WALL STREET JOURNAL Oct. 30, 2019
Treasury Exploring New Debt Products, Including 20-Year Bond
Agency looks for new ways to attract investment as analysts see years of growth ahead in federal budget deficits
By Kate Davidson and Daniel Kruger
WASHINGTON—The Treasury Department said Wednesday it was considering several possible new debt products as officials seek to find more ways to attract investment as budget analysts expect years of continued growth in federal budget deficits.
The agency is considering adding new bonds with maturities of 20- and 50-years as well as a new floating-rate note linked to the proposed replacement for the troubled London interbank offered rate.
The task of raising money to pay for government operations is taking on added urgency because analysts expect the U.S. to run years of trillion-dollar deficits, even as the economy is in the midst of its longest expansion on record. The government spent nearly $1 trillion more in fiscal 2019 than it took in—the highest deficit in seven years.
Years of rising budget deficits have put the Treasury on track to sell the largest amount of longer-term bonds and notes on record. Government bond analysts said that the agency needed to find new ways to attract investment now, before a potential slowdown in the future overtaxes its ability to efficiently fund operations when rising safety-net spending could lead to greater borrowing needs.
“It seems they’re getting to the upper limits of what they can raise with the current suite of products,” said Gennadiy Goldberg, a government bond analyst at TD Securities. They need both new short- and long-term securities because “deficits are only expected to increase,” he said.
Government deficits have now increased for four years in a row, the longest stretch of U.S. deficit growth since the early 1980s, a period marked by two recessions and a jobless rate near 11%. The budget gap widened 26% in the fiscal year that ended Sept. 30, to $984 billion from $779 billion deficit the
previous year, the Treasury said, as rising government outlays continued to outpace tax collection.
Treasury Secretary Steven Mnuchin said last month the Treasury was “very seriously considering” issuing a 50-year Treasury bond next year, as the administration looks to take greater advantage of low interest rates to slow soaring borrowing costs.
Should the Treasury add a 50-year security, it would be following other governments, including the U.K., Austria and Italy, which have broadened their efforts to attract capital by selling so-called ultralong bonds. Offering a 20-year bond would be a reintroduction of a security last issued in March 1986.
“In the long-run, they urgently need new securities,” said Thomas Simons, a money-market economist at Jefferies Financial Group.
A Treasury advisory committee said it expected to see “meaningful demand” from markets for a new 20-year bond, particularly from corporate pensions and insurance companies, but less so from foreign investors. The panel said the addition of a 20-year bond “could be a positive addition to Treasury’s issuance tool-kit,” but said more discussion was needed on the expected pricing, size and sustainability of demand before making a final decision.
That group, the Treasury Borrowing Advisory Committee, or TBAC, which is composed of large financial institutions, has tended to be skeptical that selling 50-year bonds would produce lower borrowing costs for the government over time.
Those doubts are outweighed by the risk the Treasury faces from having to continually roll-over a rising quantity of short-term debt, Mr. Simons said.
The government should look to add new securities, particularly if it can broaden its investor base, at a time when the economy is still strong and before a slowdown makes the need to raise money quickly more pressing, Mr. Simons said.
“If they’re under duress and they need them, that’s a significant problem” that could make it more difficult to raise money quickly, he said.
The Treasury also said it was closely monitoring the Fed’s recently announced purchases of Treasury bills following strains in money markets last month.
“The Fed purchases are still in the early stages and at this point we’re monitoring how the purchases program will evolve and any effects on the market,” a Treasury official said Wednesday. “It would be premature to draw any conclusions at this point.”
The Fed began buying short-term Treasury debt earlier this month and said it would continue the purchases—starting at $60 billion a month—into the second quarter of 2020. That marked a turnaround for the central bank, which until August had been shrinking its nearly $4 trillion balance sheet.
The funding pressures related to shortages of funds that resulted from an increase in federal borrowing and the central bank’s decision to shrink the size of its asset portfolio.
The TBAC, warned the purchases could lead to scarcity in the T-bill market if the Treasury doesn’t change its coupon auction sizes, but it recommended keeping issuance unchanged in the current quarter.
The TBAC also said the Fed’s efforts to boost reserves—deposits banks keep at the Fed—should help control money market rates in the near term, but could prove insufficient to prevent year-end funding stress similar to that seen during the fourth quarter in recent years.
The committee expects little or no change in borrowing through the current fiscal year, but said Treasury could need to increase coupon auction sizes in fiscal 2021.
