Santoli: Why a 50- or 100-year bond is a bad idea for the US

Published Sun, Mar 12 20177:59 PM EDT

Sometimes there are good reasons why a popular and intuitively sensible policy idea should not be taken up by government. This is the case with the notion that the U.S. Treasury should issue lots of very-long-term bonds to "lock in" today's low interest rates. Treasury Secretary Steven Mnuchin and National Economic Council chief Gary Cohn have separately expressed some support for the concept of issuing 50- or even 100-year bonds in today's low-yield environment. And plenty of taxpayers seem to view this as a prudent move. Yet as much sense as it might make for the average homeowner and corporate chief financial officer to fix their borrowing costs at current rates, the U.S. government is not like private borrowers, its relationship with the debt market is unique and "terming out" much of its debt would be economically counterproductive and would raise annual borrowing costs. Yes, other Western nations such as Canada, France and Ireland have included 50-year bonds in their financing mix. And surely there would be strong demand by insurers and other institutions for ultra-long paper, probably allowing the U.S. to borrow at somewhere under 4 percent for half a century. But the reasons not to feed such long maturities into the market are far more persuasive, if less-actively discussed: -The U.S. government interest burden is quite low, and even with the Fed lifting rates more actively will likely remain so. The government spent $240 billion on interest on $19.9 trillion in total debt. That's about the same interest expense as 20 years ago, when the economy was half its current size, the debt was one-third as large and rates were a good deal higher. Because most of the debt is under 10 years in maturity, the effective blended yield is near 1.2 percent. Treasury debt is the benchmark for global interest rates and its short-term securities are the main collateral for all institutional finance. The Treasury department and bond-market participants prize the predictability that come from its regular auctions, which has been shown to lower borrowing costs. There is huge demand for short-term Treasury bills – indeed they're sometimes said to be in global shortage. And keep in mind that Treasury borrows each year to cover the deficit, meaning it is largely financing current operating expenses. That's unlike a homeowner or a company, which by taking on long-term debt now can avoid having to tap the debt market for years to come. So issuing a lot of very long-term bonds at more than twice the current average yield on the debt would raise interest cost every year, leaving less of the annual budget for all other spending categories. Cullen Roche of Orcam Financial has a pretty cogent argument against ultra-long Treasuries on his Pragmatic Capitalism blog . The Treasury Borrowing Advisory Committee, made up of representatives of the large bond dealers, has frequently looked at the idea of ultra-long debt and consistently concluded that liquidity and cost are far more important than fixing interest costs for decades-long stretches. And the Treasury deciding now to implicitly forecast much-higher rates by initiating a 50-year issue might not send the best message to holders of its trillions in outstanding bonds. A 50-year bond might be coveted by an insurer with a long liability stream, but it would likely be bought and held, sapping market liquidity. And the risk of "market-shock" from having to roll over lots of very dated long-term paper is deemed not worth taking. Other nations that have sold 50-year paper have done so through private offerings or with a group of banks underwriting, not open auctions. Treasury has already been lengthening the average maturity of its debt partly in response to market demands – to a current 6.8 years – using the current array of debt series from Treasury bills through 30 years. -Economically speaking, selling long-term debt would be fiscally restrictive – operating as the reverse of the Federal Reserve's "Operation Twist" program, in which it bought long-term bonds to stimulate growth. New 50- or 100-year Treasuries would entail the government paying private investors more taxpayer cash each year to tie up their capital. Keeping the debt skewed to the short term also makes it most in tune with the Fed's efforts to speed or slow the economy. Yes, as the Fed lifts rates, the cost of shorter-term debt will go up. But the Fed will only generally be doing so in a stronger economy with rising inflation – conditions that raise government revenues and make it better able to service the debt. None of this means the Treasury should foreclose on the idea of 50-year issues entirely. In fact, when CNBC's Jim Cramer asked Cohn last week about long-term debt ideas, he specifically mentioned a dedicated series of 50-year savings bonds that could fund infrastructure investments. That could make a lot of sense – matching investment in long-lived productive assets with dedicated long-term debt. This is different from skewing the whole government-borrowing mix toward long maturities. And maybe it's worthwhile at least to study the potential demand for a 50-year Treasury issue, as Mnuchin has promised to do. Perhaps that would lead to an experimental benchmark issue, a chance to hand Treasury some money until deep into the 2060s. But it's hard to envision a situation where it would be smart for Treasury to issue enough half-century bonds to make a decisive difference in the government's long-term financial security. In which case, why spend much time pushing the idea?

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Treasury Secretary Steven Mnuchin and National Economic Council chief Gary Cohn have separately expressed some support for the concept of issuing 50- or even 100-year bonds in today's low-yield environment. And plenty of taxpayers seem to view this as a prudent move.

Yet as much sense as it might make for the average homeowner and corporate chief financial officer to fix their borrowing costs at current rates, the U.S. government is not like private borrowers, its relationship with the debt market is unique and "terming out" much of its debt would be economically counterproductive and would raise annual borrowing costs.

Yes, other Western nations such as Canada, France and Ireland have included 50-year bonds in their financing mix. And surely there would be strong demand by insurers and other institutions for ultra-long paper, probably allowing the U.S. to borrow at somewhere under 4 percent for half a century.

But the reasons not to feed such long maturities into the market are far more persuasive, if less-actively discussed: