AVIC Securities: Rethinking U.S. Ultra-Long Treasury Bonds in a Global Loose Cycle
Dong Zhongyun and Fang Zheng of AVIC Securities Recently, there has been much discussion in the United States over the issue of ultra-long-term bonds.
On August 16, local time, the US Treasury Department’s Debt Management Office issued a statement saying that they had conducted extensive investigations with each other, hoping to understand what investors think about the government’s 50- or 100-year government bonds.
This news once triggered a reaction to market interest rates, and 30-year US Treasury yields rose rapidly during the session.
On September 13, US Treasury Secretary Steven Mnuchin said in an interview with CNBC that the United States may initially issue 50-year Treasury bonds next year because the US government is looking for cheaper and longer-term ways to surge for this.Debt financing.
Currently, the longest term of US government bonds is 30 years. The initial change in the issue of ultra-long-term government bonds can be traced back to the government observation period in 2009. After repeated analysis by the US Treasury Department, it is stated that the purpose of the issue is not clear and does not meet the continuous issue.
The U.S. Treasury has regular and regular meetings with the Borrowing Advisory Committee (antique lending committee) every quarter. It is worthwhile for the advisory committee to submit to the U.S. Treasury opinions on the state of the US economy and provide technical advice on the technical issues of treasury management.
The Borrowing Advisory Committee is affiliated with the American Securities Industry and Financial Markets Association (SIFMA) and is composed of 15 senior representatives of the United States Investment Bank, Brokers and Investment Funds, responsible for providing timely market information to the Treasury.
After the government launched a US $ 1 trillion infrastructure investment plan, US Treasury Secretary Mnuchin continued to vigorously promote the issuance of ultra-long-term bonds. In 2017, he publicly stated that the issuance of ultra-long-term bonds was “absolutely justified”, which will help solve the financing for the US government.problem.
However, at the time TBAC believed that the feedback was that the market demand had not increased significantly at that time. If it was necessary to expand the issuance of government bonds, the existing varieties of government bond maturities could be selected. Eventually, the ultra-long-term government bonds were shelved due to the negative market response.
For a long time, governments around the world are increasing the issuance of ultra-long-term government bonds and locking in low borrowing rates. Governments in 14 countries around the world have issued 40-100-year government bonds.
Since 2009, the government’s issuance of over-long bonds has increased significantly.
Ultra-long-term Treasury bonds 杭州夜生活网 generally refer to government bonds with a maturity period of more than 20 years, which also include permanent or non-maturity national bonds. They are issued internationally and have a wide range of 30-year ultra-long-term national bonds.Long-term government bonds are also called Methuselah bonds.
After the financial crisis, the United Kingdom and China issue 50-year government bonds each year, and Japan issues 40-year government bonds each year, which is a regular and regular issuance.
Since 2014, Canada, Spain, Switzerland, France, Belgium, Italy, Italy have issued 50-year government bonds, and Belgium, Ireland, and Austria have issued 100-year government bonds.
For emerging markets, China (1996), the Philippines (1997), Mexico (2010), and Argentina (2017) have issued 100-year foreign bonds denominated in US dollars.
In July 2019, the Spanish Finance Minister stated that it would increase the issuance of 50-year government bonds.
In August, the Swedish National Debt Agency released news that it is studying the release of 100-year long-term debt. The current Swedish government bond yield curve is in a negative deviation range. At this time, it is considering whether to emulate other countries.Low government borrowing costs.
Source: bloomberg, AVIC Securities and Finance Research Institute The UK is the country with the longest history of super long-term government bond management and issuance experience.
As early as the 18th century, the rise of British sea power, the financial gap caused by overseas military expenditures and colonial expansion, the British government began to issue perpetual government bonds (unexpired government bonds). Since then, perpetual government bonds have been the main varieties of British government bonds.
After 1946, the United Kingdom has not reissued new perpetual bonds, and eventually redeemed all outstanding perpetual bonds in 2015 in accordance with the new financial law.
During World War I and World War II, the United Kingdom issued government bonds with fixed maturities of more than 50 years.