Treasury Exploring New Debt Products, Including 20-Year Bond
Agency looks for new ways to attract investment as analysts see years of growth ahead in federal budget deficits
By Kate Davidson and Daniel Kruger
WASHINGTON—The Treasury Department said Wednesday it was considering several possible new debt products as officials seek to find more ways to attract investment as budget analysts expect years of continued growth in federal budget deficits.
The agency is considering adding new bonds with maturities of 20- and 50-years as well as a new floating-rate note linked to the proposed replacement for the troubled London interbank offered rate.
The task of raising money to pay for government operations is taking on added urgency because analysts expect the U.S. to run years of trillion-dollar deficits, even as the economy is in the midst of its longest expansion on record. The government spent nearly $1 trillion more in fiscal 2019 than it took in—the highest deficit in seven years.
Years of rising budget deficits have put the Treasury on track to sell the largest amount of longer-term bonds and notes on record. Government bond analysts said that the agency needed to find new ways to attract investment now, before a potential slowdown in the future overtaxes its ability to efficiently fund operations when rising safety-net spending could lead to greater borrowing needs.
“It seems they’re getting to the upper limits of what they can raise with the current suite of products,” said Gennadiy Goldberg, a government bond analyst at TD Securities. They need both new short- and long-term securities because “deficits are only expected to increase,” he said.
Government deficits have now increased for four years in a row, the longest stretch of U.S. deficit growth since the early 1980s, a period marked by two recessions and a jobless rate near 11%. The budget gap widened 26% in the fiscal year that ended Sept. 30, to $984 billion from $779 billion deficit the
previous year, the Treasury said, as rising government outlays continued to outpace tax collection.
Treasury Secretary Steven Mnuchin said last month the Treasury was “very seriously considering” issuing a 50-year Treasury bond next year, as the administration looks to take greater advantage of low interest rates to slow soaring borrowing costs.
Should the Treasury add a 50-year security, it would be following other governments, including the U.K., Austria and Italy, which have broadened their efforts to attract capital by selling so-called ultralong bonds. Offering a 20-year bond would be a reintroduction of a security last issued in March 1986.
“In the long-run, they urgently need new securities,” said Thomas Simons, a money-market economist at Jefferies Financial Group.
A Treasury advisory committee said it expected to see “meaningful demand” from markets for a new 20-year bond, particularly from corporate pensions and insurance companies, but less so from foreign investors. The panel said the addition of a 20-year bond “could be a positive addition to Treasury’s issuance tool-kit,” but said more discussion was needed on the expected pricing, size and sustainability of demand before making a final decision.
That group, the Treasury Borrowing Advisory Committee, or TBAC, which is composed of large financial institutions, has tended to be skeptical that selling 50-year bonds would produce lower borrowing costs for the government over time.
Those doubts are outweighed by the risk the Treasury faces from having to continually roll-over a rising quantity of short-term debt, Mr. Simons said.
The government should look to add new securities, particularly if it can broaden its investor base, at a time when the economy is still strong and before a slowdown makes the need to raise money quickly more pressing, Mr. Simons said.
“If they’re under duress and they need them, that’s a significant problem” that could make it more difficult to raise money quickly, he said.
The Treasury also said it was closely monitoring the Fed’s recently announced purchases of Treasury bills following strains in money markets last month.
“The Fed purchases are still in the early stages and at this point we’re monitoring how the purchases program will evolve and any effects on the market,” a Treasury official said Wednesday. “It would be premature to draw any conclusions at this point.”
The Fed began buying short-term Treasury debt earlier this month and said it would continue the purchases—starting at $60 billion a month—into the second quarter of 2020. That marked a turnaround for the central bank, which until August had been shrinking its nearly $4 trillion balance sheet.
The funding pressures related to shortages of funds that resulted from an increase in federal borrowing and the central bank’s decision to shrink the size of its asset portfolio.
The TBAC, warned the purchases could lead to scarcity in the T-bill market if the Treasury doesn’t change its coupon auction sizes, but it recommended keeping issuance unchanged in the current quarter.
The TBAC also said the Fed’s efforts to boost reserves—deposits banks keep at the Fed—should help control money market rates in the near term, but could prove insufficient to prevent year-end funding stress similar to that seen during the fourth quarter in recent years.
The committee expects little or no change in borrowing through the current fiscal year, but said Treasury could need to increase coupon auction sizes in fiscal 2021.