Wall Street Sees Treasury Paying Up for Ultra-Long Bond Issuanceby and
For 50Y debt, median forecast is spread of 15-25bps above 30Y
Assumption is for $60 billion or less in annual issuance
Wall Street dealers, assessing the prospect of a new ultra-long U.S. government bond, predict the Treasury would issue only a limited amount of the securities and pay a yield spread over existing 30-year debt.
Treasury should consider selling at most $60 billion of ultra-long bonds annually, which may still cost the government 15 to 25 basis points in yield above the current long bond to help spur demand, according to the median estimate of 10 primary dealers surveyed by Bloomberg. The poll was conducted before Wednesday’s refunding announcement, when the Treasury said it’s studying the “costs and benefits” of ultra-longs, even as its borrowing advisory panel said it prefers increasing sales of existing maturities.
The anticipated spread underscores dealers’ skepticism about the appetite for a longer maturity from investors such as pension funds. Bank of America Corp., BMO Capital Markets and Nomura Securities International Inc. say issuance will be so limited that it will barely extend the average duration of the Treasury’s $14 trillion of marketable debt. Analysts at NatWest Markets doubt the debt would lure a consistent investor base, leaving the government vulnerable to swings in demand.
“If it’s a bigger size, I don’t think there’s going to be this massive demand, so pricing will go haywire and Treasury will have to make significant yield concessions,” said Praveen Korapaty, head of interest-rate strategy at Credit Suisse Group AG. “It’s possible if you do it in small sizes, but if you’re only issuing a small amount, why even bother?”
Those concerns may not matter. Treasury Secretary Steven Mnuchin has indicated that the Trump administration is mulling the option. He said in a Bloomberg TV interview Monday that the bonds “could absolutely make sense.” Mnuchin has formed an internal working group to study ultra-longs, a department official told reporters Wednesday.
Other countries have gone this route: France, Spain and Italy have all issued 50-year debt in the past year. In 2016, European sovereigns, excluding the U.K., issued about $17 billion in ultra-longs, data compiled by Bloomberg show. In comparison, the Treasury sold almost $160 billion of 30-year debt last year.
In its questionnaire released last month in advance of the May refunding, Treasury asked the 23 primary dealers what it should consider when structuring a bond with a maturity longer than three decades, such as 40, 50 or 100 years. It also queried, “At what price relative to the current 30-year bond offering could Treasury reasonably expect an ultra-long to price?”
Dealers used a variety of methods to arrive at spread estimates, ranging from analyzing trading patterns on overseas ultra-long obligations, to estimating relative value compared with other asset classes.
At BMO, strategist Aaron Kohli predicted the widest spread among firms surveyed. He turned to swap spreads for a sense of how costly ultra-long debt would be for the federal government. He arrived at a spread of 30 to 40 basis points above 30-year yields, assuming as much as $60 billion of annual issuance, the largest of the survey.
Credit Suisse analysts generated the tightest spread forecast in the survey, potentially even below the 30-year bond. Their analysis focused on variables such as the prospective bond’s risk premium and volatility, using the U.S. swap curve.
At NatWest and Societe Generale, strategists looked to Europe for guidance. They analyzed spreads between 30- and 50-year debt for other sovereign issuers of 50-year bonds, such as France, Italy and Spain.
Ultimately, though, the relative cost will depend on demand from long-end investors if the Treasury does introduce the new maturity
“The question isn’t who shows up for the first auctions,” Kohli said. “It’s who shows up at the 30th auction.”
Here are the survey results, which dealers contributed with the caveat that the auction method and issuance size of the potential issue could alter estimates:
|Primary Dealer||Issuance Estimate||Spread Estimate|
|BMO||$50b-$60b/year||30-40bps+ 30Y bond|
|JPMorgan||$40b/year, maximum||20bps+ 30Y|
|Bank of America||$20b/year||15bps+ 30Y|
|Morgan Stanley||$20b-$32b/year||12bps+ 30Y|
|Credit Suisse||$30b-$50b/year||5bps- 30Y to 10bps+|