New York: The likely absence of a dip in the tail-end of the yield curve helps tell you why the US Treasury probably won’t be selling ultra-long bonds.
While Steven Mnuchin (pictured), President-elect Donald Trump’s pick for Treasury Secretary, said he’d “take a look at everything” in response to a question about 50- and 100-year bonds, an analysis of the projected gap between yields on 30-year bonds and the longer securities signals investors won’t pay enough for the debt for it to make sense for the government.
An upward sloping, or even flat, yield curve between the 30- and 50-year maturities means investors aren’t willing to reward the Treasury a price premium for the debt even though many desire the benefits of positive convexity, which helps enhance returns when yields fall. In the U.K., that’s an enticement that has helped 50-year gilts yield less that sovereign securities maturing two decades sooner.
The Bloomberg’s Treasury spline model -- which assumes constant forward rates into the future -- implies a US50-year US bond would yield 3.13 percent, almost matching that of the 30-year. While that’s a theoretical baseline, the Treasury doesn’t seem to expect the curve to kink downward due to positive-convexity demand, such as in the UK with its 50-year securities.
“The Treasury has to analyze if the issuance would save taxpayers money on a risk-adjusted basis,” said Amar Reganti, a fixed-income strategist in the asset-allocation group at GMO LLC in Boston and a former deputy director of the Treasury’s Office of Debt Management. “There’s no clear indication a 50-year bond would do that as Treasury isn’t likely to be paid for the extra convexity, which would be reflected in a yield curve being upward sloping between 30- and 50-year bonds.”
The price-to-yield relationship for different maturities, as illustrated below, shows longer-term Treasuries posses more positive convexity, which enhances price gains when yields fall and curtails declines when yields rise.
