Brace yourself. Wall Street’s latest advice to our deficit-addled government is to sell bonds that almost no one will live long enough to collect on.
If that isn’t shocking enough, consider this: it’s actually a pretty good idea, for the feds and the institutions that might be in the market for ultralong bonds.
The feds should consider issuing bonds that mature in 40, 50 and even 100 years, the Treasury Borrowing Advisory Committee told the government this week. The longest bond Treasury sells now matures in 30 years.
With the market obsessing over creaky government finances, oppressive debt burdens and the threat of inflation, you might wonder who on earth might be in the market for a government bond that won’t return principal till the next century.
Presumably it won’t be Pimco’s Bill Gross. He wrote in typically overheated terms this week that rich-country government bonds of all stripes “need to be ‘exorcised’ from model portfolios and replaced with more attractive alternatives both from a risk and a reward standpoint.”
But the TBAC, made up of 13 executives from the biggest banks and money managers, said Treasury could tap into $2.4 trillion of latent demand over five years by selling new bonds that would appeal to institutions like banks, insurers and pension funds and even retail investors.
Any new source of demand will certainly come in handy at a time when economists are expecting the United States to outspend its means by about $3.5 trillion over three years.
“I would think that issuing longer bonds would be a smart move,” said Anthony Valeri, a market strategist at LPL Financial. “That’s an area of the market that is underserved globally.”
Selling century bonds and other longer-term bonds – perhaps including selling 20-year Treasurys as well as the 40- and 50-year maturities – could help Treasury pull in as much as $400 billion from asset managers concerned more with matching their assets with their liabilities than with grabbing the last bit of yield, the committee said.
Treasury’s efforts could get a boost from changing regulatory and accounting rules, which could increase institutions’ appetite for highly rated, long-dated bonds.
“There is significant demand for high-quality, long-duration bonds from entities with long-duration liabilities such as insurance companies and pension funds,” the TBAC said.
Of course, this isn’t the first time the committee has discussed the merits of longer-term bonds. It was doing so in 2009 as government financing needs went off the charts. Even before the financial crisis sent federal spending through the roof, some wags were calling century bonds an appropriate response to increasing government financing needs. So far Treasury hasn’t bitten.
But ohers have seen the ultralong light. Governments in France and the U.K. issued 50-year bonds in 2005, and the Danish central bank in 2006 published a report making the case that longer-term bonds afford substantial advantages to both issuers and purchasers. Mexico sold $1 billion of century bonds last fall.
U.S. companies have gotten into the act as well, notably with Norfolk Southern’s (NSC) $250 million offering of 100-year debt in August. An ultralong Treasury bond “could appeal to the buyer of the longer duration corporates,” Valeri said.
A notable benefit is that selling longer-term debt could also help the government lock in the current low interest rates for years, at a time of growing concern about federal finances.
The Congressional Budget Office expects federal interest expense to quadruple over the next decade or so, from $197 billion last year to a projected $792 billion in 2021. It forecasts the government will spend more than $5 trillion on interest between now and 2021.
That tab could go even higher if the government fails in coming months to take steps toward producing a credible plan to cut spending and bring the budget into balance.
Longer bonds also could help to spread out the U.S. repayment schedule, which looks a tad crowded in the next couple years. Treasury faces more than $2 trillion of debt rollovers – bonds that will be repaid by selling new bonds — over the next two years.
Longer bonds aren’t the only tweak the group recommends. The TBAC says the government could draw in some $1.6 trillion over coming years from banks by issuing callable bonds and floating rate notes, among other things, and tap some $300 billion from retail investors by issuing more liquid short-term products.
Though the U.S. household sector now owns more Treasury bonds than China, the TBAC sees opportunity to sell even more Treasurys to retail buyers, to bring U.S. household ownership levels in line with those in Britain, Italy and Japan. It notes the success of the wartime Liberty and Defense bond programs, for instance.
“Through a combination of new attractive products, and aggressive marketing, Treasury could aim at growing the household ownership share of Treasuries to the average of the last 50 years,” the report reads.
