The Daily Update - Anyone for 2120 US Treasuries

When the borrowing rates for 30-year Treasuries fell below 2% to record lows, last week, it was inevitable that talk of US century and half-century bonds would reignite. The issuing of such ultra-long bonds failed to gather a strong enough reception in 2017, but with ever more institutional investors reaching for yield it may finally be the year that the US Treasury Department find a market to extend their curve right out to 2120. (This would mark a change to a past aversion to such ultra-long debt, at least in the corporate space, recalling that Congress in the 90s tried to designate debt with maturities over 40 years as permanent equity… Disney and Coca-Cola had issued century bonds in 1993 – over 25 years ago – which Congress believed were primarily issued to avoid tax.)

Over the last couple of years some century bonds have almost doubled in value (Austria) whilst others lost almost half their worth (Argentina) last week alone. Both the accelerating trend lower for Austrian/European ultra-long yields and the recent shock higher for Argentina’s bond yields strengthen the support for a US equivalent: as European investors look for high enough yields – after cost of hedging – to maintain profitability or meet liabilities, and whilst many EM investors are re-valuating the risk-reward profile of lending to fiscally imprudent emerging countries out to the 22nd Century.

Most estimates place the yield for a potential 50-year Treasury around 2.2-2.5% with the 100-year only a little higher (i.e. around yields that the 10-year was trading at the start of 2019). So still not enough yield to meet the anachronistic return targets of many pension funds; but certainly an appealing opportunity to anyone wishing to speculate on the hype that all so-called “risk-free” assets – even as far along the curve as these – could approach zero or even negative yields as the time-value-of-money hypothesis is usurped by the priority of wealth preservation. In such a drastic (and unlikely) paradigm shift for markets, the duration sensitivity of Century Treasuries would push up their value to 3x to 4x par.

However, there remains a likelihood that the US Treasury Department will again hold fire on issuing ultra-long bonds. They may find that despite trending higher, the demand is still insufficient… or they may even decide to hold-off in anticipation that borrowing rates will fall still lower.

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