The last time the US was seriously considering issuing ultra-long dated bonds - those with a maturity of 50 and 100 years - was back in late 2016 and early 2017, when yields were near the record lows hit in recent days. As we reported back in November 2016, shortly after Steven Mnuchin was confirmed as US Treasury Secretary, the former Goldman banker proceeded to roil the bond market when he told CNBC he would look at extending the maturity of future Treasury issuance, hinting at 50 and 100 Year bonds, which promptly sent long-term US bond yields surging by the most since the turmoil following Trump’s election victory.
"I think interest rates are going to stay relatively low for the next couple of years." Mnuchin told CNBC. “We’ll look at potentially extending the maturity of the debt, because eventually we are going to have higher interest rates, and that’s something that this country is going to need to deal with." Ironically, with that statement, Mnuchin quickly sent yields spiking higher, although courtesy of foreign buyers these were promptly renormalized.
Asked if he would consider maturities of 50 or even 100 years, ultra-long issuance that has become increasingly popular in Europe in recent years as interest rates plunged to record lows as recently as July, Mnuchin said: “We’ll take a look at everything.”
Well, it's that time again.
As Bloomberg first reported, the Treasury’s Office of Debt Management is again conducting a broad outreach to Wall Street to refresh its understanding of market appetite for a potential Treasury ultra-long bond, according to a statement Friday. Specifically, the US Treasury is once again looking at the market interest in 50- or 100-year bonds, although it has not yet reached any decision whether to issue such a product.
The news of possible ultra-long supply promptly sent the 30Y yield to session highs moments after the announcement:
As noted above, the Treasury last conducted a similar outreach on this product in early 2017, and is seeking to update its "market intelligence" at a time when the Austrian 100Y bond is trading at 200 cents of par in what has emerged as unprecedented demand for ultra duration. The Treasury also said that this is part of an "ongoing and periodic review of potential products."
As a reminder, back in the May 2017 refunding announcement, the Treasury disclosed that it is studying the possibility of ultra-long bonds, with maturities greater than 30 years, although it eventually panned the idea due to no "strong or sustainable demand."
“The committee recommended that Treasury consider issuing a zero coupon 50-year bond” the minutes of the May 2017 Treasury Borrowing Advisory Committee meeting said. Like back then, so now the Treasury faces increased financing needs to pay for the soaring federal budget deficit, which in July surpassed the total deficit for 2018 with two months to spare.
Of course, as widely reported in the news in recent days, various other countries already have 50-year securities, like the U.K., and some have even longer maturity debt, such as Austria, which has both a 70-year and 100 year maturity, as does Argentina, whose century bond this week suffered an unprecedented collapse following the anticipated crash in popularity of the Macri administration.
Back in 2017, skeptic voices dominated, and ultimately the Treasury missed its window to issue ultra long-dated debt. “There’s two ways of looking at Treasury financing, and it all has to start with what the Treasury needs. The Treasury needs money so a 50-year zero coupon would make no sense for them. If they’re going to offer a 50-year, it’s going to be a full bond, ” said Ward McCarthy back in 2017.
“Treasury is already issuing the securities they find to be most appealing. The reason they are considering other options is they have no choice. They need to do this in order to address a tidal wave of increased financing from budget deficits, the Fed shrinking its balance sheet and maybe from Trump tax cuts and infrastructure spending, ” said McCarthy.
Others were concerned about the lack of liquidity such a new issue would bring with it as it would not come to auction frequently if the Treasury does create it.
“We’ve done our homework, and we think this isn’t similar to what’s in Europe,” said George Goncalves, head of fixed income strategy at Nomura. “We’re talking about the U.S., which is the benchmark of global bond markets and what is used as a reference for liquidity around the whole world, as opposed to emerging markets and other countries opportunistically issuing long-term bonds because there’s some demand in their pensions.”
