U.S. Is to Start Issuing 20-Year Bonds in 2020 to Fund Growing Deficit

As the demands for longer-dated, risk-free securities among institutional investors have always been high, the Treasury will start issuing 20-year bonds. Securities that offer some nominal yield, amid $11 trillion of global debt with negative rates. While Japanese officials are thinking about a much longer 50-year security, the U.S. officials turned this idea down in their announcement.

“The 20-year bond fits more easily into the existing market structure. This is a way of taking advantage of long-term interest rates that are low by historical standards without introducing a wild-card such as an ultra-long bond, which would have had more growing pains,” commented Lou Crandall, chief economist at Wrightson ICAP LLC.

The idea is that these new 20-year bonds will draw in more domestic buyers rather than global funds. In 2019, foreign investors in auctions bought less than 9% of the U.S. 30-year debt.

The previously issued 30-year treasuries bond yield about 2,15% while the Japanese 20-year bonds yield around 0,31% and German bonds yield just 0,07%.

Additionally, since the standard practice is to avoid a market-timing issuance strategy, The U.S. Treasury in a statement says that it will be done “in a regular and predictable manner in benchmark size”.

Also, since the bond will be relatively new, the trading of it might be a little cheaper, thinks Priya Misra who is the head of global rates strategy at TD Securities. She believes that the yield curve should steepen as the 20-year supply will “be coming sooner than some had expected”.

While in Asian trading Friday longer-maturity Treasuries fell, it steepened the yield curve. 30-year yields rose to 2.29% and 10-year yields climbed to 1.82%.

U.S. Once Ditched 20-year Bond

This is not something new. Back in 1986, the U.S. abandoned a 20-year bond and changed it to a 30-year one. Ever since then, it’s known as the “long bond” in the American markets.

Also, digging even more into history – in 1955 the U.S. issued bonds with maturities as long as 40 years. This happened between 1955 and 1963. Moreover, an interesting fact is that in 1911, Treasury sold a 50-year debt to fund the construction of the Panama Canal.

However, the U.S. Treasury is still evaluating other potential products in order to finance the debt at the lowest cost over time, says the Treasury secretary Steven Mnuchin. The large gap between the 10-year bonds and 30-year bonds is what investors are demanding. Tony Farren is the managing director at broker-dealer Mischler Financial. He believes that this 20-year bond will appeal to people who don’t want to go as long as 30 years.