A 100 Year Bond: The Ultimate Money Printing Device

Blackrock recently suggested that the US Treasury should offer a 100 year bond which offers "steady payment of interest and principle over the last 50 years."

In my opinion, Blackrock just suggested the framework for the ultimate free injection of liquidity back onto the treasury balance sheet. While analysis of such a theoretical bond structure by its very nature is speculative, the purposes behind the framework seem all too clear. Allow the governemnt to borrow at discounted rates and with no guarantee of or restriction from repayment, followed by a 50 year bond of conventional structure which can be fixed or floating rate. Britain still floats some WWI debt this way.

For the Treasury, this would be an unimaginable boon because it can allow for the differed financing of the excesses necessary to get the global economy out of its current leverage induced slump. For a leading fixed income manager like Blackrock to suggest that there are legitimate buyers for this kind of debt should tell you something about the level of risk aversion in the fixed income market. Investors would essentially be paying the steepest price to date for security and this would in some sense have to be a peak in the price for US Treasury assets. That is, if the Federal Reserve did not exist to backstop any unwanted downward price movements in the treasuries market.

By explicitly suggesting that the Fed may buy treasury securities, Bernanke has guaranteed a ceiling for long term government bond rates. This essentially creates the ability for the Federal Reserve to be the buyer at the targeted rate for long term Treasuries.

Under such a circumstance, the 100 year Treasury hybrid would become the ultimate money printing device, capable of erasing trillions of dollars of credit-excess-created losses filtered down via direct and indirect government intervention in distressed markets, be they money market funds, commercial paper, corporate bonds, asset backed bonds, agency bonds, non agency mortgage debt, or municipal debt (all of this has been approved). Or, to move into direct economic stimulation, these Treasures could encourage use of commodities (construction of public works projects as artificial demand for building materials) or energy (in traditional or technological terms as discussed by Thomas Friedman) or other technology all financed for free by the Federal Reserve.

Disclosure: None.

Comments

[djw:]

This idea is not new, IBM sucessfully issued a 100yr bond in 1996 on this day.
I.B.M.'s Issue Draws Interest From Investors
NYT By ROBERT HURTADO
Published: December 4, 1996
I.B.M. entered the debt markets in a big way yesterday, offering an issue of 100-year bonds that featured attractive returns relative to Government securities. Combined with a lower dollar, that pushed Treasuries off their early highs to finish mixed.

The International Business Machines Corporation issued $850 million of 7.125 percent 100-year bonds, priced at 98.687 to yield 7.22 percent through underwriters led by Salomon Brothers.

2008 Dec 04 01:30 AM

[Philip Gvinter:]

The difference between the IBM bonds and what is being proposed by Blackrock for the Treasury is the yield. IBM bonds yielded a reasonable rate not just relative to Treasuries but fairly close to the historic median yield for highly rated investment grade corporate bonds. The
Treasury is being advised to issue extremely long term debt at insanely low rates. It would make some sense for investors back in 1996 to want to purchase IBM yield with a yield of 7.22% it makes absolutely no sense to purchase long maturity treasury debt at historically low yields.

2008 Dec 07 09:17 AM

[Philip Gvinter:]

The difference between the IBM bonds and what is being proposed by Blackrock for the Treasury is the yield. IBM bonds yielded a reasonable rate not just relative to Treasuries but fairly close to the historic median yield for highly rated investment grade corporate bonds. The
Treasury is being advised to issue extremely long term debt at insanely low rates. It would make some sense for investors back in 1996 to want to purchase IBM yield with a yield of 7.22% it makes absolutely no sense to purchase long maturity treasury debt at historically low yields.

2008 Dec 07 09:17 AM