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April 28, 2017 at 09:40 AM
(Bloomberg Gadfly) — Steve Mnuchin, just getting his feet wet as the new U.S. Treasury secretary, isn’t giving up on the idea of ultra-long bonds.
The Treasury Department released a questionnaire to primary dealers on Friday, asking for detailed responses about their appetite for 40, 50 or 100-year bonds, as Bloomberg’s Alex Harris reported on Tuesday. While this isn’t the first time that the agency has floated the idea of such long-dated debt, this is its most detailed and specific inquiry in recent memory.
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Theoretically, this makes sense. The U.S. is going to need more money in years to come, barring some drastic and unexpected change to the nation’s budget. Other countries have sold such debt easily. And investors are clearly interested in longer-dated bonds, as illustrated by falling yields on 30-year notes.
But in practice, selling 50-year bonds would require the U.S. to either force big Wall Street banks to take on more risk than they’re comfortable with or to pay big lenders to distribute the nation’s bonds. Both options are politically untenable.
The challenge that the U.S. would face in issuing 50-or 100-year bonds demonstrates just how different this $13.9 trillion market is from others around the world. It’s the biggest debt market. Traders expect the notes to be issued and traded with regularity. And the nation relies on big banks to facilitate an auction process that includes investors submitting bids and receiving allocations based on how high their bids were relative to others.
Primary dealers, which include banks such as JPMorgan Chase & Co., Morgan Stanley and Bank of America Corp., provide a backstop to the market and are required to bid at each auction.
