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Steven Mnuchin Sees 20-Year Bonds Extending Average Treasury Maturity

Saleha Mohsin

(Bloomberg) -- U.S. Treasury Secretary Steven Mnuchin said the country’s new 20-year security will extend the average maturity on the government’s debt while adding that ultra-long bonds aren’t coming any time soon. The Treasury yield curve flattened following his comments.

Issuing ultra-long bonds, those due in more than 30 years, is “no longer on the near term -- our focus for the moment is issuing the 20-year,” Mnuchin said in an interview in Davos, Switzerland, where he’s attending the World Economic Forum.

The Treasury Department last week announced it will start issuing 20-year bonds in the first half of 2020, expanding its roster of securities as the government seeks ways to fund a budget deficit that’s set to reach $1 trillion this year.

“If you look at the number of 20-year bonds that we’ll raise, this will slightly extend” the average maturity, he said, declining to predict by how much. “This isn’t going to be a massive extension.”

Lengthening average maturity allows the government to spread risk over a longer period and lock in borrowing costs at the current low level.

For strategists and investors the average maturity may be important in determining just how Treasury might adjust the sizes of other debt sales as a result of the upcoming addition of the 20-year bond. It will also likely affect the average duration -- or sensitivity to interest-rate moves -- of bond indexes that many investors use to benchmark their holdings and performance.

The average maturity of Treasury debt outstanding is hovering just under 70 months, compared with the average since 1980 of about 60 months. It peaked at 70.7 months in mid-2017.

Mnuchin’s comments underscore a shift in a policy in place since 2017, when the Treasury Department decided to stop attempting to lengthen the maturity of the government’s debt. In announcing the 2017 change in its borrowing strategy, Treasury officials also appeared to de-emphasize the concept of weighted average maturity as a basis for debt policy, making clear that the focus instead was on getting the best deal for the taxpayer in the long run.

The idea of 50-year or 100-year bonds is on ice for now, but it is something that the Treasury will continue to review and consider, Mnuchin said. Many on Wall Street have lobbied against such tenors.

Ultra-long debt could help limit the cost to taxpayers of plugging the budget shortfall. “The main purpose is to fund the government at the best risk-adjusted rate,” Mnuchin said.

Treasuries pared their declines following Mnuchin’s comments and proceeded to rally further Friday as growing concern about the spread of the Wuhan coronavirus weighed on global risk sentiment, spurring investor appetite for havens. The 5-year to 30-year yield curve flattened slightly as longer-dated debt outperformed.

With a 20-year bond on the horizon, the Treasury Department is also weighing whether it should increase its daily cash balance for “risk-management purposes,” Mnuchin said.

“If we do that it’ll be done in a way that it doesn’t impact the markets and the Fed can manage it along with everything.”

Glitches in the market for repurchase agreements in recent months have drawn attention to swings in the amount of cash reserves that the Treasury holds at the Federal Reserve.

The Federal Reserve has so far succeeded in thwarting a repeat of the upheaval seen in mid-September -- when overnight repo rates surged to 10% from around 2%. It has done so through a combination of repo-market liquidity injections and a program to purchase Treasury bills that’s aimed at ensuring an ample supply of reserves.

Mnuchin has said he believes the Fed has resolved the technical issues that caused the glitch and he doesn’t expect them to happen again, adding that any issues with regulations are separate.

(Adds context, updates market moves.)

--With assistance from Justin Blum, Liz Capo McCormick, Paul Dobson, Benjamin Purvis and Mark Tannenbaum.

To contact the reporter on this story: Saleha Mohsin in Washington at smohsin2@bloomberg.net

To contact the editors responsible for this story: Alex Wayne at awayne3@bloomberg.net, Brendan Murray, Zoe Schneeweiss

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