On January 8th, the U.S. Treasury auctioned 30-yearTreasury Bonds with a coupon of 4.5% – the interest rate the Treasury has to pay– with an issue date of January 15. On January 10, the bond traded with a 4.96% yield, meaning interest rates continued to rise and future Treasury issues are likely to be more expensive.
In an article I wrote on May 21 of 2020, I noted that the average maturity of Treasury debt was then 69.6 months. Around $7 trillion of that matured in 1-5 years, costing from 0.15 percent for the 1-year to 0.31 percent for the 5-year. But by the Treasury’s last 30-year auction, on January 9, 2025, their bond’s carried a coupon of 4.45%.
I suggested in my May 2020 article that the U.S. refinance as much of its short term debt as it could with 50- to 100-year bonds while interest rates were then at historic lows. Although the rates on those ultra-long bonds would have exceeded rates on the then-outstanding short-term Treasury notes, the Treasury would have been protected from the rising interest rates that attended inflation, and would have had to pay significantly less than the 4.5% it has to pay on its most recent auction.
Although the idea was proposed, Trump’s Treasury Secretary Steven Mnuchen declined – for the wrong reasons. The problem wasn’t whether there was a market for ultra-long bonds or that the pricing of them was too high. The bonds were not issued for political reasons.
Short-term notes have political value: They make government officials look more fiscally responsible because their low rates keep deficits lower than the higher rates on long-term bonds.
The top ten primary dealers that distribute short term notes auctioned by the Treasury are arguably the most influential private-sector institutions in the financial markets. And they don’t favor issuing 50- to 100-year (“ultra-long”) bonds.
Although low interest rates have thinned primary dealer margins, the frequency of Treasury issues adds to their revenues because they mark up the notes they buy at auction when they distribute them to clients. They also prefer 5, 10, and 30-year maturities because those are more useful benchmarks for pricing corporate debt and mortgages.
Perhaps more important, their prestige, involvement and status allows superior access to the broader credit markets, which adds to their clout. The top ten primary dealers accounted then for almost 73% of foreign exchange trading. As counterparties to the Fed, they meet regularly with them and the Treasury to discuss monetary and economic policy and can sway decisions to their advantage.
Not surprisingly, the primary dealers expressed doubt that there’s enough investor-interest in ultra-long bonds to justify their issuance. So Mnuchin accommodated the primary dealers by shelving plans to issue 50- to 100-year bonds, claiming there’s little interest among investors. “We went out to a large group of investors and solicited feedback from our Treasury borrowing committee,” he said. “There’s some interest in this but perhaps not enough that it would make sense to issue those bonds at this time.”
But other countries have issued plenty of ultra–long bonds at favorable rates. Pension funds and insurance companies buy ultra-long maturities to match their long-term liabilities.
And, in May of 2020, there was plenty of reason to believe that the U.S. could have issued 50 to 100-year bonds at significantly less the 4.5% coupon on it’s recent 30-year auction.
In 2017, Austria issued a 100-year bond with a 2.1 percent coupon, raising €3.5 billion — and followed it in August of 2019 with a €1.25 billion re-offer at a 1.17 percent yield. In 2016, Ireland and Belgium issued 100-year bonds at yields of 2.3 percent. In 2017 the University of Oxford sold £750 million triple A-rated 100-year bonds at .85 percent over UK debt of similar maturity that drew orders of over £2.8bn. In 2019 year, the University of Virginia sold a 100-year bond at 3.23 percent, and Rutgers University sold $330 million General Obligation Bonds maturing over 100 years at 3.195 percent.
Canada issued C$1.5 billion 50-year bonds in 2014 at a 2.96 percent yield. In 2019 Mexico issued its third 100-year bond — a €1.5 billion A-rated Eurobond at a 4.2 percent yield. Additionally, countless private-sector companies had issued similar bonds.
The high volume and low cost of those bonds are compelling evidence that the U.S. Treasury should have followed suit and issued its own. It’s quite likely that 50- and 100-year Treasury bonds would have cost less in interest than the issues mentioned above given that U.S. debt was then the world’s favorite safe harbor. For instance, in May of 2020, a 50-year bond might have been issued at 2.2 percent which would have substantially mitigated the refinancing risk that attended the short-term debt it refinanced. And now, that the yield on the 30-year rose to 4.96%, it would be selling in the secondary market at yield of perhaps 5 percent and, importantly, a deep discount to its par value. If the U.S. ever got close enough to a balanced budget, it could buy them back for maybe half their par value, and with inflated dollars to boot. The benefits of a 100-year bond would have been even greater.
Clearly, the market for 50- to 100-year Treasury bonds would have been smaller than the market for shorter-term Treasury debt. The Treasury therefore would have had to balance the size of an issue necessary to provide liquidity with the smaller size needed to accommodate a smaller market.
Given the interest rate tsunami we’ve faced and the resulting increase in the our ballooning deficit and debt, it was irresponsible to delay the issuance of ultra-long bonds.