(Bloomberg) – Treasury Secretary Steven Mnuchin said issuance of ultra-long US bonds is "under very severe scrutiny" in the Trump administration, possibly setting up a move that would mark a historic $ 16 trillion market rebound. 1
The concept of issuing bonds of 50 or 100 years dates from at least 2009 and has recently gained traction in the Treasury. For the Trump administration, issuing extremely long-term debt would limit the cost to taxpayers of linking a budget deficit that is on the way to $ 1 trillion annually. The pension funds would enjoy a few extra return points amid falling returns.
Mnuchin said his renewed interest in long-term bonds was unrelated to the fall in the yield on short-term US debt. The yield on 30-year government bonds fell below 2% for the first time earlier this month, continuing their decline to a new record of 1.90% on Wednesday.
"It would be premature to comment on what our conclusion is, Sa Mnuchin and added that the department is" actively evaluating it, and that is something that is under serious consideration. "
Following Mnuchin's comments, the spread between five- and 30-year government bonds expanded to 59 basis points from 56 basis points, Mnuchin's comments helped to increase the 30-year return to 1.97%, reversing the decline earlier in the day, which was withdrawn in early trade in Asia on Thursday, and the 30-year interest rate fell to 1.93%.
Record-low interest rates make this a good time for the Treasury to revise a proposal it previously scrapped. Some observers see a window for the United States to issue extremely long-term debt instruments, though the idea has been met with a cool reception on Wall Street.
Mnuchin studied the problem when he first took office in 2017, but put the idea of resting after a review with the agency's group of market executives starters, called the Treasury Borrowing Advisory Committee, or TBAC.
Treasury's announcement last Friday after the markets closed caused some confusion among investors asking whether the renewed interest was a result of asking from TBAC or its primary dealers – or President Donald Trump.
The decision to announce the announcement came after a meeting between Mnuchin and the White House Economic Council, Larry Kudlow, according to people familiar with the matter. It was not a result of fresh information from market participants, the people said.
Among the risks of an ultra-long bond is the ebb and flow of demand during a business cycle. Buyers may be enthusiastic when returns are high, but in downturns, when the Federal Reserve cuts interest rates, demand can evaporate, pushing public borrowing costs higher over different maturities.
a little interest in it, but it wasn't necessarily in the size and scale that we thought it was sensible to pursue, ”Mnuchin said Wednesday. "It took some time, and I thought it was sensible that we considered this."
The Treasury has examined the possibility of issuing long-term bonds approximately four times in the last decade. TBAC has been enthusiastic about the prospects for an ultra-long issue since it arrived.
Investors have snapped up 100-year bonds issued by such as Austria, although recent experiences in Argentina and Germany underscore some of the potential pitfalls for investors.
Alarms were heard in the Treasury market earlier this month after the 10-year return dipped below the biennial, an event that was considered a harbinger of a US economic recession for the next 18 months.
by Trump, who tweeted on August 14 "CRAZY INVERTED YIELD CURVE!" and accused the Fed of any adverse effects.
"There are people who believe that the yield curve can predict a recession – I don't believe it," Mnuchin said Wednesday. "The answer is: In environments where the market believes the Fed is going to lower short-term interest rates, and it's built into market expectations , people end up buying securities in the longer term, and that's what could lead to a flat or reverse yield curve. The market is adapting faster than the Fed. "
(Updates with return moves in the sixth paragraph.)
– With help from Emily Barrett.
To contact the reporter about this story: Saleha Mohsin in Washington at smohsin2 @ bloomberg.net
To contact the editors responsible for this story: Alex Wayne at email@example.com, Joshua Gallu, Justin Blum
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