HALISTER1: RESEARCH ROUNDUP: Ultra-Long UST Faces Timing, Liquidity Issues

RESEARCH ROUNDUP: Ultra-Long UST Faces Timing, Liquidity Issues

(Bloomberg) -- Reaction to possibility of new USTs maturing in more than 30 yrs has focused on the potential timing of such issuance and liquidity issues, according to published research and interviews.
  • Treasury Secretary nominee Mnuchin floated the idea of longer-dated USTs to cushion the effect of rising interest rates in a Nov. 30 CNBC interview
  • Some analysts believe it would take several months or even a year or longer to issue an ultra-long bond, citing the reintroduction of 30Y issuance in 2005, which was originally discussed in May 2005 before finally being auctioned in February 2006
  • Treasury does have a history of contemplating ultra-long issuance; the agency asked dealers in its August 2014 refunding questionnaire whether it should consider issuing a security with maturity greater than 30 years
    • At February 2011 TBAC meeting, participants discussed ultra-long bond issuance, saying “significant demand” exists from entities with long-dated liabilities
    • At April 2009 TBAC meeting, one member said it would be hard to issue in size beyond 30 yrs as markets tend to be illiquid; others said such a move would raise very little debt and cost taxpayers a “significant concession”
  • Barclays (Anshul Pradhan and John Yen)
    • U.S. Treasury would likely need a “significant gap” in the time between announcing an ultra-long bond and issuing the securities, which could actually deter such issuance
    • If there’s sporadic demand for an ultra-long bond, it will challenge Treasury’s philosophy of being “regular and predictable” when it comes to preparations for a new security
  • Brean (Russ Certo)
    • It may be optimal for Treasury to issue ultra-long USTs “sooner rather than later,” as continuous discussion of debt financing will cause yields to keep rising
    • Potential for ultra-long issuance at May or August auctions; “it will be a 2017 event, maybe November at the latest”
  • Citi (Jason Williams)
    • Ultra-long issuance may take 9 months to a year, based on the amount of time it took to reintroduce the 30Y bond, since a 50Y would be a “new part of the curve”
    • Part of analysis includes logistics surrounding supply cuts and timing since 50Y may need to be issued on similar cycle as 30Y to enable STRIPS fungibility and would inject further duration supply into 3Y/10Y/30Y auction week
  • JPMorgan (Jay Barry and others)
    • Introduction of new securities “is usually a long process”
    • When Treasury introduced 3Y note, 4-wk bill and 30Y TIPS, there was at least a 6-month lag between TBAC discussing a maturity point and first auction
  • Morgan Stanley (Matthew Hornbach and others)
    • Liquidity of any new product “will be of paramount importance to Treasury”; ultra-long issuance would face liquidity challenges related to STRIPS program, indexing and investor preference for more liquidity in the 15yr-20yr curve segment
    • To be viable, ultra-long issuance would need to total $20b-$32b a year, and liquidity would hinge partly on how much gets stripped; if not seen as a trading vehicle, cost of issuance could increase
  • RBS (Blake Gwinn)
    • TBAC may not discuss ultra-long UST until May because of the time needed for the Treasury Secretary nominee to be confirmed, get settled into the new role and appoint the people involved in the decision
    • “Workable option” may be zero-coupon, reverse inquiry 50Y issue, though probably unlikely Treasury moves in this direction in the near future
  • Wrightson ICAP (Lou Crandall)
    • Treasury can increase 10Y and 30Y auctions while it works out the specifics of 50Y or 70Y offerings to get a head start on extending the average maturity of its debt
    • More concrete discussions about tenor, size and timing of ultra-long offerings “will take several months at least”
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
Anshul Pradhan (Barclays PLC)
Blake Gwinn (RBS Securities Inc)
Jason Williams (Citigroup Inc)
Jay Barry (JPMorgan Chase & Co)
John Yen (Barclays PLC)

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