Barely having confirmed he will be Donald Trump’s nominee for Treasury Secretary, Steven Mnuchin proceeded to roil the bond market when the former Goldman banker told CNBC he would look at extending the maturity of future Treasury issuance, hinting at 50 and 100 Year bonds, which promptly sent long-term US bond yields surging by the most since the turmoil following Trump’s election victory.
30-year Treasury yields spiked as much as 12 basis points to 3.06%, after Mnuchin said ultra-long bond sales would be considered. His comments also pushed 5s30s curve from a session low 115bps to above 122bp in just over an hour, rapidly steepening the curve, as the 30Y yield rose as much as 14bp to within 1bp of its YTD high.
While losses were later pared in the 3pm index rebalancing, the selloff capped the worst month for US Treasuries in more than five years, driven by gains for stocks and expectations Trump presidency will bring wider deficits, higher inflation and Fed rate increases
“I think interest rates are going to stay relatively low for the next couple of years.” Mnuchin told CNBC. “We’ll look at potentially extending the maturity of the debt, because eventually we are going to have higher interest rates, and that’s something that this country is going to need to deal with.” Ironically, with that statement, Mnuchin quickly sent yields spiking higher, although courtesy of foreign buyers these were promptly renormalized.
Asked if he would consider maturities of 50 or even 100 years, ultra-long issuance that has become increasingly popular in Europe in recent years as interest rates plunged to record lows as recently as July, Mnuchin said: “We’ll take a look at everything.”
While the US government bond market is the most liquid and deep in the world, compared to many of its peers especially in Europe, it has historically had much lower average maturities, with Treasury officials seeking a balance between cheaper short-dated bills and bonds, and more expensive long-term debt that minimizes “rollover risk”, the danger that Treasury won’t be able to refinance itself. So even as countries like Belgium, Austria and even Mexico have recently sold bonds maturing in 50, 70 or even 100 years (and led to significant MTM losses for all those who purchased them, thanks to their substantial duration) the US Treasury has never issued a bond with a maturity beyond 30 years,
According to Bloomberg, the average weighted maturity of outstanding US debt is just 5.7 years, the lowest among the G10 countries except Sweden. In comparison, the weighted average maturity of the UK gilt market is more than 14 years. This discrepancy – especially in a world where there is more than enough demand for longer dated debt – has led to repeat, if mostly muted, calls for the Treasury to start an ultra-long bond issuance programme, especially as interest rates and bond yields have plumbed record lows in recent years.
The TBAC, or Treasury Borrowing Advisory Committee, a panel of Wall Street advisors (including Goldman) who provide feedback to the US Treasury, was tasked in August of 2015 to discuss whether the Treasury should take advantage of low rates to increase issuance of long-term debt. Minutes from the meeting showed that some participants focused on “the benefits of such issuance given low absolute interest costs.” In 2014, the Treasury Department asked the TBAC whether it should issue bonds that mature in more than 30 years.
The Treasury’s reluctance to issue ultra-long mautirities may very soon change, now that it is headed by a man who wants to lock in low rates for up to one century, especially once the “Trumpflation” revulsion emerges, and the scramble for and into duration returns. One potential stumbling block, however, is that the duration of 30-year Treasuries is already among the highest in the global bond market, lessening the need for even longer-term issuance.
On the other hand, if Mnuchin is indeed focused on alleviating potential debt rollover concerns beginning some time in 2046, then century bonds are almost certainly assured. And considering that Trump is expected to unleash a new debt issuance spree to fund his fiscal stimulus, there will be more than enough space to “experiment” with previously unused maturities.
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