In 2005, the UK Debt Management Office announced the resumption of the issuance of 50-year Treasury bonds. The Treasury bonds were issued using a multi-price competitive bidding method, followed by repeated reissues.
After the financial crisis, the issuance of British government bonds increased, and the issuance method switched to the syndicate (syndicate) model, which is a syndicate led by a main underwriter and several underwriters for bookkeeping and joint bookkeeping managers to fully obtain market informationThis kind of syndicated underwriting guarantees the success rate of national debt issuance.
In addition to conventional government bonds, the British government also issues long-term index government bonds, and the principal and interest payments are regularly adjusted based on the income index.
At present, the size of pension fund assets has been comparable to the annual GDP of the UK. At a time when institutional investors such as pensions and insurance companies have a strong demand for long-term assets, the British government issued long-term government bonds to reduce the cost of financing.
In 2012, the UK cancelled its 100-year Treasury bond issuance plan due to weak demand for super long-term government bonds.
Japan’s national debt issuance management is close to that of the US model, and there are currently no plans to issue 50-year government bonds.
In 2007, the Ministry of Finance of Japan first issued 40-year government bonds as a supplement to existing long-term government bonds to meet the investment needs of institutional investors with asset-liability matching.
Since Japan implemented quantitative easing, the Japanese government and Japan will gradually continue to coordinate fiscal and monetary policies to combat deflation.
Japan ‘s Ministry of Finance ‘s government bond issuance has increased significantly, while Japan ‘s mergers and domestic banks continue to purchase government bond assets.
The maximum issuance of 40-year government bonds has continued to expand, and the number of issuances has also increased from 4 to 6 each year.
In 2016, the Japanese government decided to use low interest rates to issue more 40-year Treasury bonds. By reducing the issuance of other maturities of Treasury bonds, it will increase the issuance of 40-year Treasury bonds to 3 trillion yen in the next year, accounting for about the annual amount of Japanese government bonds.2% of circulation.
At present, Japanese government bonds are mainly composed of general government bonds and fiscal investment and financing bonds.
Among them, general government bonds are government bonds issued by the government for general general expenditures, including construction government bonds, special fiscal deficit government bonds, reconstruction government bonds, repayment of government bonds and other bonds; fiscal investment and financing government bonds are mainly government bonds issued for financing of financial loan funds.
The differences between the aforementioned national debts are mainly in the purpose of use, applicable legal provisions, parliamentary authorization and redemption guarantees.
For example, construction treasury bonds are permitted by the Japanese Public Financing Law. The government bonds issued for public benefits require legislative authorization, usually do not exceed the provisions of the general account budget, and are linked to the sixty-year redemption rules.
Japan ‘s ultra-long-term government bond issuance is a public issue, and the auction method is a Dutch auction, which is consistent with the US government bond management model, and the uncertain factors of market issuance.
The issuance of Japan’s ultra-long-term government bonds is constrained by political factors, coupled with market investors’ uncertainty over longer-term government bonds. At present, the Ministry of Finance of Japan has stated that it will not issue 50-year Japanese government bonds. Due to the needs of special periods, the United States issued perpetual government bonds and 50-year government bonds as early as the gold standard era in the early 20th century.
Prior to the establishment of the Federal Reserve, the Treasury Department was responsible for the issuance of US dollars, and the US National Bank can circulate by holding Treasury bonds as collateral for issuing notes.
According to the 1900 Gold Standard Act, the Treasury was allowed to issue 2% of perpetual government bonds with 30-year redeemable rights.
The purpose of the Ministry of Finance to issue perpetual bonds is to reduce the interest expenses on government bonds. The National Bank can also replace short-term government bonds as bill collateral with perpetual government bonds to avoid replacing collateral.
By the end of 1914, the size of all US Treasuries was 9.
US $ 6.9 billion, of which two-thirds are sustainable bonds.
The United States Congress passed a bill in 1902 that decided to take the permit for excavation of the Panama Canal from the French. At the same time, the bill authorized the Treasury to issue a maximum of one.
