Pretend that you are a government. A highly indebted government, like the United States. You need to figure out how you want to borrow from the capital markets. Do you want to:
- Borrow it all on an overnight basis?
- Borrow it all on a short-term (1-2 year) basis?
- Borrow it all as far out as you possibly can?
- Borrow across a range of maturities?
The answer is actually 4. The government needs to manage its short-term liquidity situation with bills, its long-term capital situation with bonds, and use short-intermediate term notes for everything else in between. Even if the government had the ability to do one auction of 30-year bonds and put all $20 trillion of debt in one balloon payment maturing in 2046, it's not clear that would even be desirable.
Now, what is desirable is to gradually lengthen the average maturity of its treasury issuance, which, to the Obama administration's credit, they have been doing over the last eight years, to the current level of 70 months. The longer before you have to pay that money back, the better. More accurately, a government that has borrowed mostly in the short-term could be subject to a liquidity crunch--remember what happened to Greek short-term interest rates five years ago.
But Treasury has been mostly unresponsive to calls from pension funds and insurance companies to issue bonds with longer maturities than 30 years. There are entities (like insurance companies) with very long-dated liabilities that would like an asset to match them with. If you recall, Treasury even did away with 30-year bonds for a time in the nineties, leaving tens as the longest maturity--which was a mistake.
So within hours of being named the incoming Treasury Secretary, former mortgage trader Steven Mnuchin stated on television that he'd like to introduce bonds with longer maturities--which everyone takes to mean 50 and 100 years.
A 100-year bond? It's been done before. Mexico issued one a few years back, to catcalls and jeers, but guess what--they got the deal done with no problem--there are people out there who need 100-year paper.
Now, just the concept of a 100-year bond is pretty mind-blowing--there's a pretty good chance that you won't hold it to maturity in your lifetime, and the probability that a country will go through a 100-year period without an episode of high inflation or hyperinflation is pretty low. Not to mention wars, natural disasters, political upheaval--a 100-year bond will see a lot in its lifetime. But if you're lucky, it will go on making those coupon payments.
But it was the market reaction to Mnuchin's comments that was astounding--almost immediately, the yield curve began steepening, in anticipation of increased issuance in the back end. Steven Mnuchin did in minutes what the Obama administration has been trying to do for eight years--steepen the yield curve.
It remains to be seen how much ultralong-dated paper that the market could absorb--probably only tens of billions in the first few rounds of auctions--but ultralong bonds would be an outstanding mix to the current array of maturities. And it sure would be exciting to trade them on a bond desk, at a bank.
