In Ultra-Long Treasury Debate, Bond Analysts Find Little to LikeBy and
TBAC floats 20-year bond, 50-year zero coupons as alternatives
Strategists say stick with 10- and 30-year auction process
Bond analysts saw little to like in the Treasury’s refunding announcement Wednesday, when it came to talk of possible new maturities.
On the one hand, they agreed with the department’s borrowing advisory panel. The committee shot down Steven Mnuchin’s idea of issuing bonds maturing in more than 30 years, citing a lack of evidence of “strong and sustainable demand.” At the same time, strategists were unimpressed with the alternatives the panel floated, including issuing 20-year securities or 50-year zero-coupon obligations to satiate long-duration investors.
Instead, analysts at primary dealers including NatWest Markets and TD Securities said Treasury should look to its current lineup -- the 10- and 30-year auctions that meet its stated goals and by all accounts have room to grow without driving up interest costs.
“Do more 10s and 30s if you need to, and I’m not even sure initially you need to,” said Priya Misra, head of global rate strategy at TD Securities. “The aim is predictable, regular issuance with the lowest cost to taxpayers. And with that as your guiding principal, the ultra-long doesn’t cut it, even the 20-year doesn’t cut it.”
Investors in the $14 trillion Treasuries market have scrutinized comments around ultra-long bonds since Mnuchin was named President Donald Trump’s pick for Treasury secretary. Mnuchin said in November that he’d “take a look at everything,” including 50- or 100-year obligations, sending 30-year debt spiraling downward. As recently as this week, he said ultra-long sales could “absolutely make sense,” spurring traders to offload long maturities.
That yield-curve move reversed Wednesday and Thursday, with long bonds outperforming, as the Treasury Borrowing Advisory Committee pushed back on the idea of ultra-long bonds. Its members represent pillars of the financial world, such as mutual fund managers BlackRock Inc. and Vanguard Group Inc., banks like Citigroup Inc. and Morgan Stanley, and hedge funds including Brevan Howard.
At least one of the panel’s suggested alternatives, a 20-year bond, was seen as having some merit.
It would “fill a hole in Treasury’s issuance,” and, while it may not attract strong demand, it would be comparatively better received than a 50-year security, BMO Capital Markets strategists wrote in a note. The notion also wouldn’t be completely novel: the U.S. issued that maturity for a stretch in the 1980s, around when benchmark yields reached all-time highs, according to the Treasury’s website.
The recommendation for a 20-year obligation “makes intuitive sense and is easier to implement” since Treasury has auctioned them before, JPMorgan Chase & Co. strategists said in a note Wednesday.
But to Blake Gwinn, a strategist at NatWest Markets, the alternative feels more like just doing something for the sake of doing something.
“I don’t get the 20-year -- it failed, that’s why it was taken off the calendar in the first place,” he said. “It’s a feather to put in your cap. It’s more interesting than just issuing two-, three-, five- or 10 years.”
Treasury could fill its future financing gap with proportional increases in all maturities, which would result in issuing as much as an additional $69 billion in 10-year notes and $41 billion in 30-year bonds in 2018 relative to last year’s total, according to TBAC.
The hypothetical 50-year zero-coupon bond comes with its own set of problems, even though the current size of the market for principal- and interest-only securities, known as Strips, is at an all-time high.
For one, the securities would sell at a discount, leaving the Treasury collecting up front only a fraction of what it will eventually owe. Plus, this kind of issuance would be a first for the department.
There’s very little benefit for Treasury in issuing such debt, according to Thomas Simons, an economist at Jefferies LLC.
Strategists’ “differences of opinion highlight the complicated nature of the discussion,” he wrote in a note. “They suggest that the process of developing an ultra-long program, should Treasury wish to continue, will be complex and time-consuming.”