By Tom Burnett CFA
With U.S. Treasury interest rates at record low levels, the Treasury should be planning to issue a large offering of long-term bonds whose low coupon would lock in the low interest payments over a 20- or 30-year period, depending on the bonds issued. The 30-year yield is trading in the 1.6-1.7% area, down from 2.39% at the end of 2019 and down from the 3.0% level one year ago.
At the end of September 2019, total Treasury debt outstanding was $22.7 trillion, of which $14.2 trillion was held by private investors (Treasury Bulletin, December 2019, page 33). Of the total $14.2 trillion, $1.53 trillion was in the form of bonds due 20 years or later (December Treasury Bulletin, page 33). The average maturity of all outstanding, privately held debt was just 65 months at the end of September 2019 (TB, December, page 33). According to the federal government website, Treasury Direct.gov, the average interest rate on bonds with a life of 20 years or more was 3.85% at December 31, 2019. In the current interest rate environment, the Treasury should move quickly to take advantage of this opportunity. Bonds issued at the current level of 1.6-1.7% would help to lower the Federal interest cost burden for the next 20 or 30 years, depending on the maturity selected. Subject to the Congressional debt limits, the Treasury should even consider a massive $100 billion issue of 30-year bonds that would lock in the interest cost savings relative to the current average rate for many years. For example, a $100 billion issue at 1.85% (well above the current market levels) would save 2.0% compared to the December average cost of 3.85%. Applied to $100 billion over 30 years, this cost savings would total $60 billion, an opportunity target well within the Treasury’s grasp. With $1.5 trillion of outstanding long-term bonds held by the public, an issue of $100 billion would only increase that amount by 6.0% and the market’s evident appetite for safe securities strongly suggests that such an offering would be successful.
Tom Burnett is Director of Research