U.S. Weighs Selling 50- and 100-Year Bonds After Yields Plummet

https://www.bloomberg.com/news/articles/2019-08-16/u-s-treasury-to-do-market-outreach-again-on-ultra-long-bonds-jzejo2qu

by sndean • 7 years ago

101 119 7 years ago

bloomberg.com

ianai4• 7 years ago

So pretty sure that’d be a form of institutional capital “parking” for later generations. I could see pension plans buying into them, maybe?

option_greek2• 7 years ago

That's one way to put it. Another way to put it is saddling future generations of Americans with debt.

chewz5• 7 years ago

Another way to put it is saddling future generations of Americans with debt.

It would be wasteful not to borrow money at near zero rates

ianai4• 7 years ago

When the US government has a debt there is wealth out in the non-US government above what clearing the balance sheet would allow. It’s actually a measure of the governmental contribution to social wealth. The pickle is in making the other side of the balance sheet positively affect the wealth of the nation the greatest. “Or it should be.”

A surplus would be the government taking wealth in from the non-US government side. Something that sounds a lot more like governmental corruption and waste than the other option. Exactly equalling it out would make the entire economy zero sum.

nostromo• 7 years ago

No, you can sell bonds at anytime, just like any other security.

Existing 30 year bonds change hands all the time.

beezle2• 7 years ago

Generally yes but off the run issues have much poorer liquidity and spreads can be much wider.

jazzkingrt• 7 years ago

Many institutions, such as university endowments or sovereign wealth funds, invest on these time scales. Example: https://www.bloomberg.com/news/articles/2017-08-29/why-yale-...

And as another commented, these bonds can be traded long before they mature.

ianai4• 7 years ago

Of course they can be traded at anytime. I think I’m somewhere between “why doesn’t this already exist” and “who cares”. It sounds at once both useful for creating long term assurances and highlights how different such financial choices are from common individual personal finance choices.

outside1234• 7 years ago

God, the fools they would need to find to buy these sort of instruments... There is no way whatever rate they peg these at are going to cover inflation over that time period...

chewz5• 7 years ago

the fools they would need to find to buy these sort of instruments

These fools run your pension fund.

benj111• 7 years ago

Would a 100 year bond be a good match for an annuity? (I guess that's what you're making reference to). 30 year bonds match the expected life expectancy of someone buying an annuity, 100 year bonds not so much.

hew• 7 years ago

What pension fund?

spamizbad• 7 years ago

I have a pension fund?

quaquaqua12• 7 years ago

All you have to do is tell people to put money into their 401k "FUTURE SECURE FUND (TM)###" and let the fund managers steer all the money to the 50 year bonds :)

---------

###Terms and conditions apply, see fund prospectus for details. Past performance does not guarantee future results. Complete loss of funds and/or negative returns may occur.

microcolonel• 7 years ago

We just need to ease, quantitatively, to make the contracts come true in the numeric sense.

Because of course, prices are costs. ;- )

somebodythere• 7 years ago

More for me :)

Retric6• 7 years ago

What’s the advantage for the US government?

Edit: Answering my own question the treasury sells EE Savings Bonds the can be redeemed early, and T bills that can be sold to someone else and not redeemed by the US government.

Clearly the government would like to lock in rates expected to be as low as possible for as long as possible.

dsp• 7 years ago

Why do you say they can be cashed in? US treasuries are generally nonputtable.

Retric6• 7 years ago

Got confused looking at treasury direct a while ago. https://www.treasurydirect.gov/indiv/research/indepth/ebonds...

rory096• 7 years ago

These could be cashed in early if rates rise

I don't think that's how T-bonds work. You can sell them on the secondary market, but that doesn't matter to the government — it locks in the rate it sold them at.

PKop• 7 years ago

If they think rates are nearing a bottom, and will go up from here it obviously makes sense.

Check out projections of US interest on debt expense. In a few years time it may exceed all other spending categories. Much of the US government borrowing is short term.

What happens when rates rise? So, it makes sense to lock in as much borrowing they can at low rates.

Despegar5• 7 years ago

It's the market telling us that we need to pass Medicare For All and blow out the deficit. The boomers with money deserve a positive real yield.

skybrian• 7 years ago

Some worry that it won't cover inflation and others worry that it is "saddling future generations with debt". It seems like they can't both be right, but we don't know who is wrong? It's hard to make predictions, especially about the future.

Could it be considered a hedge against deflation? (Or not as much inflation as you expect?)

JumpCrisscross3• 7 years ago

it is "saddling future generations with debt"

Can’t comment on the other parts, but this argument is nonsense. The debt is saddled when the money is spent. 10y rolled over 10x or 100y is irrelevant.