Some, however, were optimistic: David Ader, then chief macro strategist at Informa Financial Intelligence, said he expects demand for a 50-year security. “I would have thought that overseas demand for a 50-year would be good. They have real serious pension issues." He added that “we have to think about the stability and liquidity that our bond market creates for everything.”
Taking the other side, Goncalves said the longer maturity debt does not appeal to some dealers. “The longest they could probably go was 50 years and not do much in terms of size. We’re not recommending it. We just don’t think there’s enough demand for it. We think it would be harder to issue in a predictable way,” he said.
Of course that was in 2017, meanwhile this is now: one would venture to guess there would be a lot of demand for US century bonds, and why not - maybe even perpetual, zero coupon notes...
The recommendation whether to issue ultra long dated debt will be made by the Treasury Borrowing Advisory Committee but the Treasury will ultimately decide the mix it needs to meet its financing needs. If 2017 is any indication, the TBAC will shoot down the idea again, although who knows, this time may be different.
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For those curious what the TBAC thought of ultra-long dated bond issuance back in May 2017, below we excerpt from our post "TBAC Slams Ultra-Long Treasury Idea, Sees No "Strong Or Sustainable" Demand; Yields Slide"
With Bloomberg recently writing articles such as "Mnuchin to Wall Street: U.S. Is Serious About Ultra-Long Bonds", "Mnuchin Says Ultra-Long U.S. Bonds Can Absolutely Make Sense" and "Wall Street Sees Treasury Paying Up for Ultra-Long Bond Issuance", there was a tangible buildup of confusion and excitement that the US Treasury under Steven Mnuchin may follow in Europe's footsteps and announced 50, if not 100 year Treasurys in the near future. As such, today's quarterly refunding announcement by the Treasury Borrowing Advisory Committee - which met yesterday at the Hay Adams Hotel at 9:00 a.m. - was keenly watched to see whether Wall Street would agree or endorse the Mnuchin trial balloon.
It did not.
In fact, in the minutes released as part of the May 2 meeting, the TBAC was vocally against launching "Ultra-longs" at this moment saying "while an ultra-long is most likely to be demanded by those with longer-dated liabilities, the Committee does not see evidence of strong or sustainable demand for maturities beyond 30-years."
The TBAC highlights the change in US TSY issuance patterns over the past three and a half decades, and notes that since 1980, the Treasury has made minimal changes to its issuance patterns: Introduced 2 new products (TIPS and FRNs); Permanently canceled 2 products (4y and 20y); Canceled and subsequently re-introduced 3 products (3y, 7y and 30y).
"The Treasury commands an issuance premium due to its regular and predictable issuance pattern: Regular and predictable means issuance happens in all interest rate environments"
The committee also notes that "Borrowers with Large Funding Programs Are Generally Less Opportunistic in their Approach to the Market"
The TBAC further "recommended that further work be done to study these demand dynamics to get a better sense of where an ultra-long bond might price, which could be above or below the longest maturity debt issuance based on the pricing of domestic ultra-long derivatives, ultra-long bonds abroad, and theoretical models."
Instead of rushing to issuing 50 and 100-year paper, the TBAC suggested that "regular and predictable issuance policy should remain the central consideration to minimize Treasury’s funding cost over time." It also suggested other ways that Treasury might tap potential demand from long-duration investors. As such it recommended that "Treasury consider issuing a zero coupon 50-year bond, and coupon maturities between 10- and 30-years, preferably the reintroduction of the 20-year."
Furthermore, the TBAC noted that it does not expect "meaningful ultra-long supply"
And while the TBAC was pessimistic about demand for 50 Year paper, it explicitly recommended against issuing a 100-year bond due to "limited pension or insurance cash flows beyond 50-years and the preferable attributes of stripped 30-year bonds to meet a similar duration as a 100-year coupon bond."
Here is the full breakdown of TBAC recommendations on ultra-long dated paper:
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The TBAC presentation on Ultra long-Dated issuance is below (link)