Would you like to borrow money … and then take 100 years to pay it back?
That’s what Treasury Secretary Steve Mnuchin thinks might be a good idea for the federal government.
In February, Mr. Mnuchin said in an interview with CNBC:
"Whether we can raise 50-year or 100-year money at a very slight premium, that’s something that makes sense for Treasury to look at."
As you might expect, the secretary’s comments caused a bounce in the 30-year Treasury bond yield. That’s because additional ultra-long bond supply in the future would weigh most on the current longest-date maturity.
Well, today we found out that the Treasury department’s own advisers have looked at the idea of an ultra-long bond … and they don’t like the idea very much.
A story in today’s Wall Street Journal titled, "Wall Street Pushes Back on Mnuchin’s Idea of Ultralong Debt," outlines the objections to the 50- and 100-year Treasury idea from the department’s advisory committee.
The Borrowing Advisory Committee, which is composed of representatives from some of the largest financial institutions that actually buy and sell bonds, told Treasury officials this:
"The committee does not see evidence of strong or sustainable demand for maturities beyond 30 years."
So, what does this mean for the future of Treasury bonds?
Treasury officials don’t have to heed the advisory committee’s recommendations to move forward on issuing ultra-long dated bonds. But this advisory committee’s recommendations carry a lot of weight.
The reason why is because the members include the "big guns" of the bond world. That is, the primary dealers authorized to participate directly in Treasury auctions.
That group also includes leading hedge funds and asset managers, namely Vanguard Group and BlackRock Inc. (BLK).
My read on the ultra-long-dated bond is that it’s not likely to gain traction, at least not at this moment.
However, if the White House and the Treasury Department think that it makes sense politically to issue 50- and 100-year bonds, don’t rule out that possibility.
As we’re likely to see in the years to come, political needs are likely to trump fiscal concerns.
The Fed Gets ‘Transitory’
The markets got what they expected today from the Federal Reserve, as the FOMC left interest rates unchanged.
Nobody expected the Fed to hike at today’s meeting. (It didn’t.) But there was some question about what the FOMC statement might say about the economy and the likelihood of future rates.
Here’s the key paragraph from the May statement:
The Committee views the slowing in growth during the first quarter as likely to be transitory and continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will stabilize around 2 percent over the medium term.
The key term here is "transitory," meaning that the recent hiccups in GDP growth and job-creation are only temporary. More importantly, this won’t keep the Fed from hiking rates as anticipated this year.
Already, the Fed Funds futures are telling us there is more than a 70% chance of a rate hike at the June meeting. So Wall Street is betting that the Fed is going to stick to its guns and continue to normalize monetary policy.
That is, unless the data changes radically over the next six weeks.
Good luck and happy investing,
Uncommon Wisdom Daily