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US Treasury to sell bonds with maturities of 100 years

billy d

Baruch MFE, Class '11
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2/2/10
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The US Treasury has been urged to sell “ultra-long” bonds with maturities of up to 100 years to help lower the government’s borrowing costs.

The longest bond issued by the US has a maturity of 30 years, and in recent years, the UK, France and China have sold 50-year debt. Extending the average maturity of its outstanding debt beyond the current 59 months would enable the US to take advantage of prevailing low yields on bonds.

On Monday, a member of the Treasury Borrowing Advisory Committee raised the issue at a regular quarterly meeting with officials from the US Treasury and Federal Reserve Bank of New York.

The group consists of 13 senior executives from Goldman Sachs, JPMorgan Chase, Morgan Stanley, RBS Securities, Bank of America and investment firms active in Treasury trading, including Soros Fund Management, Moore Capital and Tudor Investment Corp.

The TBAC member, who was not identified in minutes of the meeting published on Wednesday, recommended that the Treasury consider ultra-long bond issuance, defined as securities issued with a tenure of 40, 50 or 100 years.

Investors would welcome the sale of such ultra-long debt as it would satisfy the long-term investment needs of banks, pension funds, insurers and retail investors.

To read the whole article, follow the link:
FT.com / Capital Markets - US Treasury urged to sell ultra long bonds
 
In my previous job I was a consultant to the UK government, and helped out a bit with their project for ultra longs, and perpetual bonds.
It's an interesting question about what price difference there should be between a 100 year bond and a perpetual.

In the midst of the current situation, it's easy to forget that supply / demand for government bonds accounts for a large chunk of their price/yield normally far more than fears of default.

For pension funds and other very long term investors, government debt is a necessary hedging instrument, and building much of their business without a very low risk fixed return would be like trying to build a skyscraper without steel, and to an extent government bonds are industrially produced components for financial engineering.

100 years might seem a bit long for such purposes, but if you're 21 and starting a pension now, there's a (very roughly) 3-5% chance you will be still drawing it 100 years from now. Also as bonds approach their maturity, their utility to pension funds goes down reasonably strongly.

I don't know the precise details of the US operation, but in the UK, the DMO holds regular meetings with market makers to find out what sort of bonds they think will sell. This is perfectly good market research that any other manufacturer would carry out.
Another part of the Treasury long ago spotted a market for bonds whose yield is entirely random, whereby the pot of money that would be paid in coupons is put in a big pot, and doled out randomly, with each bond represent a bet, that may yield anything from 0% to 1,200,000,000% per year. (there's a lot of zero yields). One in three Brits have invested in this.

If the Fed listened to me (which they don't), they'd issue perpetuals, which would be fractionally cheaper to issue, and increase liquidity. Liquidity is important to the issuer of any debt because it means that the buyer is less likely to find himself with something he can't sell for a decent price when he needs to. Perpetuals could be made fungible, which is something you can't do with a mess of different coupons and maturities and thus would be inherently more liquid.

(BTW if you are with the Fed, my consultancy rates are high, but cost effective).
 
It's an interesting case to ponder. I believe the UK actually has some experience with this, since I seem to recall seeing somewhere that they issued a perp during WWI. Perpetual callables / convertibles are fairly common in the corporate space, but this is the only perpetual sovereign I'm aware of, and also the only perpetual straight bond.

From a naive standpoint, there should be little difference between a 100-year bond and a perp to the holder at issuance (and for some time afterward). Pretty much whatever assumption you make in the "there be dragons" region beyond the 30Y point on the yield curve, the two instruments come out with essentially the same fair coupon and duration. A 100-year bond's roll-down effect and the credit exposure due to the bullet are basically indistinguishable from zero for a long time to come.

Actually, though, the fungibility of the instrument is part of what may make it unattractive for the issuer. Suppose today Treasury issues at the fair coupon rate--something like 4.625%. Eventually interest rates rise (as they will), so that the debt trades at a substantial discount. With a 250bp parallel shift (or even just at the long end), the same debt trades below 67.50. If the government wants to issue again at that maturity, they now have to issue 1.5 times as much face as cash they want to raise.

From a cash flow standpoint, of course, there is no difference: If they did 100Y coupon issuance, they'd be paying the same cost to raise the same amount of cash. But to a politician I would imagine there's a world of difference between issuing 10 billion and 15 billion in a single shot, even if the cash flows for the next 99.5 years are exactly the same.
 
It's an interesting case to ponder. I believe the UK actually has some experience with this, since I seem to recall seeing somewhere that they issued a perp during WWI. Perpetual callables / convertibles are fairly common in the corporate space, but this is the only perpetual sovereign I'm aware of, and also the only perpetual straight bond.

From a naive standpoint, there should be little difference between a 100-year bond and a perp to the holder at issuance (and for some time afterward). Pretty much whatever assumption you make in the "there be dragons" region beyond the 30Y point on the yield curve, the two instruments come out with essentially the same fair coupon and duration. A 100-year bond's roll-down effect and the credit exposure due to the bullet are basically indistinguishable from zero for a long time to come.

Actually, though, the fungibility of the instrument is part of what may make it unattractive for the issuer. Suppose today Treasury issues at the fair coupon rate--something like 4.625%. Eventually interest rates rise (as they will), so that the debt trades at a substantial discount. With a 250bp parallel shift (or even just at the long end), the same debt trades below 67.50. If the government wants to issue again at that maturity, they now have to issue 1.5 times as much face as cash they want to raise.

From a cash flow standpoint, of course, there is no difference: If they did 100Y coupon issuance, they'd be paying the same cost to raise the same amount of cash. But to a politician I would imagine there's a world of difference between issuing 10 billion and 15 billion in a single shot, even if the cash flows for the next 99.5 years are exactly the same.

Robert: How did you get 1.5X? Thanks.
 
The UK issued undated bonds during WWII, they may be redeemed at any time. They pay a pretty low coupon, so it's not likely the British government will do so any time soon, unless it wants to make a political point.

Bob has a good point about the politics of it, the UK started issuing perpetuals and ultra longs when bond markets rarely made the news, indeed I had an email conversation with a senior BBC business correspondent where I whine that they never covered us at all. I'm not sure if I should have wished for that...
 
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