The 20-year Treasury bond struggles to convince investors

US government bonds have had a tough time this year. And then there’s the 20-year-old bond, which has faced its own unique issues.

Reintroduced last year for the first time since 1986, the 20-year bond was intended to help the government achieve the lowest possible long-term borrowing costs. In recent weeks, however, investors have demanded an additional payment to hold the 20-year bond instead of the 30-year government debt with the longest maturity.

It’s not supposed to work like that. Typically, investors insist on higher yields to hold bonds that will be redeemed more in the future to compensate for additional time during which inflation could accelerate or the Federal Reserve could raise interest rates. . Yields on long-term bonds sometimes fall below those on short-term bonds – in what on Wall Street is called an inverted yield curve – because investors worry about the economic outlook and believe the Fed could lower rates.

But that is not what is happening now. The Treasury yield curve looks fundamentally normal outside of the 20-30 year section. The main problem, analysts say, is that the 20-year bond has never completely won over investors, who are used to betting on the economy by buying or selling other types of Treasuries.

Investors prefer 30-year bonds over 20-year bonds because they trade more frequently, said Thomas Simons, money market economist at Jefferies LLC. This preference then reinforces the disadvantage of the 20-year bond, ensuring that it continues to trade less often than the 30-year bond.

“It’s an unfortunate kind of chicken and egg problem,” he said.

Right now, demand for the 30-year bond versus the 20-year bond is particularly strong because investors have focused on a particular bet, analysts said.

Most investors believe the central bank will raise short-term interest rates next year, thereby slowing inflation. Higher interest rates would undermine the attractiveness of short-term Treasuries. At the same time, a slowdown in inflation could reduce the need to raise interest rates in the future, making long-term Treasuries more attractive in comparison.

As a result, investors effectively sold short-term Treasuries and bought longer-term bonds. But in doing so, they focused on buying 30-year bonds more than the new alternative with a slightly shorter maturity.

On Tuesday, the yield for the 20-year benchmark bond was 2.071%, compared to 2.022% for the 30-year bond.

The 20-year bond issues may not have been inevitable. The Treasury Department first announced it would bring back the obligation in January of last year, days before the Centers for Disease Control and Prevention publicly confirmed the first case of Covid-19 in the United States. At the time, market participants believed there would be strong demand for the new title from pension and insurance companies looking for assets to match their liabilities.

Ultimately, however, the Treasury never had the option of easing the 20-year bond in the market by issuing small amounts first and then gradually increasing, as it often does in the market. introduction of a new type of security.

In January, TD Securities analysts guessed that the first 20-year bond auction in May would be $ 12 billion. Instead, it stood at $ 20 billion and quickly hit $ 27 billion in November as the Treasury was forced to fund massive coronavirus relief programs.

More recently, as these programs expire, the Treasury has been able to reduce borrowing. Unsurprisingly, it reduced the size of each 20-year bond auction by $ 4 billion, more than any other maturity.

However, further reductions may be necessary.

“In a year or two, we could see much smaller 20-year and more competitive auctions,” Simons said. The fact that the 20-year bond pays more than the 30-year bond is “the biggest signal that this is an adjustment that needs to happen.”

This story was posted from a feed with no text editing

To subscribe to Mint newsletters

* Enter a valid email address

* Thank you for subscribing to our newsletter.

Never miss a story! Stay connected and informed with Mint. Download our app now !!

Source link

About Andrew Estofan

Check Also

Pakistan Cables: Transmission of the quarterly report for the period ended March 31, 2022

board of directors Mr. Mustapha A. Chinoy Mr. Shoaib Javed Hussain Ms. Spenta Kandawalla Mr. …