WALL STREET JOURNAL Oct. 30, 2019 Treasury Exploring New Debt Products, Including 20-Year Bond Agency looks for new ways to attract investment as analysts see years of growth ahead in federal budget deficits By Kate Davidson and Daniel Kruger WASHINGTON—The Treasury Department said Wednesday it was considering several possible new debt products as officials seek to find more ways to attract investment as budget analysts expect years of continued growth in federal budget deficits. The agency is considering adding new bonds with maturities of 20- and 50-years as well as a new floating-rate note linked to the proposed replacement for the troubled London interbank offered rate. The task of raising money to pay for government operations is taking on added urgency because analysts expect the U.S. to run years of trillion-dollar deficits, even as the economy is in the midst of its longest expansion on record. The government spent nearly $1 trillion more in fiscal 2019 than it took in—the highest deficit in seven years. Years of rising budget deficits have put the Treasury on track to sell the largest amount of longer-term bonds and notes on record. Government bond analysts said that the agency needed to find new ways to attract investment now, before a potential slowdown in the future overtaxes its ability to efficiently fund operations when rising safety-net spending could lead to greater borrowing needs. “It seems they’re getting to the upper limits of what they can raise with the current suite of products,” said Gennadiy Goldberg, a government bond analyst at TD Securities. They need both new short- and long-term securities because “deficits are only expected to increase,” he said. Government deficits have now increased for four years in a row, the longest stretch of U.S. deficit growth since the early 1980s, a period marked by two recessions and a jobless rate near 11%. The budget gap widened 26% in the fiscal year that ended Sept. 30, to $984 billion from $779 billion deficit the previous year, the Treasury said, as rising government outlays continued to outpace tax collection. Treasury Secretary Steven Mnuchin said last month the Treasury was “very seriously considering” issuing a 50-year Treasury bond next year, as the administration looks to take greater advantage of low interest rates to slow soaring borrowing costs. Should the Treasury add a 50-year security, it would be following other governments, including the U.K., Austria and Italy, which have broadened their efforts to attract capital by selling so-called ultralong bonds. Offering a 20-year bond would be a reintroduction of a security last issued in March 1986. “In the long-run, they urgently need new securities,” said Thomas Simons, a money-market economist at Jefferies Financial Group. A Treasury advisory committee said it expected to see “meaningful demand” from markets for a new 20-year bond, particularly from corporate pensions and insurance companies, but less so from foreign investors. The panel said the addition of a 20-year bond “could be a positive addition to Treasury’s issuance tool-kit,” but said more discussion was needed on the expected pricing, size and sustainability of demand before making a final decision. That group, the Treasury Borrowing Advisory Committee, or TBAC, which is composed of large financial institutions, has tended to be skeptical that selling 50-year bonds would produce lower borrowing costs for the government over time. Those doubts are outweighed by the risk the Treasury faces from having to continually roll-over a rising quantity of short-term debt, Mr. Simons said. The government should look to add new securities, particularly if it can broaden its investor base, at a time when the economy is still strong and before a slowdown makes the need to raise money quickly more pressing, Mr. Simons said. “If they’re under duress and they need them, that’s a significant problem” that could make it more difficult to raise money quickly, he said. The Treasury also said it was closely monitoring the Fed’s recently announced purchases of Treasury bills following strains in money markets last month. “The Fed purchases are still in the early stages and at this point we’re monitoring how the purchases program will evolve and any effects on the market,” a Treasury official said Wednesday. “It would be premature to draw any conclusions at this point.” The Fed began buying short-term Treasury debt earlier this month and said it would continue the purchases—starting at $60 billion a month—into the second quarter of 2020. That marked a turnaround for the central bank, which until August had been shrinking its nearly $4 trillion balance sheet. The funding pressures related to shortages of funds that resulted from an increase in federal borrowing and the central bank’s decision to shrink the size of its asset portfolio. The TBAC, warned the purchases could lead to scarcity in the T-bill market if the Treasury doesn’t change its coupon auction sizes, but it recommended keeping issuance unchanged in the current quarter. The TBAC also said the Fed’s efforts to boost reserves—deposits banks keep at the Fed—should help control money market rates in the near term, but could prove insufficient to prevent year-end funding stress similar to that seen during the fourth quarter in recent years. The committee expects little or no change in borrowing through the current fiscal year, but said Treasury could need to increase coupon auction sizes in fiscal 2021.
What would the floating rate bond get you that TIPS don't already get you other than protection against a different index?
If you're a savvy investor more convexity juice. My guess is the Fed isn't pleased with the LIBOR fixing scandal and for very good reason. You basically had hundreds of trillions of dollars worth of securities and loans fixed to a rate fraudulently set by Deutsche Bank, Barclays, UBS, Rabobank, and the Royal Bank of Scotland over a protracted period of time. In fact, regulators and commercials are still wary of the LIBOR market and it has eroded quite a bit of confidence and trust which is not good. I read a nice piece about this on the Council on Foreign Relations website. I'll attach a link below. Not only did these banks pay over $9B in fines to US and EU regulators - I read that something like $35B of outstanding private legal settlements apart from fines and regulatory action are being litigated at present through arbitration. My guess is that the Fed has had enough and wants a different standard that is less susceptible to malfeasance and which is easier for regulators to oversee. Here's a nice primer on the LIBOR Stain that must be removed: https://www.cfr.org/backgrounder/understanding-libor-scandal
https://www.wsj.com/articles/the-un...-the-ecb-is-forcing-the-feds-hand-11564490313 The Undeclared Currency War: How the ECB Is Forcing the Fed’s Hand If losing demand to Europe weakens U.S. growth and threatens to push inflation too low, U.S. rates must also drop Federal Reserve policy makers reportedly are essentially being forced to cut interest rates because of the European Central Bank’s much-lower policy rate. If losing demand to Europe weakens U.S. growth and threatens to push inflation too low, U.S. rates also must also drop, The Wall Street Journal explained. “The ECB’s policy rate, at minus 0.4%, is already nearly 3 percentage points below the Fed’s. And last week ECB President Mario Draghi strongly hinted it will soon go further into negative territory. Fed officials have concluded they cannot permit U.S. rates to deviate too far from their foreign counterparts’. So even though the U.S. economy is in much better shape than Europe’s, the ECB is helping to force the Fed’s hand,” the Journal reported. The U.S. central bank now is factoring not just foreign economic developments but also foreign interest rates into where U.S. rates ought to be. “U.S. rates can diverge to some extent from global rates but there’s a limit to how far that process can go, because of integrated capital markets,” Fed Vice Chairman Richard Clarida said recently on Fox Business Network. “If one central bank raises rates and another doesn’t, capital pours into the first country, pushing its currency up and putting downward pressure on inflation, exports and economic growth. In the other country, the opposite occurs. These dynamics are why other countries often follow the Fed. This year, though, the Fed is a follower, not just a leader,” WSJ.com explained.
Assuming that I know far less then you're giving me credit for when it comes to fixed income, would you mind expanding on what you mean by more convexity juice? I thought that any indexed products would have very little convexity, or are you just saying it would have more than TIPS?
I’m assuming by the vague description this will be a type of variable coupon tied to a FED created money market reference plus a quoted spread. Guess on my part.