The 100-Year Bond Man

Ultra-long-dated securities can lock in low borrowing costs, but investors can sour on them quickly.

When interest rates are low, it makes sense to borrow money for as long as possible.

That's what France, Austria, Mexico and Italy have all done in recent years. These nations and others have sold debt maturing in half a century or longer as central banks suppressed borrowing costs globally. The U.S. has resisted following suit. Until now, perhaps.

Steven Mnuchin, President-elect Donald Trump's nominee for Treasury secretary, said Wednesday that he would consider issuing 50- or 100-year U.S. government bonds as a way to lock in such low borrowing costs. Treasury traders immediately responded, with a sudden plunge in value for the longest-dated U.S. government debt. 

Mnuchin's willingness to consider ultra-long-term debt is sensible, especially considering the next administration's ambitious spending plans. The idea of 50-year U.S. debt isn't new, nor is it a bad one. But Mnuchin has to negotiate a delicate dance as he considers lengthening the maturities of Treasuries outstanding.  

It's clear that bond traders are pricing in a new reality under Trump. Traders are suddenly expecting more inflation and higher deficits. While benchmark government bond yields globally are still low, they can rise rapidly, especially with more such loose talk about borrowing more money and spending it freely.

For guidance on just how quickly investors can sour on these extremely long-dated securities, check out U.S. bonds maturing in 15 years or more, a time frame that's more comprehensible than 50 years or a century. Since the day before the U.S. election on Nov. 8, these notes have plunged more than 6 percent, with yields climbing to their highest levels of the year.

Trumped-Up Yields

Longer-term borrowing costs rose in the wake of Donald Trump's election as the next U.S. president

Source: Bloomberg

And even though the effect of Trump's plans on Europe is less clear, half-century bonds on the Continent also sold off, with some such notes losing more than 10 percent since the election.

Higher Rates Ahead

Ultra-long bonds in Europe sold off after the U.S. election, leading to higher rates in that region

Source: Bloomberg

Rates have since stabilized as pension funds and insurers find the higher yields appealing. And yields are still relatively low. But that could change once Trump's policies are clearer.

If Mnuchin is serious about issuing longer-dated Treasuries, he needs to act quickly. Otherwise, the bill will be substantially bigger and a much harder sell for a nation that's already ambivalent about increasing its debt load.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Lisa Abramowicz in New York at labramowicz@bloomberg.net

    To contact the editor responsible for this story:
    Daniel Niemi at dniemi1@bloomberg.net

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