Treasury Considers 50-Year Bonds as Deficit Tops $1 Trillion

WASHINGTON — The Trump administration may begin issuing 50-year “ultralong” bonds next year as the government seeks new ways to finance ballooning deficits and tries to take advantage of low interest rates.

Treasury Secretary Steven Mnuchin said on Thursday that he had been studying whether there was sufficient market demand for a 50-year bond, which would overtake the 30-year bond as the longest-term debt that the government issues. Mr. Mnuchin has been considering the possibility since assuming his role in 2017, and his staff has pressed ahead in recent months after a call by President Trump to “refinance” America’s debt.

“We think there is some demand for it,” Mr. Mnuchin said Thursday in an interview on CNBC. “And that’s something we’ll very seriously consider for next year.”

The Treasury secretary made clear that he backed the idea, adding, “I personally think it would be a good thing to expand the U.S.’s borrowing capabilities.”

The comments came as new figures released by the Treasury Department showed the federal budget deficit topping $1 trillion for the first 11 months of the fiscal year. It was the first time the budget gap reached that threshold in seven years. The federal budget deficit is growing faster than expected as a result of Mr. Trump’s tax cuts and spending increases, which have forced the United States to borrow increasing sums of money.

Interest in the idea of issuing longer-term debt suggests that America’s deficits will not be erased any time soon.

“This would be an acknowledgment that long-term deficits are here to stay,” said Priya Misra, the head of rates strategy at TD Securities.

The United States used to issue debt with longer maturities decades ago, including a 50-year bond that was issued in 1911. The merits of returning to the practice remain a matter of debate among economists and investors alike.

In the current environment of low interest rates, issuing longer-term debt could save taxpayers money in the long run by locking in reduced borrowing costs. The long bonds would also likely appeal to long-term investors such as pension funds and insurers, and they could be used to fund infrastructure projects. However, there are questions about investor appetite for such assets and whether they could prove to be disruptive to markets.

Interest in the idea appeared to fizzle since Mr. Mnuchin examined first examined it in 2017. But Mr. Trump seized on the concept over the summer after the yield curve in the bond market “inverted,” spurring speculation that a recession could be coming. An inverted yield curve occurs when longer-term interest rates fall below shorter-term interest rates, and has historically been a warning sign that a recession could be on the way.

“I told Secretary Mnuchin that this is a great time to refinance our bonds, or some of our bonds,” Mr. Trump said in August.

The president addressed the issue again on Wednesday when he called on the Federal Reserve to cut interest rates and said on Twitter that “we should then start to refinance our debt.”

Mr. Trump, who often fears that the United States is being outdone by other countries, might have taken notice that Britain, Canada and Italy have sold 50-year bonds in recent years, and 100-year debt has been issued in countries like Mexico and Belgium.

As the outlook for global economic growth darkened this year, yields on long-term Treasury debt have tumbled sharply. The yield — the interest rate that investors earn — on the 10-year note fell to 1.46 percent on Sept. 4 from more than 3.20 percent in November 2018. Around the same time, yields on the 30-year Treasury bond dropped below 2 percent for the first time, touching a low of 1.94 percent on Sept. 3, according to data provider FactSet. Even though yields have risen somewhat since, they remain significantly lower than where they were last year.

When bond yields fall, prices rise. So the recent drop in yields suggests strong demand for the longest-maturity debt the Treasury currently issues.

But on Wall Street, there is significant skepticism that enough demand exists among investors like insurance companies and pension funds to justify a long-term commitment to selling 50-year bonds.

Several analysts, when contacted Thursday, pointed to the fact that in 2017, the group that advises the Treasury on market conditions investigated the potential for issuing such long-term debt, and found little evidence of strong or sustainable demand for it among investors.

“I’m personally skeptical that it makes sense now,” said Seth Carpenter, the chief United States economist at UBS, who served as acting assistant secretary for financial markets at the Treasury Department from 2014 to 2016. “But the balance of the argument has shifted pretty dramatically, and it’s gone in the direction of making it more plausible.”

Ultimately, analysts say, the decision to issue ultralong-term debt should not be made because of a short-term move in bond market yields. For decades, the Treasury Department has tried to distance itself from such tactical or opportunistic offerings of debt, instead focusing on maintaining a regular and predictable system of issuing new securities. That system emphasized building the broad buyer base that makes Treasury debt some of the most liquid, or easily traded, financial instruments available.

The depth and liquidity of the market has value to investors, who are willing to pay higher prices — and accept lower yields — in exchange for the ease of trading. That helps lower the government’s borrowing costs. Some market participants say they are concerned that an effort to issue ultralong bonds without sufficient demand could be disruptive.

“It looks like a very opportunistic move that will just probably distort the Treasury curve for the time being and then get terminated, so why bother?” said Ralph Axel, an interest rate strategist at Bank of America Merrill Lynch.

Disruption in the Treasury market could potentially have broader implications, as a broad range of financial products — such as mortgages, car loans and corporate bonds — are based, in part, on the Treasury market rates.

“The Treasury market is the backbone of fixed income markets globally,” Mr. Axel said. “So you have to treat it with a lot of care.”

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