TBAC(o) Road: Treasury Borrowing Advisory Committee Against Mnuchin’s “Ultra-long” Treasury Bond Idea (Competing with Japan, France, Italy)

While Treasury Secretary Mnuchin has been pushing extending the maturity of US Treasury Bonds beyond their current longest maturity of 30 years, the Treasury Borrowing Advisory Committee (TBAC) issued a warning against issuing “ultra-long” Treasury bonds.

Lastly, the Committee commented on the demand for ultra-long debt, noting that the regular and predictable issuance policy should remain the central consideration to minimize Treasury’s funding cost over time. While an ultra-long is most likely to be demanded by those with longer-dated liabilities, the Committee does not see evidence of strong or sustainable demand for maturities beyond 30-years. The Committee recommended that further work be done to study these demand dynamics to get a better sense of where an ultra-long bond might price, which could be above or below the longest maturity debt issuance based on the pricing of domestic ultra-long derivatives, ultra-long bonds abroad, and theoretical models.

The Committee suggested that other ways that Treasury might tap potential demand from long-duration investors. To that end, the Committee recommended that Treasury consider issuing a zero coupon 50-year bond, and coupon maturities between 10- and 30-years, preferably the reintroduction of the 20-year. Finally, the Committee recommended against issuing a 100-year bond due to limited pension or insurance cash flows beyond 50-years and the preferable attributes of stripped 30-year bonds to meet a similar duration as a 100-year coupon bond.

Well, 50 year zero coupon bonds seems pretty ultra-long to me.

But the missing point is that other nations that have issued sovereign debt with maturities longer than 30 years like Japan, the UK, France and Italy all have one thing in common — massive amounts of outstanding sovereign debt.

While Greece lead Europe in Debt to GDP, their maximum sovereign debt maturity is 25 years.

Of course, Japan has a sovereign debt to GDP ratio of around 235% while the US has a smaller ratio of sov debt to GDP at “only” 106%.

So, it appears that the US is in a competition with Japan, France, Italy and the UK to borrow as much as possible.

Yes, the US is truly on TBAC(o) Road.

Mnuchin: Damn, I didn’t realize that we owed that much and may have to double that figure!