President-elect Donald Trump’s apparent desire to issue longer-term debt to lock in low rates reportedly may be derailed by a Treasury unit that deflects such possibly market-jolting moves.
“Some money managers worry that too much experimentation could be destabilizing — especially at a time when the incoming Trump administration has put forward fiscal plans that could entail a big expansion of the budget deficit,” the Financial Times reported.
To be sure, Trump said "I am the king of debt" in a May CNBC interview. "I love debt. I love playing with it."
But “he replaced fearmongering about debt with an even more alarming notion — a bankruptcy of the United States federal government that would incinerate the world economy,” as Vox reported then.
"I would borrow, knowing that if the economy crashed, you could make a deal," Trump said. "And if the economy was good, it was good. So therefore, you can't lose."
But the president-elect’s aspirations “will run up against the highly conservative ethos of the corners of the Treasury that oversee the delicate and market sensitive task of issuing securities that are seen as the bedrock of global finance,” the FT explained.
The U.S. “has an unusually short debt maturity compared with its peers. That is even after the Treasury extended the debt portfolio’s weighted average maturity from a low of 48 months in 2008 to 69 months now,” the FT said.
But internal discussions have previously concluded that “the costs of introducing, new, longer-dated securities, outweigh the benefits. Political appointees in the Treasury are advised by its Office of Debt Management, comprising just 12 people and directed by Fred Pietrangeli, a career official. The Treasury has prided itself on its efforts to avoid market-jolting gambits,” the FT reported.
“It is a market that works,” said Erik Weisman, a portfolio manager at MFS Investment Management. “It is the market against which all other markets, domestic and internationally, are measured. To add needless layers of uncertainty, perhaps for minimal benefit, strikes me as silly.”
Newsmax Finance Insider Larry Kudlow, who is reportedly under consideration to be chairman of Trump’s Council of Economic Advisers, has said 100-year bonds should be issued as soon as possible to take advantage of cheap borrowing costs.
“With new economic-growth policies poised to drive up average Treasury rates to perhaps 6 percent, the Treasury folks better get moving fast to capture today’s historically low yields. Up to now they’ve been sleeping at the switch,” Kudlow wrote for Newsmax Finance in December.
“The key point? Start issuing much longer bond maturities. Much longer. If possible, the U.S. should experiment with 50-year debt issuance, and maybe go out as long as 100 years. And this better happen fast,” Kudlow warned.
Meanwhile, Steven Mnuchin, Trump’s pick for Treasury Secretary, said he’d “take a look at everything,” in response to a question about 50- or 100-year U.S. maturities in a Nov. 30 CNBC interview.
The remarks sent 30-year U.S. bonds into a tailspin, even though the Treasury has persistently slapped down the notion.
“The move sounds reasonable in theory: Long-term interest rates are near record lows, and other countries have issued maturities of 50 or more years, though not necessarily on a regular basis. But for the U.S., that approach carries risk: The predictability of the nation’s debt auctions lures investors and lowers borrowing costs. What’s more, the average maturity of the world’s biggest bond market is already set to reach historic highs,” Bloomberg reported.
“Treasury has built up a very good reputation as a predictable, reliable issuer that doesn’t play games with the yield curve -- investors like that,” said Aaron Kohli, an interest-rate strategist in New York at BMO Capital Markets, one of the Federal Reserve’s 23 primary dealers. “If you lose that, you issue the 50-year because it’ll make people happy, that’s not something that’s really going to be a strong positive in the long run,” he told Bloomberg.
The Treasury says regular issuance has been a “pillar” of its debt management since the 1970s. Daleep Singh, assistant secretary for financial markets, last month reiterated the importance of that stance at a presentation at Columbia University. “Treasury does not face a one-time issuance decision,” Singh said in prepared remarks.
“What would be the effects of an abrupt cancellation of a 50-year bond issuance, or the program itself, on the credibility of Treasury as a regular and predictable issuer?”
While not impossible, such longer-term obligations look unlikely, at least for now.
“There is not anyone who does not come into the Treasury department who doesn’t initially think this might be a good thing to do," Amar Reganti, a fixed-income strategist at GMO LLC in Boston, who used to work in the department, told the FT. "But once you look at the costs and benefits you end up shrugging your shoulders.”
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