Sovereign bond yields across the globe are stuck nearall-time historic lows, with Germany issuing negatively-yielding 30-year debtfor the first time ever on last Wednesday.
While bond markets may be signalling recession ahead for the global economy, governments around the world are increasingly eager to take advantage of historic low borrowing costs to fund their near continuous deficits.
That’s likely one reason why the US Treasury quietly mentioned last Friday that it was putting out feelers for “ultra-long” Treasury bonds—meaning government debt that would mature 50 or 100 years from the date of issuance. Currently, the longest maturity of sovereign debt that the US government sells is 30 years.
Record low interest rates are certainly a crucial reason why the US government sees an opportunity to reopen the conversation around ultra-long bonds, given the opportunity to lock in a low cost of capital for decades to come. But considering that long-term interest rates have actually been falling for some time now, “century bonds” or debt dated longer than the average human lifespan crucially reflects how our populations are aging, our birth rates declining, and to pessimists, our economies ossifying.
“The world is undergoing a dramatic demographic transition,” wrote Carlos Carvalho, Andrea Ferrero, and Fernanda Nechio in a recent research piece for the Federal Reserve Bank of San Francisco. “In most advanced economies, actual and expected longevity have increased steadily. An increase in life expectancy would lengthen individuals’ retirement period, generating additional incentives to save rather than spend throughout the life cycle… and increase in life expectancy puts downward pressure on rates.”
“The primary consumer of these bonds would be corporate pension plans and insurance companies,” said Alex Nepper, portfolio manager at Cambridge Associates. “Corporate pensions in particular have shifting towards hedging their liabilities overtime as opposed to growing their asset base, so they would look for longer-dated debt.”
A handful of large companies including wealthy universities and health care networks have already caught on and issued century-long debt in the past years. Among many others, that includes the Cleveland Clinic in 2014and most recently the University of Pennsylvania, which last month issued abond that matures in 2119 and yields 3.61%. On the same day, US Treasury bondsdated 30 years yielded around 2.5%.
That goes to show how a flat yield curve (meaning it doesn’t cost much more to borrow for longer periods of time) incentivizes borrowing for 50 or 100 years rather than 20 or 30 years. Already, fourteen countries inside the 34-country strong OECD have issued sovereign debt with maturities ranging from 40 to 100 years, and Austria, Belgium, and Ireland have all issued century-bonds within the past two years as Eurozone borrowing costs have declined. Notably, these countries are predominately made up of countries with slowing population growth and increasing lifespans.
August 20’s proposals were not the first time that the US government has toyed with the idea of ultra-long bond. After the financial crisis they were put up for discussion by the Obama Administration, and they were reproposed in 2017 under Treasury Secretary Steven Mnuchin.
Earlier this year the Treasury Department even tabled the idea of issuing perpetual bonds. That is, bonds that never mature but pay interest into eternity (the way most bonds worked around the Middle Ages, but that’s another story).
Still it definitely took market watchers by surprise when news on a new exploration of ultra-long issuance broke on the same day that after the 30-year yield fell below 2% for the first time ever.
“This is a surprising break from typical Treasury practice since it was unexpected, late on a mid-August Friday in low liquidity, and outside of quarterly refunding guidance that was just provided 2.5 weeks earlier,” said Mark Cabana, CFA, heads of US rates strategy at Bank of AmericaMerrill Lynch. “We are not sure why Treasury delivered such an announcement but expect it reflects a desire to take advantage of historically low long-dated interest rates, and push back on recession concerns from an inverted yield curve.”
However, there doesn’t appear to all that much enthusiasm within the banking community about the idea this time around, either.
“Treasury has studied ultra issuance numerous times in the past and has always concluded it was not in the best interest of the taxpayer,”Cabana added. “In their 2017 study, they did not see evidence of strong or sustainable demand for maturities beyond 30 years. We doubt Treasury's conclusions from upcoming outreach will be materially different.”
Per the US Treasury’s website, the Treasury’s Office of Debt Management is currently conducting “market outreach to refresh its understanding of market appetite” for ultra-long debt and will take a decision whether to proceed following that consultation.