Should Treasury Issue Hundred-Year Bonds?

Peter Fisher was, until 2004, the Treasury official in charge of bond issuance. So when he says that Treasury should start issuing 100-year bonds, it's worth paying attention.

"If you issued a 100-year bond and had principal and interest pay down smoothly over the last 50 years, you create a great borrowing device for the Treasury that would let us move this hump of borrowing over the generational retirement that's coming up," Fisher, managing director and co-head of fixed income at BlackRock in New York, said in a Bloomberg Radio interview.

Ah yes, Social Security. I remember that; I suppose it makes sense to start thinking about funding it now, while Treasury rates are uncommonly low.

That said, however, I'm not a fan of Fisher's idea. Have a look at David Merkel's list of US government obligations which trade very wide to Treasuries -- and note that the spreads involved are only getting wider. Anything which is illiquid, and anything which needs to be explained, trades at a significant discount. Any century bond would fall into that category -- especially if it had some weird amortizing structure where principal was paid down over the second 50 years.

If Fisher had dealt with international rather than domestic finance, he would remember the Brady market, which was full of weird and wonderful sovereign debt instruments, foremost among them the Brazilian C bond. I once, for no particular reason, tried to find out exactly how the C bond was structured, and asked a bunch of people who actually traded it for a living. None of them could tell me. Unsurprisingly, Brazil's plain-vanilla global bonds traded at much tighter spreads than its Brady bonds, and a lot of investment banks made a lot of money in the late 1990s structuring swaps whereby Latin American countries issued new global bonds and bought back the Bradies which nobody wanted or understood.

The Treasury market has no interest in trading anything clever -- that's one reason why TIPS are trading at such ridiculous levels right now. Investors in Treasuries know what they want, and that's large, liquid issues of bullet bonds at round-number maturities like 10 years. Even the 30-year long bond is out of favor these days.

In any case, Treasury has its hands full these days funding TARP, and whatever stimulus plan is going to be enacted sooner rather than later. Social Security may or may not be a problem in the long term, but it's relatively low on the list of priorities right now.

Comments

[Alex Filonov:]

One thing author misses: Social Security Fund is holding treasuries. That's how the invest (by law) money they don' t need right now. Social Security doesn't need money right now, it's in black and going to be at least 5 years more. So maybe Fisher means that 100 year bond is needed for SocSec as an investment vehicle? Especially when other treasuries are at insanely high prices?
I'd like to see what Fisher said in full, but can't, the link in article is dead.

2008 Dec 03 11:12 AM

[bearfund:]

Issuance of a 100-year bond would probably be the signal that the Treasury bubble has reached its final stage (if it hasn't already). Assuming a vanilla structure and any likely coupon rate, the only people other than the Treasury itself who would make money on it would be speculators shorting it. There's been insatiable demand for Treasuries of all kinds, including the long bond, but such an issue might well finally get speculators to focus on the fundamentals. If that's what it will take to chase them out of this least-productive of all asset classes, then they should do it. Perhaps it would even stop people from whinging about "deflation" (shrinking money supply) on the one hand and then going out and borrowing vast sums of money at low rates to buy ever more Treasuries on the other. A situation in which there's always lots of money available for free but only for the buying of Treasuries is probably the worst possible environment for staging a recovery in the real economy. Bursting this bubble needs to be a top priority.

2008 Dec 03 11:20 AM

[SW Richmond:]

What's the first thing one does when attacked in an unexpected war? Buy time, stall, gather resources, and deepen (NOT expand, but deepen) the field of conflict if possible. Give yourself room to maneuver. If there's a wall behind your back, move it. Try to fight on your own terms, not the enemy's.

Witness the deflationary scare, which IMO was "allowed". What do scared investors do in a deflationary scare? They buy anything issued by the US Treasury. What does the government need to do in a economic crisis? Borrow vast sums of money. 1+1 still equals 2. Does anyone believe the government is upset by low rates?

Free markets, my ass. Cui bono?

2008 Dec 03 12:00 PM

[hoover:]

Somehow this 100 year Treasury bond reminds me of the 100-year Generational Mortgages in Japan before Japan imploded in the 1990's. The mortgages were supposed to offer the "advantage" of each generation (from father, son, grandson) paying their part of the home mortgage as each inherited it from the other. I'm inclined to believe 30 years is about the maximum any debt should be extended.

2008 Dec 03 02:08 PM

[Smarty_Pants:]

Soon the USTreasury will issue a special series "Smarty_Pants" bond.

You give them the money now and they promise to repay you ... someday. Any day now. Real soon. Trust them on that. Really.

2008 Dec 03 03:16 PM

[moonbat1775:]

If I ever issue a currency, it will say "Redeemable in our current commodity in an amount Moonbat thinks fair"

2008 Dec 03 03:21 PM

[User 312073:]

remember, the Frnach issued a 50yr bond in 2005, it was the FRTR 4.00% 04/25/2055; today it trades at about 111.64 = 3.49% yield.
so it is possible that the US could issue 50 yr paper, or even 100yr (which sounds a bit to crazy)

2008 Dec 03 03:49 PM

[AlexR:]

What about short rates hovering near 0%? Why doesn't the Fed open up an Arbitrage Desk? Short Treasuries, long Money Market... Free money!?

2008 Dec 04 02:37 AM