Once every three months, the Treasury Borrowing Advisory Committee, whose members come from among the designated primary Treasury bond dealers, makes a presentation to the government on the state of that market. In the most recent meeting, earlier this week, the TBAC suggested that the Treasury is missing an opportunity to sell to a potentially large segment of bond buyers–$2.4 trillion worth–by sticking with the plain-vanilla bonds it issues now. Although the TBAC cited callable and variable-rate securities as possible new flavors, its main suggestion was that government issue longer maturity bonds. It thinks there would be many willing buyers of even 100-year Treasuries.
The TBAC argument in favor of long-duration bonds is economic. Its main conclusions:
–insurance companies, due to the long duration nature of the risks they underwrite, need a constant supply of high-quality bonds to use as an offset.
–new capital adequacy rules for banks will increase demand from this sector as well.
Three other points were unspoken:
–even private companies have been able to issue very long duration bonds over the past year
–interest rates are at emergency-low levels, so circumstances are very favorable for sellers, and
–the current US issuance strategy, which emphasizes bonds with maturities of three years or less, minimizes the current interest expense of the country’s debt burden, but exposes the government to considerable refinancing risk, as the following data taken from the TBAC powerpoint presentation illustrate:
outstanding Treasury bond maturities
3 years or less 40%
5-7 years 40%
10-15 years 12%
20+ years 8%.
During a subsequent press conference, a Treasury spokesperson said a 100-year bond makes no sense for the US government. I don’t think this is an economic conclusion. It’s a political one.
No, I don’t think the Treasury is concerned with potential repercussions from the losses it might be saddling buyers of a 100-year bond with, as interest rates begin to rise. After all, it continues to sell savings bonds to the (shrinking number of) Americans unwise enough to purchase them.
Instead, I think the Treasury has two main motives in taking the immense refinancing risk its current maturity profile entails:
–with the government paying 1% interest or less on 40% of the outstanding debt, the current outlay to finance the borrowings is much less than it would be with a more prudent maturity schedule ( a 1% increase would add about $140 billion to the budget deficit), and
–in the current, highly partisan political climate, the administration would surely be accused of acquiescing to, or institutionalizing, the current size of government debt by extending maturities.
I guess it makes some sense to argue that the constant need to refinance exerts pressure on Washington to rein in spending. There’s no evidence I can see in Congressional behavior that would suggest this theory is right, however. In fact, it seems to me more like the lower interest expense reduces any sense of urgency to rein in deficit spending.