NO COURAGE TO EXTEND DURATION
2017-11-07 8am EDT | #bonds #Treasury #Mnuchin
For a supposedly shrewd guy, Treasury Secretary Mnuchin sometimes astounds me. When he first took over the job, Mnuchin said the “concept of ultra-long bonds made sense for us to explore.”
With interest rates knocking at multi-generational lows, the idea of the government extending duration seemed prudent.
So what did Mnuchin do? He sent out a survey to the Federal Primary Dealers asking them for their opinions.
Isn’t that like asking your barber if you should grow out your hair? After all, these dealers make some of their living continually rolling over the Treasury’s debt. If that debt’s maturity was extended, that would reduce the number of auctions the government would need each year.
Big surprise, the answer came back that there wasn’t enough demand for an ultra-long bond. Shock!
This is one of those Steve Jobs/Henry Ford moments where a leader should step up and show some vision. Henry Ford once said that if he asked customers what they would want, they would say “faster horses.” And when Steve Jobs first introduced the idea of the Apple Store, the pundits speculated how it would be the death of Apple. Sometimes doing the right thing takes guts.
I am aware that US pensions rules are different than European ones that require liabilities to be more duration matched. But are you kidding me that the Reserve Currency issuer cannot float a boatload of 50 or 100-year bonds at a good price? Not a bloody chance. The demand would be huge. If Austria can sell a 100-year bond at 2.1%, then the US can do the same.
No, Mnuchin is just scared to stand in there and make a sale of ultra-long bonds. Issuing longer dated bonds is, in essence, a big bond short bet. And if he is wrong, then it would look bad. What if rates go even lower? He would have just locked in a relatively high cost of funding.
But let me paraphrase the immortal Jesse Livermore - “sell when you can, not when you have to.”
My guess is that we will look back at those countries that had the foresight to lock in the longest duration funding and wonder why everyone didn’t do that. It will seem obvious in hindsight, but the fact that it is so hard to do today, is the exact reason Mnuchin doesn’t want to do it. And it’s probably the reason why we should make the sale instead of Mnuchin.
Hey look - the Austrian 100-year bond has rallied since its issuance.
It’s now below a 2% yield. Think the Austrian government is regretting their sale? Well, let me tell you - a 3% yield would be a price of 71.50. A 4% yield would be $53. Here is my prediction - at some point, this bond will trade for less than 50 cents on the dollar.
For governments with tons of future funding requirements, not extending your duration by as much as the market allows down here at these crazy stupid low yields is imprudent. But hey, what do I know? I think shorting a 100-year bond at a 2% yield is a good idea.
Thanks for reading,