It only takes a quick glance at the US bond curve to realize that something is wrong. One US Treasury bond – the 20-year note – is out of step with the rest of the market. It is hovering at yields much higher than those of the bonds around it – the 10-year and 30-year notes.
This isn’t just a small aesthetic issue that might worry traders. It’s costing American taxpayers a lot of money. Since the Treasury Department re-auctioned 20-year bonds in monthly auctions four years ago, their sale has added about $2 billion a year in interest expenses to what the government would otherwise have to pay, according to simple math. That works out to about $40 billion over the life of the bonds.
This, on some level, is nothing for a government that spends nearly 7 trillion dollars Annually. However, $2 billion is a long way off. It’s the same amount that The government is spending Each year, up to $10 billion is spent operating the National Park System, more than what goes to home purchase assistance for military veterans.
If you ask most bond market experts, they’ll hesitate and hesitate about whether the 20-year bond should be scrapped to save money. It’s more complicated than it sounds, they say. But one person—of about a dozen people interviewed for this story—said without hesitation or qualification that the bond should be scrapped. And it’s worth noting that this person is the same man who brought the bond back to life in 2020: Steven Mnuchin.
“I’m not going to continue to issue it,” Mnuchin, who served as Treasury secretary under then-President Donald Trump, said when contacted by Bloomberg News. He says the idea — creating another maturity to help lock in decades of low borrowing costs — made sense at the time, but it simply didn’t work out as planned. “It’s expensive for taxpayers.”
Mnuchin’s shift in stance in some ways reflects the break-even approach to policymaking favored by Trump and his team. By contrast, the Biden administration is taking a more traditional approach, sticking with the 20-year bond — albeit at a reduced size — to ensure continuity and stability in the government’s debt-selling program. (A Treasury spokesperson declined to comment.)
Whichever party wins the White House in November, the result of the 20-year budget plan is clear: The ballooning government deficit has become more difficult to manage. In 20 years, the government deficit is now $1.5 trillion. 2 trillion dollarsThat’s double what it was just five years ago. And investors are unlikely to rush to buy some new bonds just because the Treasury is offering them.
This is the grim new reality of American finances, say bond market experts. The country needs as many creditors as possible willing to lend it money. And for those experts who hesitate to recommend a quick end to auctions of 20-year bonds, that need is vital—even if it means paying huge sums to lure buyers into new securities on the market.
“Having another maturity point gives them some additional flexibility,” says Brian Sack, head of macro strategy at multi-strategy hedge fund Palyasny Asset Management.
United State resume sale 20-year bonds in May 2020 after a hiatus of more than three decades.
There were signs from the start that the debt would be expensive. Bond market advisers who approved the new maturity warned the Treasury not to overestimate demand. Yet the initial auction sizes were much larger than recommended.
“We wanted to issue as much long-term debt as possible to stretch out the maturities and stabilize the very low rates that were in place at the time,” said Mnuchin, who now runs the private equity firm Liberty Strategic Capital. He even wanted to offer very long-term debt — securities maturing in 50 or 100 years — but settled on 20 years when advisers discouraged him from the idea.
Twenty-year bonds began to decline after a series of auction increases and quickly became the highest-yielding U.S. government bonds. Today, even after auctions were reduced, they remain the most expensive form of financing after short-term Treasuries.
Analysts point to a variety of reasons why the 20-year bond is keeps on fightingThe most notable of these drawbacks are that they are not as liquid as ten-year bonds, and they offer a shorter duration, or less interest rate risk, than thirty-year bonds.
At 4.34%, the yield on the 20-year note is currently about 0.23 percentage points higher than the average of the 10- and 30-year bonds. It can be difficult to measure the cost of alternative financing precisely because the yield on the 10- and 30-year bonds would be slightly higher today if the Treasury had sold more of them instead of issuing the 20-year bonds. But this yield gap, when calculated at the time of issuance over the past four years, generates an estimated additional cost of about $2 billion per year.
More conservative calculations of the additional cost, based on the gap between Treasury yields and interest rate swaps, put the figure at about half that amount.
“From a taxpayer perspective, the most important thing is whether we can get borrowing costs down over time,” says Ed Al-Husseini, an interest-rate strategist at Columbia Threadneedle Investments in New York. “But it’s not clear that we’ve been able to do that.”
Al-Husseini is one of the few in the market who shares Mnuchin’s view. He says the whole thing was “a mistake.” “There’s not a lot of demand for these bonds in particular. It doesn’t make sense.”
In an effort to better match supply and demand, the Treasury has cut back sharply on its issuance of 20-year debt in recent years. Its quarterly sales of 20-year debt now stand at $42 billion, down from a peak of $75 billion.
“The Treasury has been successful in shrinking the 20-year bond to a more appropriate size,” says Sack, who was a member of the Treasury Borrowing Advisory Committee, a panel of bond traders and investors that advises the government on issuance strategy. In 2020, the committee supported the launch of the 20-year bond. “The market for these securities is now in better balance than it was a few years ago.”
The market is likely to look better in a few years, said Amar Riganti, a former deputy director of the Treasury Department’s debt management office. Riganti said it could be some time before the new securities attract the same steady demand as other maturities.
While the four years since its debut “seems like a long time in the capital markets, it’s actually a very short period from a debt management perspective,” said Riganti, now a fixed-income strategist at Hartford Funds.
But that doesn’t apply to Mnuchin, who said the market had had enough time to make its judgment.
Meanwhile, one group has already stopped selling 20-year bonds: corporate America. At first, it was CFOs across the country. Enhanced One positive side effect that policymakers sought was the sale of 20-year bonds when the Treasury reintroduced maturity.
But that rally quickly fizzled, and today the market is all but dead. New offerings totaled just $3 billion in the first half of the year, down from $82 billion in all of 2020. Maturities represent less than 1% of combined sales of 10-year and 30-year bonds, down from about 10% previously, according to data compiled by Bloomberg.
“We always say that supply follows demand in the corporate market, and there’s not a lot of demand for 20-year bonds in general. It’s just a weird maturity,” said Winnie Caesar, head of global credit strategy at CreditSights.
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