Why U.S. Ponders Going Long on 'Methuselah' Debt: QuickTake Q&A

Mnuchin Says Ultra-Long Bonds Could Make Sense

Is it time to call Methuselah? U.S. President Donald Trump wants to cut taxes and spend to rebuild the country’s infrastructure. Treasury Secretary Steven Mnuchin is looking for creative ways to finance that agenda. He’s investigating the idea of issuing bonds with extra-long maturities, sometimes called Methuselah bonds, that could help by locking in ultra-low rates for decades to come. Or they could just bring big headaches, at least to the banks and dealers whom Treasury would turn to for selling the bonds -- and who so far have been markedly unenthusiastic.

1. How long is long?

Right now the longest duration security the Treasury sells is the 30-year bond. The most likely new ultra-long term bond appears to be a 50-year maturity, though a recent Treasury survey of primary dealers asked for feedback on 40- and 100-year bonds as well.

2. How would they help?

Think about the government’s debt like a mortgage. Since the government rolls over much of its debt, selling short-term debt like 2-year bonds is like having a variable rate mortgage. A 30-year bond locks in a rate for a generation. But since rates are now near their record low, why not lock them in for even longer? The savings could be looked at as the difference between the interest rate a 50-year bond sells for now and what the government would have to spend to roll over debt in the 20 years after a 30-year bond matures.

3. Would this add to the federal debt?

That’s not something that’s effected by how the Treasury adjusts its debt offerings. How much the government spends, taxes and borrows is up to Congress, not the Treasury. Mnuchin is talking about changing the mix of bonds the government issues, not the total. But to the extent that ultra-long bonds reduce the cost of borrowing even more, they may add to the logic of those who argue in favor of a big infrastructure or stimulus package to take advantage of the current low rates.

4. How would ultra-long bonds work?

Probably like regular bonds. That is, most bond strategists think that a 50- year Treasury, for instance, would be structured in the same fashion as current offerings, with interest paid twice a year and the principal paid as a lump at maturity. Peter Fisher, a former Treasury Undersecretary who’s a supporter of ultra-long bonds, said they could be made more appealing by having their principal amortized over part or the entire life of the bonds, as mortgage loans do.

5. Who wants to do this?

During a Bloomberg TV interview on May 1, Mnuchin said ultra-long term bonds “could absolutely make sense” to help finance the government. Gary Cohn, Trump’s top economic adviser, talked in an interview on CNBC about the “enormous amount” of ultra-long bonds the government could issue to finance spending on Trump’s $1 trillion infrastructure plan, although he said that some of that would be financed through public-private partnerships and tax credits rather than entirely through debt.

6. Who would buy them?

Pension funds and insurance companies often prefer parking their cash in debt with long durations (or high tenors, as they’re known). They have long-term liabilities, so long-term bonds help them invest in a way that reduces the risk that they might have a liquidity crunch in the future. For investors who trade bonds rather than sit on them, the longer bonds could have two drawbacks: the limited supply of the bonds and limited interest by buyers could make them harder to buy or sell; and the longer the duration, the greater the risk that changes in interest rates could damage their value.

7. Are there people who think this is a bad idea?

Yes, and some of them are the dealers the Treasury would need to make it work. The Treasury Department relies on a small group of what are known as primary dealers to purchase government debt and sell it on the secondary market. They’ve been pessimistic about the idea of ultra-longs. The Treasury Borrowing Advisory Committee, which is made up of investors as well as primary dealers, has said that it worries that there wouldn’t be enough demand for the bonds. As a result, committee members say, the Treasury could need to offer a yield premium that could cancel out any savings from the longer duration. When Barack Obama was president, the Treasury analyzed the idea of adding long-duration bonds several times, yet chose not to in part out of concerns that demand wouldn’t be consistent beyond the first few sales.

8. Have these bonds worked before?

A number of European governments, including France, Belgium and Spain have successfully issued 50-year bonds in recent years. Their primary goal has also been to take advantage of the low rates. The U.K. has also issued 50-year bonds, many of which were bought by pension funds there. The U.S. did issue a series of bonds with up to 40-years to maturity between 1955 and 1963, and sold 50-year bonds in 1911 to fund the construction of the Panama Canal. But they haven’t been offered since Treasury began to follow a self-imposed goal in the 1970s to keep its debt issuance regular and predictable, a key reason why America’s $14 trillion bond market is the deepest and most liquid and the world’s benchmark.

9. What else might the Treasury do?

The advisory committee suggested that the Treasury might issue more 10- and 30-year bonds instead, or consider reviving a 20-year bond. While they recommended against a 100-year bond, they said the government could consider selling 50-year zero-coupon bonds, which make no interest payments and return only principal at maturity.

The Reference Shelf

  • A Federal Reserve Bank of New York overview on the emergence of Treasury’s "regular and predictable" debt issuance goal.
  • A history of Treasury’s long-term debt sales.
  • Former Treasury undersecretary Peter Fisher on debt management.
  • A Bloomberg View column on the history of perpetual and ultra-long debt.

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