U.S. Treasury Secretary Steven Mnuchin is again talking about how it might be a good time for the government to issue ultra-long bonds, or those with 50- and 100-year maturities, given that yields are at or near record lows. Whenever the Treasury has brought up this idea in the past, the Wall Street dealers that help make sure that government debt auctions go smoothly have balked, citing concern about a lack of demand. They are likely to do so again, but this time the Treasury should ignore their concerns and plow ahead.

Why have Wall Street dealers generally opposed the government borrowing for very long periods of time, locking in low rates without the risk of refinancing these securities for at least half-a-century or more to the benefit of taxpayers? It  first helps to understand how the government borrows.

For more than 60 years, the Treasury has relied on a select group of primary dealers – currently numbering 24 - who are not only authorized to trade with the Fed, but are also obligated to bid at government debt auctions. That means they are expected to put their own capital at risk and buy the securities issued by the Treasury. This group of dealers accounts for a large chunk of the Treasury Borrowing Advisory Committee, or TBAC, which counsels the government on its financing needs.

The Treasury has historically placed a great deal of weight on this group’s recommendations. The TBAC has lately stressed the importance of regular and predictable securities issuance, along with demand for that issuance. When the Treasury brought up the idea of ultra-long bonds in 2017, the TBAC cautioned against the move and pointed to surveys of investors that suggested tepid interest.

But since the primary dealers are relied on to support these securities, they must have viewed the idea of a new bond with a long duration and no benchmark as a big financial risk to them rather than a benefit to the taxpayer. These dynamics have not changed, which means when the TBAC meets next in late October, it will likely point to uncertain demand as a reason not to proceed with ultra-bonds once again.

Note that the TBAC in 2012 was in favor of the Treasury issuing of short-term floating-rate notes. Identifying demand back then didn’t seem very important to the group. The minutes of the January 2012 TBAC meeting used the words “could result in incremental demand” and “may have demand for” when discussing who would buy the securities. The TBAC instead focused on the government’s ability to “manage its liability profile, enhance market liquidity, and expand the investor base in Treasury securities.”

Very low duration securities that have Treasury bills as benchmarks coupled with the dealers themselves having a need for such securities to satisfy regulatory capital requirements made the TBAC enthusiastic supporters of floaters. In other words, the opinion of bond dealers on what is best for government financing appears to be conflicted by their desire to make money and avoid unnecessary financial risk. But ultra-long bonds present no more risk of default than the current 30-year Treasury bond.

Bond math also shows that ultra-bonds have a lot of positive convexity, which means they have increasing duration when interest rates fall. Such a bond would find a natural home with many investors that own a great deal of bonds with negative convexity, such as mortgage-backed securities and callable corporate bonds.

So, if the TBAC is afraid of the financial risk required to support a new class of Treasury securities, maybe the Treasury should consider an alternative distribution network. After all, traditional dealer networks are being replaced by electronic platforms where investors place bids and offers directly without the need of an intermediary.

Such platforms would jump at the chance to issue ultra-bonds for the Treasury. Not only would they post these bonds on their platforms to match buyers and sellers, but also they would stand ready to offer futures, options and swap contracts tied to these securities. They can offer the ability to “strip” these securities into their coupon and principal payments and maintain an active repurchase, or repo, market for financing. They can even do away with the 19th century practice of quoting Treasury securities in fractions and move into the digital world by quoting them in decimals!

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