Why the Treasury’s offering a new 20-year bond

Justin Ho Jan 30, 2020
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A view of the U.S. Treasury building in Washington, D.C. Chip Somodevilla/Getty Images

Why the Treasury’s offering a new 20-year bond

Justin Ho Jan 30, 2020
A view of the U.S. Treasury building in Washington, D.C. Chip Somodevilla/Getty Images
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This spring, the Treasury Department will start offering a new 20-year bond to investors. Amid the $1 trillion federal budget deficit, the goal is to raise money for the government.

But the Treasury also knows there’s an appetite out there for 20-year government debt. For instance, the bonds could appeal to investors who manage ordinary people’s money.

“You’re going to see pension plans, insurance companies, that would be natural buyers of these securities,” said Chuck Tomes, associate portfolio manager at Manulife Investment Management.

Pension funds, for instance, are hungry for long-term bonds that mature when the retiree needs the money. In a lot of cases, a 20-year bond fits right in.

“In particular, as you think about putting together a pension fund for retirees, you’re going to have investment horizons that are in 15 to 30 years in maturity,” said Jim Vogel, executive vice president at FHN Financial.

The Treasury used to offer 20-year bonds, but stopped in the 1980s. Vogel says 30-year bonds were just more popular at the time, partly because they paid more in interest.

Now, Vogel said, investors will have to figure out how to work the new bonds into their portfolios. And that can take a while to do.

For the government, part of the appeal of a 20-year bond is that it’s really not all that different from a 10-year or a 30-year bond. The Treasury had been considering 50-year and 100-year bonds, but those would have been uncharted territory.

“With a 50-year, and especially a 100-year bond, there’s not a lot of data,” said Seth Carpenter, chief U.S. economist at UBS. “There’s no way to know for sure where those bonds would price.”

That lack of data could have pushed the government to pay more in interest on those ultra-long term bonds in order to make up for that uncertainty.

“With the 20-year, there already exists data that have that kind of remaining maturity,” Carpenter said. “It’s in between the 10-year and the 30-year — that would give you some idea.”

He said that data will help the government lower the interest on those 20-year bonds, which American taxpayers ultimately pay.

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