Mnuchin’s Longer Bonds No Guarantee for Lower Interest Burden

  • Increase in maturity profile may raise interest burden
  • Treasury should think twice before embracing 50-years bonds

A closer look at the current breakdown of interest payments on U.S. debt should cause President-elect Donald Trump’s Treasury Secretary pick Steven Mnuchin to pause before endorsing the sale of ultra-long bonds as a cushion against rising rates.

At least that’s what Cullen Roche, founder of San Diego, California-based brokerage Orcam Financial Group LLC, says after pointing out that despite the surge in total U.S. debt over the past decade, the government’s annual interest costs have been relatively flat.

And even if interest rates do edge higher, given there is no risk of the U.S. going insolvent, there is minimal risk that it will cause U.S. interest costs to surge, Roche wrote in a recent research note.

Given the yield curve is upward sloping, the Treasury would likely have to pay more to sell 50-year bonds than 30-year securities right off the bat. That would raise, not lower interest expense, by pushing further out on the maturity spectrum, Roche said.

The Treasury has already sharply increased the average maturity of its debt to lock in historic low rates. About 87 percent of its debt matures in 10 years or less, Treasury data shows. Tilt that scale further upward with longer term bonds, Roche stresses, and taxpayers will face higher average interest costs. More bills sales would be the best idea, in Roche’s world.

Roche isn’t bothered by those who say he’s missing the mark by not realizing that the Treasury risks a big financing shock down the road if rates do take off, since the government would be rolling over more securities at time when yields are even higher.

“We’ve heard a lot of fear mongering about the scenario where interest rates surge and inflation spirals out of control,” Roche said in a phone interview. “But the USA looks a lot more like Japan in a stagnant growth scenario, with low inflation.”

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