Welcome Back: The 20-Year Treasury

By Crescent Team

On January 16, 2020, the U.S. Department of the Treasury (U.S. Treasury) issued its results of market participant feedback to re-introduce the 20-year U.S. Treasury – and it could not have come at a better time. Even before the COVID-19 pandemic and its subsequent economic downturn, back in 2019, the amount of issuance was already staggering; now, as the pandemic continues to surge across the nation midway through 2020, after a global economic shutdown and an unprecedented amount of money spent on early relief aid packages, the U.S. is more than $26 trillion in debt, which is an 18 percent increase from just 12 months ago[1]. With the 20-year Treasury as a reference point during these tumultuous times, investors can feel empowered to make longer-term investments while also more sufficiently tracking historic financial trends.

Despite the shock of recent auction sizes, the 20-year Treasury has been greeted with healthy demand as prices have increased and yields have fallen. This will also provide more information and ultimately more efficiencies for investors, lenders and borrowers as it puts another point on the yield curve. Prior to the 20-year Treasury’s re-introduction in May of this year, the 10- and 30-year Treasury were the only long-term references for potential lenders and borrowers since 1986, the last time the 20-year Treasury was auctioned.

TREASURY PERSPECTIVE (WHY AND SUPPLY)

Overall, watching the U.S. Treasury issue $3 trillion in debt during just the second quarter of 2020 alone is a breathtaking experience – and not in a good way. The previous quarterly record for Treasury issuance was $569 billion, set during the global financial crisis more than 10 years ago.

From the Treasury’s press release on January 16, 2020:

“The U.S. Department of the Treasury today announced it plans to issue a 20-year nominal coupon bond in the first half of calendar year 2020.

Over the past several years, Treasury has explored a range of potential new debt products, including 20-year, 50-year, and 100-year bonds, as well as floating-rate notes linked to the Secured Overnight Financing Rate—all with the goal of expanding borrowing capacity to finance the federal government at the least cost over time.

“The Treasury Department appreciates the input of market participants, including the Treasury Borrowing Advisory Committee and primary dealers, for their contributions to Treasury’s decision to launch a 20-year bond,” said Treasury Secretary Steven T. Mnuchin. “We seek to finance the government at the least possible cost to taxpayers over time, and we will continue to evaluate other potential new products to meet that goal.”

As part of its consideration of new products, Treasury gathered feedback on these potential products from a large and diverse set of market participants. Treasury believes that there will be strong demand from investors for a 20-year bond, which will increase Treasury’s financing capacity over the long term.

Consistent with Treasury’s longstanding issuance practice, Treasury plans to issue this product in a regular and predictable manner in benchmark size. Additional information regarding the launch of the 20-year bond will be provided in Treasury’s quarterly refunding statement on Wednesday, February 5, 2020.”

Coincidentally, the Treasury reiterated its view that the weighted average maturity of the debt, while not an explicit target, is adequate and noted prior discussions suggesting issuance in the belly of the curve is preferable over the long end given the cost/risk tradeoff. In the second quarter, auction sizes increased across all nominal coupon tenors, the most being in the 10-year.

According to the Congressional Budget Office and U.S. Treasury, since 2001 the weighted average maturity on Treasury has been 5.1 years and is now at 5.8 years:

When inflation is not a concern, simply rolling short-dated treasuries into lower-coupon, short-term T-bills is the more affordable route. If inflation increases, taxpayers could gain substantial monetary benefits from preemptively locking-in longer-term financing.

INVESTOR APPETITE (DEMAND)

Though a typical buy-and-hold retail investor may avoid this issuance due to potential inflation and interest-rate risk, institutional buyers looking to hedge specific risks, such as pensions and insurance companies, will show interest. Fixed income managers can also use the 20-year Treasury as an additional tool to help fine tune their portfolios.

With interest rates still positive in the U.S. compared to other countries like Germany and Japan, the U.S. Treasury yield will remain compelling to foreign buyers until rates either turn negative or the U.S. dollar depreciates below fiscal deficits. Central banks like the U.S. Federal Reserve offer programs to enable more sources of unlimited demand. Examples of such programs include the Fed’s quantitative easing and potential yield curve control.

Holders of U.S. Treasury Securities

OTHER EFFECTS

Unlike the Treasury, since 1986, corporations continue to issue 20-year debt and, since 2013, there has been a notable uptick in corporate 20-year issuance, taking advantage of lower rates. The recent return of the 20-year U.S. Treasury auction will likely bolster this trend as added encouragement for corporate borrowers.

IS THERE SUCH A THING AS A COINCIDENCE THESE DAYS?

 In terms of the future over the long term, the recent return of the 20-Treasury auction is a necessity. But is it also a test of the market? Is the 50- or 100-year Treasury next? While this might seem shocking and even unfathomable, the Treasury has discussed such options.

For the time being, we are more focused on the inflation and interest-rate effects of the elevated debt levels. At the very least, we can view the 20-year Treasury as an important financial mechanism that enables the U.S. population to:

• Gradually lock-in lower financing rates

• Gauge economic information at this all-important time in history

For more information, please contact any of the professionals at Crescent Wealth Advisory.

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[1] U.S. Treasury, as of June 2020

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