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Mnuchin Risks Unsettling Markets With Ultra-Long Treasury Bonds

Alexandra Harris and Liz Capo McCormick
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Mnuchin Risks Unsettling Markets With Ultra-Long Treasury Bonds

(Bloomberg) -- The U.S. government’s latest look at expanding its bond horizon way past 30 years may also signal a shift away from the debt-issuance strategy it’s used for decades to soothe investors.

And the idea will probably encounter resistance from the elite group that advises Treasury Secretary Steven Mnuchin on how to manage America’s debt. The Treasury Borrowing Advisory Committee has previously recommended not issuing ultra-long bonds and its views haven’t changed, according to people familiar with their current and past thinking.

The Treasury Department used to have a relatively scattershot approach to selling debt, but in the 1970s moved to a predictable schedule. Before that, the government would issue debt on a tactical basis, often catching investors off guard and disrupting markets, according to a 2007 analysis from the Federal Reserve Bank of New York.

Raising, yet again, the possibility of selling 50- and 100-year bonds looks like a tactical decision to some on Wall Street. Long-term U.S. yields have never been this low, so the Treasury would lock in cheap borrowing costs for longer.

“This is a Treasury that’s increasingly focused on market timing and believes, given how low rates are, that they should try and take advantage of that,” said Mark Cabana, head of U.S. interest rate strategy at Bank of America Corp. “It represents a pretty broad shift in the Treasury’s regular and predictable management approach.”

For the Treasury, the timing couldn’t be better; the yield on 30-year bonds touched a record low of 1.90% on Wednesday. Rates have been sinking since late 2018 as the growing pile of negative-yielding debt around the world drives investors into longer-term U.S. bonds.

Mnuchin said Wednesday that issuing debt beyond 30 years is under “very serious consideration.” Speaking with Bloomberg News in Washington, he explained that “if the conditions are right, then I would anticipate we’ll take advantage of long-term borrowing and execute on that.”

The Treasury Borrowing Advisory Committee is likely to double down on past counsel that such sales wouldn’t be sustainable in a consistent fashion over the long term when Treasury debt managers gather next in October, the people familiar with the matter said.

“The views TBAC presented in May 2017 regarding the debatable benefits of the U.S. selling 50- or 100-year remain true today because it emphasizes Treasury’s goal to have issuance be regular and predictable over time,” said Jason Cummins, who was TBAC chair in 2017 and is now chief U.S. economist at hedge fund Brevan Howard Asset Management.

While Mnuchin isn’t bound by TBAC’s recommendation, he shelved a similar plan floated early in his tenure as head of Treasury under President Donald Trump after a cold reception from Wall Street investors and Treasury advisers.

A JPMorgan Chase & Co. survey of institutional investors, released Thursday, found that while support for an ultra-long bond is “broader than it was two years ago,” more than half of respondents preferred a 20-year security.

The U.S. pivoted toward a predictable auction calendar in the 1970s as the ballooning deficit required sales of more securities. The switch helped the government sell debt at the lowest possible rates and reduced market uncertainty, according to the 2007 report published in the New York Fed’s “Economic Policy Review.”

If the Treasury issues 50- or 100-year bonds, there’s no guarantee that it would satisfy the government’s policy of financing debt at the lowest cost over time, according to Barclays Plc strategists Anshul Pradhan and Andres Mok. The government has raised the possibility of ultra-long bonds several times, including two weeks ago and in 2017.

“The reasons that held back the Treasury from going ahead in 2017 still hold,” they wrote in an Aug. 22 report. “There may not be regular and predictable demand and the issue is also likely to price in at a discount to the 30-year.”

--With assistance from Emily Barrett and Sarah Ponczek.

To contact the reporters on this story: Alexandra Harris in New York at aharris48@bloomberg.net;Liz Capo McCormick in New York at emccormick7@bloomberg.net

To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Nick Baker, Dave Liedtka

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