The Treasury Department said late Thursday that it will begin issuing 20-year bonds in the first half of this year as it seeks to fund a deficit expected to top $1 trillion a year for the foreseeable future.
The Treasury explored a range of new offerings, including 20-year, 50-year, and 100-year bonds. “Institutional investors have been clamoring for more longer-dated, risk-free securities that offer some nominal yield, amid a global total of $11 trillion of debt with negative rates,” Bloomberg News reporter Saleha Mohsin writes. But many on Wall Street had lobbied against the ultra-long options.
The government now sells 10-year notes and 30-year bonds. In choosing to add the 20-year securities, Treasury said Thursday that it anticipated strong demand for them. Treasury last issued 20-year bonds in 1986, before it switched to 30-year securities instead. Mohsin notes that previously issued 30-year Treasury bonds with 20 years left to maturity yield about 2.15%, roughly two percentage points more than Japanese or German 20-year bonds.
Why not longer-term bonds?
“The 20-year bond fits more easily into the existing market structure,” Lou Crandall, chief economist at Wrightson ICAP in New York, told Bloomberg. “This is a way of taking advantage of long-term interest rates that are low by historical standards without introducing a wild-card such as an ultra-long bond, which would have had more growing pains.”
Other bond investors echoed those sentiments, noting that 20-year bonds would be more useful than the ultra-long 50- or 100-year offerings Treasury had considered.
The Treasury Department said its goal was to expand the federal government’s borrowing capacity while keeping costs down. “We seek to finance the government at the least possible cost to taxpayers over time, and we will continue to evaluate other potential new products to meet that goal,” Treasury Secretary Steven Mnuchin said in a statement.
Bloomberg columnist Brian Chappatta writes that, after twice reviewing the idea of ultra-long bonds as a way to take advantage of historically low interest rates, Mnuchin decided to play it safe. “And it was the right call,” Chappatta argues. “There was simply no way to know for sure that the government could successfully place 50- or 100-year bonds at monthly or quarterly auctions in any kind of reasonable size.”
Treasury’s latest decision, he adds, suggests that the U.S. may never turn to ultra-long bonds. If Mnuchin couldn’t justify extending maturities now, “when the federal government is running $1 trillion annual deficits and the 30-year U.S. yield is just a few months removed from an all-time low, it seems unlikely the department will ever give the green light,” Chappatta says. “And that’s just fine with the Treasury market.”