Markets

Mark Gilbert is a Bloomberg Gadfly columnist covering asset management. He previously was a Bloomberg View columnist, and prior to that the London bureau chief for Bloomberg News. He is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”

Marcus Ashworth is a Bloomberg Gadfly columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.

U.S. Treasury Secretary Steven Mnuchin said this week he'll consider issuing ultra-long bonds provided there's sufficient demand for an ongoing program, not just a one-off sale. The U.K. Debt Management Office says it's open to investor persuasion on issuing bonds with maturities beyond 2068. One of these countries needs to lengthen the maturity profile of its debt -- and it's not alone.

Missing a Trick?
Weighted average maturity of outstanding debt
Source: Bloomberg's DDIS function

Mnuchin formed a working group in May to examine the pros and cons of selling debt repayable in as many as 100 years, after saying ultra-long maturities "absolutely make sense" for the U.S. "We're reaching out to the borrowing community and investors to see what the demand is," he told Bloomberg Television on Monday.

Given how flat the Treasury curve is, with the gap between two- and 30-year yields the narrowest it's been since the end of 2007, it would make sense for the U.S. to take advantage of the relative cheapness of long-term funds.

Flattest Curve in a Decade
Gap between two- and 30-year U.S. Treasury yields
Source: Bloomberg

But as things stand, the government is reliant on shorter-dated debt, which has to be rolled over more frequently.

Front Loaded
U.S. has a heavy weighting of short-dated debt which shortens its maturity profile
Source: Bloomberg DDIS Function

Germany could do both itself and the European Central Bank a favor by increasing its maturity profile. Announcing its 2017 borrowing plans in December, Germany's Federal Finance Agency said it planned only a "moderate lengthening" of its debt profile, mostly by scrapping 12-month sales of so-called Bubill securities and increasing the volume of 30-year bond sales.

Germany, though, doesn't enjoy the flat yield curve profile of the U.S.; after arguably missing opportunities last year and the year before, it might want to pounce if the current flattening trend continues into the third quarter. With 30-year yields at about 1 percent -- far below their average during the past decade of about 2.6 percent -- long-dated money is still very cheap for Germany on an absolute basis. 

Third Time's the Charm?
Gap between two- and 30-year German yields
Source: Bloomberg

More longer-dated German debt would also help solve a dilemma at the central bank. The ECB's QE program is fast reaching the limits of German bonds available to buy, given so-called capital-key restrictions that limit how much of a particular nation's debt it can purchase. These restrictions explain why the ECB has been underweighting its purchases of German (and indeed Portuguese debt) relative to what the rules would suggest. 

Capital Key Over/Under
Cumulative divergence year-to-date from the ECB's monthly buying targets
Source: ECB, Bloomberg's Stephen Spratt

The Bundesbank has been reducing the maturities of the bonds it buys as it wants to bring its exposure to QE to as rapid an end as possible, which has tightened the squeeze on available high-quality collateral for the repo lending market. Adding longer-dated German supply with yields above zero -- unlike bunds with maturities of eight years or shorter -- would at least smooth the ECB's purchases.

There's nothing new about the concept of ultra-long sovereign bonds. In February 2009 France became the first major sovereign to offer 50 year bonds, followed by the U.K. a month later and Poland in the third quarter of that year. China entered the fray in November 2009.

Italy -- also in need of a longer debt profile -- came in October 2016, and Austria's 70 year deal followed later that month. Belgium managed a 100-year private placement for 100 million euros ($111.7 million) in April last year. Mexico blazed the trail in 100-year offerings in 2010, a trend Argentina joined just this week.  

As the first chart shows, the U.K. is streets ahead of its peers in shifting its funding needs into the future, with an average maturity of almost 15 years, almost three times that of the U.S. and Germany. Successive U.K. regulatory changes have forced defined benefit money managers (pension funds and life insurers) to buy government guaranteed assets, creating a captive audience for gilts.

That degree of force may not be needed in the U.S.; there are promising signs of investor demand if Mnuchin goes ahead. "Duration looks attractive even at this level," Geraldine Sundstrom, portfolio manager at Pimco Europe, told Bloomberg Television. The search for yield is driving investors to dip in to securities that are more vulnerable to changes in interest rates, though the prospects for low inflation and continued growth may be easing their path.

U.S. and Germany could do themselves an ultra-long favor by taking a leaf out of the U.K's playbook.

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

To contact the authors of this story:
Mark Gilbert in London at magilbert@bloomberg.net
Marcus Ashworth in London at mashworth4@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net