Mnuchin ponders ultra-long debt— up to 100 years

Steven Mnuchin

The Trump administration is giving careful thought to selling something Wall Street may not be ready to buy: ultra-long debt.

Treasury Secretary Steven Mnuchin said that offering bonds with maturities of 50 to 100 years is under "very serious consideration," with officials conducting an intensive review.

"If the conditions are right, then I would anticipate we'll take advantage of long-term borrowing and execute on that," Mnuchin said in an interview with Bloomberg News in Washington.

Record-low interest rates make this an opportune time for the Treasury to revisit a proposal it's shelved in the past. Some observers see a window for the U.S. to issue extremely long-term debt instruments, yet some investors have been bruised by long bonds recently, and the idea has been met repeatedly with a cool reception on Wall Street.

"For the borrower, it's great. For the investors, you are taking a lot of risk for not a lot of reward," said Linda Beck, director of fixed income for Bailard Inc., a California money manager.

Among the risks of the ultra-long bond is the ebb and flow of demand over the course of an economic cycle. Buyers may be enthusiastic when yields are high, but in downturns, when the Federal Reserve is cutting rates, demand could evaporate, pushing government borrowing costs higher across different maturities.

Investors have snapped up ultra-long bonds issued by the likes of Austria and the U.K., although recent experiences in Argentina and Germany underscore some of the potential pitfalls of buying such long-maturity debt.

The decision to rekindle the idea didn't stem from fresh information from market participants, according to people familiar with the matter. It followed a meeting between Mnuchin and White House economic adviser Larry Kudlow on the same week in August that the yield curve inverted — news that caught the attention of President Donald Trump.

The U.S. has entertained the idea of issuing 50 or 100-year bonds since at least 2009, and it has recently gained traction within the Treasury. For the Trump administration, issuing extremely longterm debt would limit the cost to taxpayers of plugging a budget deficit that's headed to $1 trillion annually. Pension funds would enjoy a few extra points of returns amid falling yields.

Mnuchin studied the issue when he first took office in 2017, but put the idea to rest following a thorough review with the Treasury Borrowing Advisory Committee, whose members include representatives from JPMorgan Chase, Bank of America, Pacific Investment Management Co., Citadel and Goldman Sachs. The committee has been pessimistic about the idea of ultra-longs since the debate emerged in 2009.

Mnuchin said he still hasn't made up his mind.

"It would be premature for me to comment on what our conclusion is," Mnuchin said, adding that Treasury is "actively revisiting it, and it is something that is under very serious consideration."

The U.S. Treasury issues coupon-bearing debt with maturities ranging from two to 30 years. Other countries have opted to sell bonds due in more than three decades, including Spain, Belgium, France, Austria and the United Kingdom.

Wagers made on Argentine debt maturing in 98 years suffered a blow in August, falling 29% over just one week, though the investors have nearly a century for prices to recover. But not everyone agrees with the Treasury Borrowing Advisory Committee.

"It makes sense now to issue ultra-long term debt. Why wouldn't Treasury want to refinance debt at historically low interest rates," said Ed Yardeni, the president and founder of Yardeni Research Inc., who has been following the bond market since the 1970s.

Trump's Treasury Department has weighed several unorthodox options for Mnuchin to pursue. In July, White House officials confirmed that it weighed a dollar intervention to weaken the greenback.

Mnuchin said he has "no intention" to intervene at this time, and signaled he preferred that any future move be coordinated with the Federal Reserve and global allies.

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