$ 300 million 30-year Treasury bond.
As the project’s advancing budget continues to increase, the U.S. Congress specifically authorized the Treasury to issue a maximum of 2 in the Penn-Eldridge Tariff Act of 1909.
A $ 900 million coupon with a 3% 50-year government bond supports the construction of the Panama Canal.
In 1911, the Treasury Department issued US $ 5,000,000 of 50-year Treasury bonds, but stipulated that the Treasury cannot be used as collateral for bills issued by the US National Bank, resulting in the National Bank ‘s demand for the issuance of new 50-year Treasury bonds is not great.
However, the Ministry of Finance encouraged individual investors to subscribe by providing convenience. Eventually, the government bond was still oversubscribed by the market.
Since the 1970s, the US Treasury Department has reset a regular and predictable government bond issuance system, and the US government bond market has gradually developed into the world’s largest and alternate liquidity sovereign debt market.
From 1955 to 1964, the U.S. Treasury Department issued government bonds with maturities ranging from 30 to 40 years from time to time to meet the demand for replacement of existing short-term bonds.
At that time, the issuance of ultra-long-term government bonds was uniformly priced by the Ministry of Finance, without considering the real-time demand of the market.
After the 1970s, the US Treasury Department believed that the ability to issue long-term Treasury bonds to the market on a regular basis was particularly important. It abandoned the method of issuing irregular long-term Treasury bonds on an irregular basis, and finally determined that the maximum term of U.S. Treasury bonds was 30 years.
In the Treasury Bill Amendment passed in 1993, the United States Congress authorized the Treasury Department’s permanent management of the Treasury market.
The previous US Treasury bond management system was negotiated by the Treasury Department and the Federal Reserve to determine the size of the annual Treasury bond issuance and announced the Treasury bond issuance calendar at the beginning of the year, including detailed auction dates and types of issuance.
The advantage of the new government bond issuance strategy is that market participants and investors can know the information of government bond issuance in advance, brake the rational arrangement of funds, reduce market risks, and facilitate the smooth issue of government bonds.
Therefore, in 2017, the U.S. Treasury Department is considering the issuance of new ultra-long-term government bonds. Without the replacement of sustained and stable market demand, the issuance of ultra-long-term government bonds may be opportunistic, and with regular and predictable financing policies absolutely.
The Ministry of Finance should give special consideration to the depth and continuity of investor demand for new government bonds, and the potential impact of issuing new bonds on the long-term operation of the government bond market, including the liquidity of the long-term government bond market, and the potential impact on the shape of the government bond yield curve.
Under the current global easing cycle, there is room for downward interest rates, and secondary market investors’ enthusiasm for long-term bonds is heating up.
Absolutely, investors seeking long-term positive returns are driving demand for long-term bonds.
Against the background of global economic growth, increasing trade conflicts and the threat of Brexit, the current 30 central banks around the world have cut interest rates and the global monetary policy has entered a loose cycle.
Investors’ growth in the global economy is rising rapidly, the market demand for government debt hedging instruments continues to rise, the scale of negative interest rate bonds hits a record high, and the global bond market value accounts for nearly 30%.
The highest level of yield has repeatedly hit new lows, and the period affected by negative yields has also been gradually extended. The yields of European multinational ten-year government bonds have fallen to negative values, and the yields of ultra-long-term bonds such as 50 years are positive.
The global interest rate reduction cycle may continue to expand the scope and scale of negative interest rates. Investors seeking positive yield bonds will often expand the allocation of ultra-long-term government bonds.
The US Treasury secondary market is huge and the investor structure is diversified, including commercial banks, mutual savings banks, pension funds, life insurance companies, mutual funds, state and local governments, and retail individual investors.
The main buyers of ultra-long-term government bonds are insurance companies and pension funds, and their investment strategies are mainly holding to gradually replacing active management, which has led to the replacement of liquidity in the secondary market of ultra-long-term government bonds.
At present, the US Treasury is issuing new treasury bonds, which are subject to various constraints such as issuance, issuance rhythm, and issuance methods.
