain more certainty and the ability to lock in low rates for a long time.”

A number of Democrats are on board as well. Last year, Mark Warner, the ranking Democratic member of the securities, insurance and investment subcommittee of the Senate Banking Committee, pushed then-Treasury counselor Antonio Weiss on why the U.S. wasn’t selling ultra-longs. He hasn’t changed his tune.

“If there is an appetite for long-term debt in foreign markets and with U.S. corporations and universities, there would be sufficient appetite to market the debt of the world’s safe-haven and reserve currency,” Warner said in an emailed reply to questions.

For the naysayers, the case against ultra-longs rests on two basic concerns: liquidity and cost. Regular and predictable auctions have been a pillar of the Treasury’s debt management since the 1970s, and a key reason the U.S. bond market has become the deepest and most important in the world.

A 50-year bond would likely yield about 0.2 percentage points more than 30-year Treasuries, according to JPMorgan Chase, whose analysts said such sales aren’t a good idea.

Whatever the case, big Treasury decisions are often political decisions. Under Larry Summers, the department introduced inflation-linked bonds, known as TIPS, in 1997, to provide policymakers a market-based gauge of inflation expectations, even though studies have shown they ended up costing taxpayers billions in extra interest. Former Treasury Undersecretary Peter Fisher ended sales of the 30-year bond in 2001, only to see it revived in 2006 as the war in Iraq and the Bush administration’s tax cuts caused record budget deficits.

That hasn’t stopped a number of other countries from issuing ultra-long bonds in recent years to take advantage of low interest rates. Nations including Canada, France, Mexico, Switzerland and the U.K. have all sold debt maturing from 40 years to 100 years, though few have done so on a regular basis. Several companies have also issued century bonds.

Fisher, who is now a senior lecturer at Dartmouth College, says a good argument for the U.S. government to consider issuing ultra-long bonds is that it would help push financing needs past the droves of baby boomers who are currently retiring and drawing Social Security.

“I had hoped to come back and eventually issue 60- or 100-year maturities, but we didn’t get around to it,” he said, referring to his tenure at the Treasury.

Gemma Wright-Casparius, a senior money manager at Vanguard, says one feasible approach would be for the Treasury to cut the size of its 30-year bond sales to make room for a 50-year bond. She said Vanguard, which oversees $4.1 trillion, would be buyers if the ultra-longs are included in benchmark bond indexes — as long as the price is right.

“I don’t see any reason why not,” she said. “For Treasury, anything is possible, as long as they do their due diligence.”

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