As an analogy, the length of time a dollar spent on a credit card will take to be paid off has nothing to do with the card’s term. It’s purely a function of spending and balance settling, the latter being a function of discretionary income and fiscal sense.

beezle2• 7 years ago

until you can't roll it over anymore

alpha_squared2• 7 years ago

In my naive and ignorant perspective, it _feels_ like it paves the way to spend more now without thought of how to pay it back.

A 10-year bond carries the likelihood that a way to pay it back will need to be considered in the near future, when many involved in selling the bonds are still around to figure out how to pay them back. Who here, with at least 50% confidence can say they'll be around in 50 years? 100 years?

The issuance of bonds on that scale appear to carry the assumption that it will be paid back _somehow_ at _some point_ with little regard as to how. Isn't the current social security crises partly the fault of not thinking at scale of a century?

Again, ignorance and nativity, please correct me where I'm not understanding.

Despegar5• 7 years ago

Everyone who says "we're saddling future generations with debt" are almost exclusively rich people that want to cut entitlement spending.

Which is why it's absolutely great that they're on the way to earning negative yields on their wealth. If they want a positive real yield from risk-free assets like Treasuries they should advocate for Medicare For All and increased infrastructure spending.

ericd5• 7 years ago

It's not absolutely great. All those pension funds that are going to support decidedly unwealthy retirees (teachers, police, other public servants) are going to be in dire straits. And if those blow up, it's going to be a pretty big problem for those unwealthy people, and a political problem for everyone else.

And it's not just wealthy people who worry about the national debt, I think that's a pretty big concern for anyone who gives half a shit about social safety nets.

And how do real yields correlate at all with Medicare For All and infra spending? If anything, higher real yields make it harder for the government to balance its budget as debt servicing costs rise.

I'm really confused.

artfulhippo• 7 years ago

What’s the probability that the US exists in 100 years?

chewz5• 7 years ago

If it won't someone else will pay.

Countries fall and mutate but their borrowings get paid.

https://en.wikipedia.org/wiki/Repudiation_of_debt_at_the_Rus...

https://www.nytimes.com/2000/11/19/world/russia-redeeming-cz...

hedora• 7 years ago

Presumably, the collapse of the government would coincide with a period of hyperinflation. Since US bonds are payable in US dollars (I think), that would effectively wipe out the debt.

In the Russian example, the bond holders claimed they were owed about 100x the actual payout.

shoo• 7 years ago

That's an interesting question!

Can anyone suggest a good way to estimate this?

I'd estimate the odds at around 80%-90%, but I don't have any coherent working to back that up.

Note that very few human institutions have lifespans of 1000 years or more: a few universities and the Catholic church. I'd hazard a guess it is highly unlikely that the US exists in 750 years.

nealabq• 7 years ago

Should the US consider selling perpetual bonds, with no maturity date? I know Britain used to do this (the bonds were called Consols). Is this form of finance now discredited?

timwaagh• 7 years ago

If it's cheap.... But British consols were 4% so they opted to pay back instead of bleeding money forever.

raverbashing• 7 years ago

It makes sense when it pays interest, when interest is close to zero, I'm not sure how it would work.

40acres2• 7 years ago

Over the next generation fiscal policy will regain it's place (see post war era) as the primary growth tool as opposed to monetary policy. Monetary policy has led to a glut in capital that has no idea what to do with itself: it's led to huge asset bubbles as seen with housing and start up evaluations.

The US should absolutely lock in these low interest rates to fuel green infrastructure and technology. Debt used to fund infrastructure and technology is the most effective use in our current environment.

Retric6• 7 years ago

That would be reasonable if the US was funding investments with debt. Instead it’s subsidies mostly tax breaks and consumption for little long term return.

Lowering the cost of debt is still a good idea, but let’s not pretend we are in a fiscally sound situation.

Despegar5• 7 years ago

Instead it’s subsidies mostly tax breaks and consumption for little long term return.

There's nothing wrong with consumption. Consumption is what drives the US economy and makes it the powerhouse that it is. The American consumer is what is keeping the US out of a recession while export-driven economies like Germany are heading into recession.

The problem with our fiscal policy was that the tax cuts passed by Trump almost exclusively went to the richest people who have a low MPC (marginal propensity to consume). There's nothing wrong with expanding the deficits, the US doesn't need to worry about debt and the falling bond yields confirms that. But that fiscal spending should have been targeted at the poorest people in America. It should have been to give them universal health care or free higher education, not cutting corporate taxes.

gtfratteus• 7 years ago

You can't subsidize a tax break. That doesn't make any sense because you don't need to spend money to give people a tax break.

pishpash2• 7 years ago

Tax breaks are just borrowing using the good credit of the US on behalf of the private sector. Because the Treasury can borrow so cheaply is it bad that it is the one borrowing?

