Picture credit: DonkeyHotey || Should bonds get longer?
When I visited the US Treasury during the first Treasury/Blogger summit I encouraged the US Treasury to issue debts longer than 30 years, and also floating rate debt. I said the insurance companies, pension funds and endowments would be willing buyers, and that it would be cheaper than issuing 30-year bonds. I thought that the yields on (say) 50-year bonds would be lower than 30-year bonds, because the yield curve for most of my life (at that point) had the yield curve peaking out at around 22 years or so. 30-year bonds usually yielded less than 20-year bonds.
The case for issuing longer debt was easy when 30-year bonds yielded less than 20-year bonds. That is no longer true, and has not been true since the financial crisis. In a low interest rate environment, 30-year bonds yield more than 20–year bonds. In a higher interest rate environment, the relationship flips.
So, should the US treasury issue 50-year, 100-year, or perpetual bonds? I still think the answer is yes, and for three reasons.
1) It’s an experiment. The market doesn’t always know what it wants until you offer an option to it. No degree of discussion with the advisory committee can beat an actual offering to the market. There used to be callable T-notes, and even a Treasury note denominated in Swiss Francs. Experiments are worth trying on a small level just to see what happens. Knowledge is a valuable thing — theory is worth less than tangible data.
2) Rates are low. Why not lock in the low rates? Even if 50-year bonds have a premium yield to 30-year bonds, those yields are likely lower than what you might get when interest rates are high.
3) It would be genuinely useful for life insurance companies and pension funds to have a benchmark for 50-year bonds, which would encourage the corporate market to issue debt as well. Those who make long promises need others who will make similarly long fixed commitments.
Then there are the speculators, who I don’t care much about. They would appreciate longer debt as well, as it would give them a greater place to speculate.
My advice to the US Treasury is this: issue longer debt as an experiment. If there is additional cost in the short-run, see if it is cheaper in the long run. There is a market for longer debt, even if your advisory committee thinks differently.
Hi David. Per your “Notes from an Unwelcome Future”, (and anyone else reading a chart of US debt), we will have a large reality check on budget issues in the late 20s/early 30s. I would think that issuing 50s would also be a way of lowering volatility and uncertainty in that time frame.
On the commercial side, you have cited countless examples of companies busting for borrowing short. While a 10 year window isn’t exactly short for companies, for the US, maturity of currently-issued 10s does put us right in a tough spot.
You’re far more experienced in this area than me, so curious if I am just missing some dynamic since you haven’t really pushed this as a top benefit of longer terms.
Thanks!
I just re-read what I wrote in my visit to the US Treasury in 2009. Two of the things I didn’t write were the only two things I actually got to say at the meeting. The first was my telling them that they could learn something from the way Canada regulates their banks, and also that the US state-regulated insurance companies were regulated better than the depository institutions in the US, especially for solvency.
The second thing that I said was that the US should lengthen maturities for Treasury issuance, and issue fifties, centuries, and consols. Also floating rate debt. I told them that the US government would face a crisis when there is too much debt to roll over, so stagger the maturities, and pay up to borrow longer.
So, yes, that would be a major reason why the government should issue longer debt. That said, it’s easier if there is a natural home for the debt. It’s also an easier sell if the US government uses the funds to take care of long-lived infrastructure projects.
But the main problem will still remain. If interest rates rise, will the the increase in the deficits lead to higher taxes, inflation or default? I think the Fed will try to repress higher interest rates for s long as it can, and the US might try an external default or a dual currency (like South Africa of old), before they try something worse. But who knows what shape the mess will take? It will come down to politics, and that is not predictable.