§ There has been increasing chatter about Treasury issuing bonds with a maturity greater than 30yr. It would help fund higher deficits, help extend the average maturity of the debt and take advantage of the current low levels of term premium. It could also allow Treasury to tap into another investor base—domestic ALM investors or Japanese lifers.
§ However, insurers and pensions currently don’t seem to own too many Treasuries. It is not clear how much the demand for the ultra long end will cannibalize current demand for the 30yr. Ultra long issuance is also likely to be a buy-and-hold product with lower liquidity. Meanwhile, negative swap spreads highlight that Treasuries are cheap to swaps (we believe due to higher cost of dealer balance sheet). This issue will be starker in the very long end due to the longer duration and likely demand for the P-STRIPS (resulting in orphaned C-STRIPS). One potential way for the Treasury to overcome this challenge would be to issue standalone P-STRIPS as opposed to whole bonds, but that might result in potential logistical challenges for some dealers.
§ While the yield of a 50yr should be lower than a 30yr due to convexity benefits, it may initially suffer from an illiquidity discount. Comparing to the last two new products that Treasury introduced, we expect the market’s reception to a 50yr to be less favorable than to FRNs (since that investor base already existed in agencies and money fund form reform brought in more demand) but not as difficult as TIPS (which had no obvious captive investor base). The ultra futures contract did see volumes pickup following its introduction, suggesting that it may simply take additional time for 50yr bonds to become liquid.
§ We do not expect Treasury to make the decision on issuing ultra long-dated Treasuries in a hurry or without due consideration. Treasury will evaluate the decision relative to its objective of bringing regular and predictable issuance to market at the lowest cost to taxpayers over time. We expect higher issuance needs in 2017 to initially be met with bills and then across the coupon curve. We do not expect Treasury to bring an ultra long-dated issue to market until 2018 at the earliest.