What’s Wrong With a 100-Year Payback Plan?

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.

***

What do you think? Leave a comment on our website or send us an e-mail.

Good luck and happy investing,

Brad Hoppmann
Publisher
Uncommon Wisdom Daily

Your thoughts on “What’s Wrong With a 100-Year Payback Plan?”

  1. If 100 year bonds are such a great idea, why stop there? Why not try to sell 500 year bonds? LOL

  2. I don’t see 50-100 years as a disaster. There is no conceivable set of events that would ever enable us to pay off the Federal debt. If that should be possible, I think it feasible to buy them back, or pre-fund redemption. Market-makers see no place for them because they’ve never seen a market with terms that long. Slower turnover looks like it would provide fewer chances for dealers to make money. The issue is what rate premium (vs. 30 yrs) would be demanded. With rates at historic lows and inflation inevitable over 50 yrs, borrowing longer, for less, makes sense for a debtor who will never repay principal anyhow.

  3. I understand that the UK has, or had until recently, some very long dated bonds. I think there was a 100 year bond and also I know there was something called a perpetual bond with NO maturity! This was, or is, what was known as a Government Annuity yielding 6%. It was issued in, something like the year 1720 and may still exist.

    As for current US interest rates, I think that the ultra low rates are exactly what has held this recovery back and drawn it out over a much longer time than a more normal recovery would take. If the FED continues to raise rates gradually, then the pace of economic activity will pick up slowly, also. I’m referring to increasing GDP and inflation numbers. I see this as very positive!

  4. Another nail in the coffin paying back our National Debt. This would lead to more out of control spending.. more debt and fiscal default on our debt.

  5. 100 year bonds makes as much fiscal sense as a 20 year used car loan. That would be the ultimate in kicking the can down the road. My great, great, great grand kids would get to pay our bill. LUNACY!!

  6. 100 years is ridiculous. 50 maybe. I just wish they would bring back paper copies. I expect our greenbacks will vanish soon too.

  7. So, maybe you can tell me, when have political needs ever taken a back seat to fiscal concerns. The politicians always, always, will collet and spend my money, deficits and total debt be damned. The big money fellows have it right. Based on the accuracy of our gov’t forecasts, and our way over leveraged economy at every level, who would buy a 10 year bond, much less a 50 or 100 year bond? The next time the wheels come off the economy we’ll probably be in the ditch for a long time.

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