Steven Mnuchin plays it ultra-safe

After three years of will-he-or-won’t-he, US 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 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 US municipalities, companies and universities, but would have been unprecedented for the federal government.
The Treasury Department has deemed “regular and predictable” issuance a cornerstone of its debt-management process. Just this month, the US 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.
The 20-year maturity was always viewed as more palatable to the $16.7 trillion Treasury market because it “fits” within current yield curve. Effectively, 20-year bonds already exist — they’re just the 30-year securities issued 10 years ago. Those obligations yield 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 help guide companies that borrow for 20 years.
Investors in US 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 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 US 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.
—Bloomberg

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