First, the United States is one of the very few countries in the world that has established a debt ceiling. At present, the fiscal deficit of the United States in 2019 has exceeded one trillion US dollars, which is the first time since the “fiscal cliff” in 2012.
The probability of newly issued bonds is a replacement for the existing bonds with other maturities, without increasing the debt stock alone.
In fact, the United States currently implements a regular and predictable government bond issuance system. The stable and determined issuance rhythm has directly reduced the risk of public issuance.
This means that plans for new issuance of ultra-long maturities will need to be considered from a long-term perspective, and cannot be issued temporarily for special purposes.
Thirdly, the U.S. Treasury bonds are issued in the form of a Dutch tender. This method puts the issue size and the issue price decision right into the market. The influence of government intervention is weak. New types of Treasury bonds may have a high bid interest rate or be issued.Less than expected.
At the same time, European countries issue non-public long-term government bonds by private or issuance of syndicates. Issuers often have higher bargaining power, facilitate the transfer of issuance risks, and ensure the success rate of government bond issuance.
In summary, the US Treasury Department still faces difficulties in issuing 50-year ultra-long maturities.
According to Bloomberg statistics, the current average maturity of U.S. Treasury bonds far exceeds that of the United Kingdom, Japan, and the countries of the Eurozone. The market value of ultra-long maturity Treasury bonds with a term of more than 20 years is equivalent to that of the Eurozone. Japan is basically the same.There is room for further improvement.
In the current context of loose liquidity, the purpose of issuing ultra-long-term government bonds is twofold.
Due to restrictions on government debt in Switzerland, Sweden, Sweden and other countries, the country mainly uses a negative interest rate environment to issue bonds to lock in long-term low-cost government financing costs. Restructuring, for the euro area, Japan and other regions with high debt, mainly throughCooperate with unconventional monetary policies such as quantitative easing to adjust the level of long-term interest rates.The Fed exited quantitative easing as early as 2014, and the reduction schedule ended in September of the beginning of the year. At present, the issue of ultra-long-term government bonds has little relevance to monetary policy.
Therefore, the issuance of ultra-long-term government bonds is mainly due to the need for government financing.
At present, the government’s tax reform dividend has gradually faded, and the market’s expectations of overweighting fiscal policy have re-emerged. It has gradually changed to penetrate the Fed to push up market interest rates. The expansion of financing contraction will hinder economic growth.
With the gradual shift of the Fed’s policy stance, there is room for downward market interest rates, and the market environment for the issue of ultra-long-term government bonds has improved from time to time. Investment demand in the secondary market has improved compared to 2017.
However, the constraints faced during the issuance stage of the primary market are still ongoing, and the Ministry of Finance may need to make institutional innovations to promote the issuance of new government bonds.
Domestic ultra-long-term national debt issuance is relatively small, market transactions are cold, and liquidity is relatively poor.
In order to adjust the structure of the central budget, the Ministry of Finance of the developing countries first issued a 50-year fixed-rate interest-bearing bond with a coupon rate of 4 on November 27, 2009.
In the end, the Ministry of Finance has repeatedly issued 50-year government bonds through tenders, and the establishment of a reasonable ultra-long-term government bond yield curve has also been gradually put on the agenda.
In 2015, the Ministry of Finance for the first time split the 50-year government bond issue plan.
In 2016, the Ministry of Finance further divided 30-year government bonds into issuance plans.
On October 28, 2016, the Ministry of Finance announced for the first time the yield on 30-year government bonds.
The issue of ultra-long-term Treasury bonds and the preparation of their yields are an important part of improving the yield curve of Treasury bonds. Non-bank financial institutions such as insurance companies, trust funds, pension funds, etc. hold ultra-long-term Treasury bonds due to the structure of assets and liabilities.
Considering that the strategies of insurance institutions that configure ultra-long-term government bonds are basically held to maturity, and very few secondary market transactions, the term spread of ultra-long-term government bonds not only reflects the term premium, but also has potential liquidity risks.Premium.