All it took was a non-committal comment from Janet Yellen to persuade Treasury traders there’s a chance the U.S. will finally expand maturities in the world’s biggest bond market beyond 30 years.
The Treasury Department has pondered ultra-long bonds for years, but they’ve never been introduced in part because of resistance from Wall Street. But Yellen, President Joe Biden’s pick for Treasury secretary, got people buzzing about them again by discussing the topic Tuesday during her Senate confirmation hearing. Markets responded, with traders selling 30-year bonds.
“There is an advantage to funding the debt, especially when interest rates are very low, by issuing long-term debt, and I would be very pleased to look at this issue and examine what the market would be like for bonds of this maturity,” Yellen said when asked about longer-term debt, including 50-year Treasurys.
That drove up long-term rates and steepened the yield curve, with the gap between 5- and 30-year bonds reaching a daily high of 140 basis points. The move was pared some, with the spread recently around 138.8 basis points.
“There’s been a bit of a reaction in the long end following Yellen’s comments, but I think a 50-year bond is still a long shot,” said Subadra Rajappa, head of U.S. rates strategy at Societe Generale.
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Just this month, former Treasury Secretary Robert Rubin cautioned against taking rock-bottom interest rates for granted and said the government should take advantage of the moment by substantially increasing the maturity of its debt, including possibly issuing ultra-long bonds.
The current Treasury secretary, Steven Mnuchin, pushed hard during the early part of his tenure for issuing 50- or 100-year bonds to lock in historically low rates. But he and his debt managers never followed through, in large part because bond dealers and the Treasury Borrowing Advisory Committee were skeptical there would be enough demand to sustain periodic auctions.
The Treasury Department instead rebooted issuance of 20-year bonds in 2020, part of an effort to lock in low rates and fund a federal deficit that ballooned under former President Trump.
“The Treasury has delved into this topic several times before and concluded that the demand dynamics do not support ultra-long bond issuance,” Rajappa said. “The Treasury should be able to fund itself with the current coupon schedule for the remainder of the year, so I do not see an urgency for a 50-year bond.”
