The flight to safety hasn’t been equally kind to all Treasury bonds.
The spread between the yields on the 10-year Treasury note and the 30-year bond hit a record Wednesday. The long bond was yielding 114 basis points more than the 10-year Treasury, an increase of 40% since the start of the year.
The gap stems in part from lingering fears that inflation will reassert itself down the road, even as the market grapples now with worries that prices will keep falling. Inflation, of course, erodes the value of longer-term bonds by reducing their purchasing power, and that prospect weighs more heavily the longer the bond.
Investors have been speculating that Treasury might reduce the amount of longer-term debt it sells. Cutting the size of 30-year bond auctions could reduce the yields on those bonds, by forcing investors such as insurance companies and pension funds to compete for a smaller pool of new long-term assets.
But the bankers who advise the Treasury on its debt-issuance plans counseled the government to retain maximum flexibility in deciding how much long-term debt to sell, according to minutes of the Treasury Borrowing Advisory Committee released Wednesday.
Treasury has made progress over the past year in lengthening the average maturity of its debt, locking in low rates as interest rates have fallen. The government has also cut the size of its bond offerings since the spring, as its financing needs have slowed.
But the economic outlook has turned sharply weaker in the last few months, prompting one committee member to note that “in contrast to the recent strong price performance in many financial assets, economic fundamentals have continued to weaken,” the minutes show.
With considerable uncertainty about the course of the economy, the committee — which comprises top executives at JPMorgan Chase , Goldman Sachs , Morgan Stanley and several big hedge funds — concluded that “it was important for Treasury to maintain the flexibility to cut across the curve in the future.”
Accordingly, the bankers said, Treasury should move only cautiously in reducing the size of debt auctions “until more clarity forms around the economic and fiscal outlook.” The way things are going, we could be waiting a long, long time.