Just a quick glance at the U.S. bond curve shows something is not quite right. One type of Treasury bond – the 20-year – is separate from the rest of the market. Its yield hovers well above the yields on its surrounding bonds (10-year and 30-year).
It’s not just some minor issues that worry traders. It costs American taxpayers money. Since the Treasury Department reintroduced 20-year bonds in monthly auctions four years ago, the sales of those bonds have added about $2 billion a year to interest payments on top of what the government would otherwise have paid. That’s just a simple aside. ——Envelope calculation display. Over the life of the bonds, that’s about $40 billion.
To some extent, this is a pittance for a government that spends nearly $7 trillion a year. However, $2 billion goes a long way. That’s the same amount the government spends each year to operate the national park system and more than the home-buying assistance provided to veterans.
Ask most bond market experts this question and they’ll hesitate and consider whether to eliminate the 20-year bond to save money. They say things are more complicated than they seem. But of the dozen or so people interviewed for this article, one had no hesitation or clarity in saying it should be killed. It’s clear that this is the man who revitalized this connection in 2020: Steven Mnuchin.
“I’m not going to continue to issue them,” Mnuchin, who served as Treasury secretary under then-President Donald Trump, told Bloomberg News in an interview. He thinks the idea of creating another term to help lock in low borrowing costs for decades made sense at the time, but things simply didn’t go as planned. “It’s very costly for taxpayers.”
Mnuchin’s about-face echoes the “move fast and break things” approach to policymaking favored by Trump and his team. In contrast, the Biden administration has adopted a more traditional approach, insisting on issuing 20-year bonds – albeit at a reduced scale – to ensure continuity and stability in the government’s debt sales program. (A Treasury spokesman declined to comment.)
No matter which party wins the White House in November, the consequences of rolling out the 20-year plan are clear: Managing the government’s ballooning deficits is becoming increasingly difficult. Nearly $2 trillion, double what it was five years ago. Investors won’t necessarily rush to snap up some new bonds just because the Treasury Department dangles them in front of them.
Bond market experts say this is the grim new reality facing U.S. finance. The country needs as many creditors as possible willing to lend it money. For experts who are hesitant to recommend a quick end to the 20-year-old auction, this need is critical – even if it means paying to attract buyers for new securities on the market.
“Having another point of maturity gives them additional flexibility,” said Brian Sack, head of macro strategy at multi-strategy hedge fund Balyasny Asset Management.
The United States resumed issuance of 20-year bonds in May 2020 after a hiatus of more than three decades.
There were signs from the beginning that debt would be expensive. Bond market advisers who support the new maturity have warned the Treasury against overestimating demand. However, the initial auction size was significantly larger than recommended.
“We wanted to issue as much long-term debt as possible to extend our maturities and lock in the very low interest rates that were available at the time,” said Mnuchin, who now runs private equity firm Liberty Strategy Capital. He even thought about introducing ultra-long debt—securities maturing in 50 or 100 years—but after advisers discouraged the idea, he settled on 20 years.
After a series of auction increases in size, the 20-year bond did start to falter and soon became the highest-yielding U.S. government security. Today, even after fewer auctions, it remains the most expensive form of financing besides short-term Treasury bills.
Analysts point to a variety of reasons why the 20-year bond continues to struggle. The most prominent: It is less liquid than the 10-year bond and carries less term or interest rate risk than the 30-year bond.
The 20-year Treasury bond yield is currently 4.34%, 0.23 percentage points higher than the average yield on 10-year and 30-year securities. Precisely measuring alternative financing costs can be difficult because the yields on 10- and 30-year bonds would likely be higher today if the Treasury sold more bonds instead of issuing 20-year bonds. However, based on the yield gap at the time of issuance over the past four years, additional costs of $2 billion are expected to be incurred each year.
A more conservative calculation of the incremental cost, based on the spread between Treasury yields and interest rate swap yields, puts the figure at about half that amount.
“The most important thing from a taxpayer perspective is, over time, can you minimize your borrowing costs?” said Ed Al-Hussainy, interest rates strategist at Columbia Threadneedle Investments in New York. “It’s unclear whether we understand that.”
Husseini is one of the few in the market who agrees with Mnuchin. The whole thing was a “mistake,” he said. “There’s not a lot of demand for these particular bonds. It doesn’t make sense.
To better match supply and demand, the Treasury Department has significantly reduced the size of its maturing bond issuance in recent years. Quarterly sales of 20-year bonds are currently at $42 billion, down from a peak of $75 billion.
“The Treasury Department has resized the 20-year bond to a more appropriate size,” Thacker said. He served as a member of the Treasury Borrowing Advisory Committee, a group of bond dealers and investors that advises the government on issuance strategy. In 2020, the committee supported the issuance of a 20-year bond. “The market for this type of security is more balanced now than it was a few years ago.”
Amar Reganti, former deputy director of the U.S. Treasury Department’s Office of Debt Management, said the market could be better in a few years. Reganti stressed that it may take some time for the new securities to attract the sustained demand that other bonds have attracted.
Reganti, fixed income strategist at Hartford Funds, said that while four years since their debut “seems like a long time in capital markets,” “from a debt management perspective It seems that this is actually a very short period of time.
Not for Mnuchin. He said the market has had enough time to make its verdict.
Meanwhile, one group has stopped selling 20-year bonds: Corporate America. Initially, when the Treasury reintroduced the 20-year bond maturity, treasurers across the country increased sales of 20-year bonds. This is one of the positive side effects that policymakers seek.
However, this uptick quickly faded and today the market is all but dead. New bond issuance totaled just $3 billion in the first half of this year, down from $82 billion in all of 2020. About 1% of future bonds.
“We always say in the corporate market, supply follows demand, and overall there’s not a lot of demand for 20-year bonds,” said Winnie Cisar, global head of credit strategy at CreditSights. “It’s just a weird tenor.”
