Bond Dangers Compounded By U.S. Pushing Out Debt Maturities

Uncle Sam is going long.

As the insatiable demand for Treasuries pushes down yields, the U.S. has locked in low-cost financing for years to come by issuing more long-term debt. The average maturity of Treasuries is now poised to reach an all-time high this year.

The shift is saving money for American taxpayers -- but it’s also made Treasuries more perilous for bond investors as the strength of the U.S. economy bolsters the Federal Reserve’s case for raising interest rates. Holders stand to lose about $570 billion if yields rise by a percentage point, data compiled by Bloomberg show. In 2009, it was $170 billion.

Treasuries are “becoming detached from U.S. economic fundamentals,” said William Irving, a Merrimack, New Hampshire- based money manager at Fidelity Investments, which oversees about $2 trillion. “I don’t think it’s a great time to buy.”

Long-term Treasuries have been some of the best investments around in the past year as oil tumbled, deflation emerged in Europe and a global slowdown threatened to drag on the U.S. recovery. The 30-year bond, the longest maturity security issued by the Treasury, returned 29 percent, double that for U.S. equities. The rally accelerated in 2015, pushing down yields to a record-low 2.22 percent on Jan. 30.

A year ago, yields were closer to 4 percent.

The demand for long bonds helped the Obama administration trim the nation’s short-term borrowing, which ballooned as U.S. ran trillion-dollar deficits to restore demand after the credit crisis. Treasuries due three years or less make up 48 percent of the market for U.S. debt, versus 58 percent six years ago.

Debt Burden

The share of bills, due in one year or less, is approaching the least since the 1950s.

That’s given the U.S. more time to repay its obligations. The average maturity has reached 68.7 months, or two months short of its high in 2001. With the U.S. budget deficit falling to a six-year low, the government is in better shape to finance its record debt burden when interest rates do rise.

The U.S. pays less in interest now than it did in 2008, even after the amount of U.S. debt outstanding more than doubled to $12.5 trillion. Instead, it’s bond investors who are being exposed to the brunt of the risk as the Fed looks to end its six-year-long policy of holding benchmark rates close to zero.

Based on a bond-market metric known as duration, Treasuries are more vulnerable to losses when yields rise than at any time since at least 1997, according to Bank of America. The potential losses are the greatest for 30-year bonds.