Treasury Secretary Steven Mnuchin speaks with reporters outside White House in Washington, DC, on March 13, 2020.
Jim Watson | AFP | Getty Images
The U.S. government is moving faster than expected to stretch out the time over which it will pay down its record deficit, strategists say.
As part of that plan, the Treasury is bringing back the 20-year bond, last issued in 1986. It will debut in a $20 billion auction at 1 p.m. ET Wednesday.
“I think the 20-year should do fine. Obviously, we haven’t seen one in a little bit of time. There’s always is a little bit of uncertainty around the unknown in general,” said Gregory Faranello, head of U.S. rates at AmeriVet Securities.
On a when-issued basis, the 20-year was yielding 1.21% Tuesday. Yields move opposite price, and its yield is about 50 basis points above the 10-year, at 0.70% Tuesday. The 30-year bond was at 1.42% Tuesday.
“If you look at it from a macro perspective, relative to a lot of the G7 rates around the world, even if you look at the 30-year, it is still offering a very attractive yield level,” said Faranello. “Relative to the 10-year it looks attractive as a yield pickup.”
Michael Schumacher, director rates at Wells Fargo said he expects the new issue will be met with good demand. The 20-year should appeal to foreign investors and also to pension funds and insurers ,who look for longer duration holdings to match their liabilities.
“It’s got a little more pizzazz and it’s new,” he said.
The U.S. government considered paying down its record debt by issuing 50-year and 100-year bonds, but Treasury Secretary Steven Mnuchin said during Congressional testimony Tuesday that there wasn’t demand for those type of securities.
“We did get advice on a 20-year. We added the 20-year. That gives us the ability to extend the duration to raise a significant amount of funds,” Mnuchin said. “It’s my intention to expand our financing in 10-, 20- and 30-year bonds. What I’d like to do is lock in a significant amount of very low interest rates so that the money we are borrowing can be paid back and dealt with over a long period of time.”
Schumacher said the Treasury is issuing more 20-year bonds than were expected.
“With Treasury terming out and doing things like the 20-year a little faster than we expected, at a bigger size, it means the duration is upticking pretty quickly,” said Schumacher. “That’s part of our argument for yields going up at the end of the year.”
The Treasury first announced its plans for a 20-year bond at the beginning of the year, when the deficit was expected to run at about $1 trillion. Since then, the government has needed to fund the trillions being spent on programs to fight the coronavirus,
Schumacher expects the federal deficit to total $3.4 trillion for fiscal year 2020, and $2 trillion in 2021. He said the Treasury is expected to issue about $2.3 trillion in Treasury bills in the second quarter, but reduce that amount to $278 billion in the third quarter, as it replaces them with longer term debt.
Schumacher expects the 10-year yield to rise to 1.25% by the year end, but he said the 20-year may appeal to some investors who normally would have held the benchmark 10-year. Because the 10-year is often used for hedging mortgage and corporate debt holdings, it automatically sees stronger demand. That could hold its yield down, particularly if there is a flight to quality.
“I think the Treasury has done their due diligence in terms what the demand is like,” said Faranello. “The fact we have a very stable 30-year and a very stable 10-year, probably puts the 20-year in a very good spot. Our ability to issue Treasury debt on a stable basis has a long history. I wouldn’t bet against the 20-year.”