Efforts by the Treasury to sell bonds due in more than 30 years would face obstacles as the Federal Reserve begins raising interest rates from a record low, according to dealers that underwrite U.S. debt sales.
The Treasury Department asked the Fed’s 22 primary dealers today to comment on demand for such securities. The question came amid a bond rally this year that surprised traders who began 2014 forecasting higher yields as the economy improved.
“They really have to think about what the demand is going to be like for it in the future,” said Thomas Simons, a government-debt economist in New York at the primary dealer Jefferies LLC. “That’s anybody’s guess.”
Futures trading shows 60 percent odds that the Fed will boost interest rates for the first time since 2006 by July 2015 as the U.S. economy improves. Policy makers have maintained the benchmark rate for overnight loans between banks in a range of zero to 0.25 percent since December 2008 to support the economy.
Thirty-year yields will increase to 4.12 percent by mid-2015, according to the median forecast in a Bloomberg survey of analysts and economists.
“It doesn’t sound like there would be tremendously aggressive demand” for 50-year securities in a period where yields are rising, Simons said.
Treasuries maturing in 10 years or more have returned 13 percent this year, rebounding from a 12 percent loss in 2013, according to Bank of America Merrill Lynch bond indexes. The broader Treasury market gained 3.4 percent. Yields on 30-year bonds, the longest maturity the U.S. now sells, fell to as low as 3.26 percent yesterday, the least in 13 months, after starting the year at 3.97 percent, the highest since 2011.
The rally in longer-term Treasuries has been fueled in part by pension funds looking to lock in gains in equities and by demographic shifts as aging investors have bought more fixed-income securities to save for retirement. Gains in the broader Treasury market were also spurred as investors sought safety amid turmoil in Ukraine and the Middle East.
While demand for long-term debt could boost prices for a potential 50-year bond, it might displace purchases of the current 30-year security, said Justin Lederer, an interest-rate strategist at Cantor Fitzgerald LP in New York, a primary dealer.
“It’s the same players out in the long-end,” Lederer said. “It would definitely affect the 30-year.”
Issuance of 50-year securities would probably be smaller than that of 30-year bonds, and the Treasury would probably have to reduce the sales of that security to make room for the new one, Lederer said. The department sold $168 billion of 30-year bonds last year.
Supporting new, longer-term securities in the secondary market would be difficult for dealers, given moves by banks to cut back the extent of their balance-sheet commitment to trading amid tighter regulatory scrutiny and declining trading revenue, said Shyam Rajan, an interest-rate strategist in New York at Bank of America, another primary dealer.
“I’m not convinced that there’s enough demand, especially in a world with constrained dealer balance sheets, to run a longer-duration product,” Rajan said.
The Treasury asked for comment on demand for U.S. bonds due in more than 30 years in its quarterly survey of dealers released today in Washington.
The U.K. and Canada have sold 50-year bonds.