On Friday, after the close, Treasury decided to go ahead and tip a new “outreach” effort aimed at “refresh[ing] its understanding of market appetite” for ultra-long issuance.
In addition to a 50-year tenor, there’s some speculation about a US century bond. It was obviously not a coincidence that the news came after a week during which 30-year yields fell below 2% for the first time.
Although Steve Mnuchin said in 2017 that ultra-long obligations might “absolutely make sense”, previous outreach efforts have generally been met with a tepid response.
If you ask BofA, Treasury now harbors a “bias to proceed”, irrespective of pushback from TBAC.
The bank’s Mark Cabana calls Friday’s announcement “a surprising break from typical Treasury practice”. He cites the fact that it was unexpected, that it came “late on a mid-August Friday in low liquidity” and that it hit “outside of quarterly refunding guidance that was just provided 2.5 weeks earlier”.
The odd character of the announcement may suggest Treasury is aiming to capitalize (figuratively and literally) off plunging long-term borrowing costs and engineer away some of the recession jitters as manifested in the curve.
Although Treasury has always employed a “regular and predictable” approach to debt management and steered clear of trying to time the market with opportunistic issuance, BofA thinks Friday’s announcement could telegraph a strategy shift towards issuance that’s “less regular and predictable, more market timed, and biased to proceed with ultra-longs”.
As far as how a 50-year would trade, BofA sees it at 10-20bps cheap to the 30-year, although the bank says that could be optimistic. Cabana cites “demand and liquidity concerns [which] may overwhelm the convexity benefit of the 50y bonds”.
The bottom line from where BofA is sitting is that if Treasury goes this rout, it will mean a steeper curve and “cheaper USTs & higher term premium due to R&P departure”, among other developments.
But hey, how else is the White House going to finance that Greenland purchase, right?