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Steven Mnuchin Plays It Ultra-Safe Instead of Going Ultra-Long

Brian Chappatta
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Steven Mnuchin Plays It Ultra-Safe Instead of Going Ultra-Long

(Bloomberg Opinion) -- After three years of will-he-or-won’t-he, U.S. Treasury Secretary Steven Mnuchin officially decided that it’s not worth rocking the boat when it comes to financing the federal government.

The Treasury announced late Thursday that it would start issuing 20-year bonds in the first half of this year, bringing back the maturity for the first time since 1986. While it sounds like a big move to bring back an obligation that has been discontinued for more than three decades, it’s tame compared with the alternative. Mnuchin had long floated the idea of an “ultra-long” 50- or 100-year security, which has been issued by Argentina, many European countries and even some U.S. municipalities, companies and universities, but would have been unprecedented for the federal government.

In the end, he played it safe. And it was the right call.

The Treasury Department has deemed “regular and predictable” issuance a cornerstone of its debt-management process. Just this month, the U.S. auctioned $16 billion of 30-year bonds and $24 billion of 10-year notes, as it did in December. 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. Sure, investors like pension funds that need long duration assets to match their liabilities seemed like natural buyers of ultra-long debt, but limiting the potential pool of investors would have been risky, especially given that bid-to-cover ratios are already trending lower at Treasury auctions.

The way the Treasury borrows is through Dutch auction, in which it fills the highest-priced bids and then lower ones, with the lowest level indicating the price for all. It’s something of a gamble — in theory, there could be too few buyers to take all the debt, or the clearing yield could be absurdly high — but because it’s the largest and most liquid bond market in the world, no one even considers that a possibility. It would be riskier with an untested ultra-long bond. That’s why many European countries have used a syndicate of banks for their sales.

Mnuchin knew all of this, of course. I wrote in December 2016 that ultra-long bonds were an ultra-long shot, with rates strategists and Treasury officials alike warning that messing with the yield curve or a failed auction could have unpredictable consequences for the world’s biggest bond market. And he received persistent and unwavering skepticism from bond dealers on the influential Treasury Borrowing Advisory Committee. Just a few months into Mnuchin’s tenure, the group said it didn’t see evidence of “notably strong or sustainable demand” for such long maturities and brought up a 20-year bond as a possible alternative.

Mnuchin eventually set the ultra-long idea aside, only to begin a second review this past August at the request of President Donald Trump. It was that month that 30-year Treasury yields fell to 1.9%, an all-time low, as recession fears reached a fever pitch.

The 20-year maturity was always viewed as more palatable to the $16.7 trillion Treasury market because it “fits” within the current yield curve. Effectively, 20-year bonds already exist — they’re just the 30-year securities issued 10 years ago. Those obligations yield about 2.15%, compared with 1.82% for 10-year Treasuries and 2.28% for 30-year bonds. That pricing could change once Treasury establishes a benchmark, which would also help guide companies that borrow for 20 years.

It seems that there are at least marginal benefits to bringing back the maturity, with relatively little added risk. But some remain skeptical. “I don’t get the 20-year — it failed, that’s why it was taken off the calendar in the first place,” Blake Gwinn, a strategist at NatWest Markets, told Bloomberg News. “It’s a feather to put in your cap. It’s more interesting than just issuing two-, three-, five- or 10 years.”

Investors in U.S. Treasuries are risk-averse by nature, so a ho-hum move sounds much better than introducing a wild card just for the sake of it. Mnuchin did say in a statement that “we will continue to evaluate other potential new products” to finance debt at the lowest cost over time. But if he couldn’t justify ultra-long bonds 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. And that’s just fine with the Treasury market.

To contact the author of this story: Brian Chappatta at bchappatta1@bloomberg.net

To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.

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