Analysts give long odds on ‘ultra-long’ bond

Analysts see hurdles to the introduction of a new “ultra-long” bond, which has garnered attention this week after the Treasury asked industry participants to share their views on the idea.

Goldman Sachs and Societe Generale put out research papers on Friday addressing the topic, both saying they believed the likelihood of it becoming reality was slim.

The notes came as Treasury yields have maintained their lows for the year. The US 10-year Treasury fell to a new closing low of 2.17 per cent this week before climbing back to 2.25 per cent by the end of the week. The 30-year finished the week at 2.9 per cent, down from its 2017 high of 3.21 per cent in March. It still finished the week 1 basis point higher than seven days ago.

Goldman said:

We think the Treasury is unlikely to introduce ultra-long issuance, for three reasons. First, it is likely to again receive skeptical feedback from dealers about market demand. Second, given that feedback, the case would be largely an opportunistic one to lock in low rates, but this would be out of keeping with Treasury’s long-standing principle of regular and predictable issuance. Third, the new Administration’s interest in ultra-long issuance appears largely tied to financing a large infrastructure program that we think is unlikely to materialize.

Societe Generale said:

Although there is a greater willingness on the part of the Treasury secretary to find alternative ways of funding the government, we believe the hurdle is still quite high for the introduction of ultra-long bond issuance. We believe the coupon of a 50y bond could be as low as 3.05 per cent, a mere 15bp higher than the yield on the current 30y bond. We believe the market is underpricing the risk of a June rate hike and suggest ways to position for a hawkish re-pricing when we get past risk events in early May.