Among the risks of an ultra-long bond is the ebb and flow of demand over the course of an economic cycle. Buyers may be enthusiastic when yields are high, but in downturns, when the Federal Reserve is cutting rates, demand may evaporate, pushing government borrowing costs higher across different maturities.
“The determination we made at the time was that there was definitely some interest in it but it was not necessarily at the size and scale that we thought made sense to pursue,” Mnuchin said Wednesday. “Some time went by and I thought it made sense that we revisit this.”
The Treasury has examined the possibility of issuing long bonds about four times in the past decade. The TBAC has been unenthusiastic on the prospect of an ultra-long issue since it emerged.
Investors have snapped up 100-year bonds issued by the likes of Austria, although recent experiences in Argentina and Germany underscore some of the potential pitfalls for investors.
Alarms sounded in the Treasury market earlier this month after 10-year yields dipped below two-year ones, an event considered a harbinger of a U.S. economic recession in the next 18 months.
The move caught the attention of Trump, who on Aug. 14 tweeted about the “CRAZY INVERTED YIELD CURVE!” and blamed the Fed for any negative effects.
“There are people who think that the yield curve can predict a recession -- I don’t believe that,” Mnuchin said Wednesday. “The answer is: In environments when the market thinks that the Fed is going to lower short-term rates, and that’s built into the market expectation, people end up buying longer-term securities, and that’s what can lead to a flat or inverted yield curve. The market adjusts quicker than the Fed.”
This article was provided by Bloomberg News.