Gibbon1• 7 years ago

I saw this clip earlier this morning which reminds me of our current central bankers trying to manage economic policy all by themselves via short term interest rates.

https://www.youtube.com/watch?v=8GhJNjt9IT4

phkahler3• 7 years ago

What about fiscal responsibility? If you have your house in order there are lots of options.

incompatible• 7 years ago

I'm not sure what "glut in capital" really means. Capital is the "means of production" and includes things like buildings, developed land, and equipment. A glut in capital would mean that there are too many of these things and many are left idle, e.g., empty houses because nobody wants to pay even a low rent to use them.

Where I live, for example, there's a shortage of housing and houses are rented for higher prices than they should be. This is a capital shortage, not a capital glut.

Monetary policy, such as governments running up large debts and central banks keeping interest rates low, leads to a large amount of "paper wealth" in circulation, which doesn't relate directly to physical capital. People and organizations are apparently happy to hoard this paper, so that it doesn't lead to inflation in the real economy.

dsfyu404ed• 7 years ago

The US should absolutely lock in these low interest rates to fuel green infrastructure and technology.

The best time to build infrastructure is yesterday. It's always cheaper to do it before you truly need it. Bring on the 6-lane highways nobody wants and the subway stops that nobody needs.

That said, maybe I'm just jaded from living in a dump of a state where one infrastructure plan after another gets neutered by rich people who don't want it where it should be.

pjc503• 7 years ago

Inequality of assets had risen to extraordinary levels. The world is awash with cash looking for somewhere to park. If wealth taxes are politically inconceivable, fine; let the government sell negative real yield bonds instead. Nobody's even forced to buy them.

How many dollars should the government borrow for 99 cents to be repaid in a century?

votepaunchy• 7 years ago

Wealth taxes in the United States are not just politically and practically infeasible. The Constitution requires that a wealth tax be in proportion to each state’s population.

rolltiide3• 7 years ago

You’re right, we should therefore make representation proportionate to each state’s population, fair trade.

(Obviously no consensus on a constitutional amendment but some states have passed laws that their electoral college votes must go towards the popular vote, which could get more widespread enough)

pjc503• 7 years ago

Where does it say that, and what does that mean?

rolltiide3• 7 years ago

Good question, the Austrian 100 yr bond has doubled in price, mostly over the last month. I’ve never seen a bond trade for this high a price (200+). Unless Austria has low-key formalized their citizenship by investment program forcing rich passport traders to buy gov bonds then this just shows desperation for stability and the US can further capitalize on that with a new series.

resters• 7 years ago

When your reputation is on the brink you attempt to borrow more. It matters little what the rate turns out to be, as long as it is lower than it will be once the reputation is soiled.

Animats• 7 years ago

Now that's a bet against inflation.

gumby• 7 years ago

Next will be selling consols.

(For those who've never heard of them: https://en.wikipedia.org/wiki/Consol_(bond) )

blackflame70004• 7 years ago

It’s highly worrisome when dollar values get to be so large, that the fundamentals of finance that we all follow in our daily lives are completely thrown out the window. Voting over and over to raise the debt ceiling, printing more money, keeping interest rates low in a strong economy are all things common sense thinking would be weary of. It's starting to feel like the same myopic thinking that lead to the Mortgage-backed securities crisis is making similar decisions again

Invictus02• 7 years ago

Running a household and running an economy are totally different things. There is a reason macro and microeconomics are taught separately.

blackflame70004• 7 years ago

See that's the problem. At the end of the day, its humans trading with humans whether it's 100 people or 10 Billion. The core of any economy and any transaction is trust. Trust that you are getting an even barter for your payment. Profits are always second to Trust in any market and when that trust is violated by clever accounting, there is always a time of reckoning.

xxxpupugo• 7 years ago

100 years? Won't most of the lenders would already die by that moment?

dehrmann• 7 years ago

Sure, but bonds are often resold, so it's not like the value is lost.

phkahler3• 7 years ago

If you just want to create a market for something that won't produce real value in your lifetime, buy crypto currency.

peter303• 7 years ago

Next they'll offer 100 year student loan enforceable on your children and grandchildren. :-)

6gvONxR4sf7o• 7 years ago

For a while, U.S. has targeted X% inflation. What happens if we sell a 100 year bond at Y% yield and then in 50 years economists learn we should target less than Y% inflation? In that case are we stuck between either the bonds growing faster and faster and faster than the dollar, or being constrained in inflation targets?

phkahler3• 7 years ago

Thereby illustrating what a stupid idea it is. That's the whole problem, everyone want to just push financial problems into the future.

cmurf• 7 years ago

I wonder if these will come in TIPS versions. We had quite substantial inflation in 1919, 14-18%, followed by massive deflation in 1921 approaching -16%, and +9-15% in 1980/1981.

Looking at the past 25 years, you might get the idea it's not a good idea to buy TIPS bonds, but is hyperinflation inevitable or is it a solved problem?

U.S. Weighs Selling 50- and 100-Year Bonds After Yields Plummet

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