An Economic Band-Aid: U.S. Plans for a 20-Year Bond

The U.S. government is no stranger to deficits. The administration’s latest plan to tackle its approximately one trillion-dollar budget deficit is issuing 20-year bonds in the first half of 2020. While issuing bonds is standard practice, the length of the bond drew interest from financial experts and the media. 20-year bonds have not been regularly issued since 1986. As with any government action plan to better the economy, the justification and efficiency of such a policy must come into question.  

 Despite President Trump’s claims that the American economy is booming, the U.S. is currently facing its largest budget deficit since 2012. While it is true that certain measures of economic wellbeing, such as unemployment, have improved under the Trump administration, government spending has soared in large part due to an aging population, steep tax cuts, and an ever-expanding defense plan. Deficits are unavoidable and a part of any healthy economy; however, the U.S.’ spending is increasing at a rapid rate with no signs of slowing down. For example, U.S. military spending has increased for the past five consecutive years, and the 2020 U.S. fiscal budget is requesting $750 billion for national defense, an increase of $34 billion from 2019. Additionally, as the 2020 presidential race collects momentum, politicians continue to promise increasingly expensive and populist social and economic reforms. This consistent increase in government expenditure necessitates lending and therefore, a source of funding.  

 The motivation behind issuing bonds is straightforward: the government borrows from the public to raise funds for its budgeted expenditure and to decrease the U.S. economy’s ballooning debt. Prior to the announcement of the 20-year bond, the U.S. Treasury offered two benchmark bonds: one for 10 years and the other for 30 years. The U.S. Treasury also offers shorter-term debt instruments such as T-bills, that have a maturity of up to one year, and T-notes, that have a maturity of up to 10 years. The implementation of a 20-year bond raised eyebrows as historically, the U.S. government has preferred rolling over short-term debt by issuing T-bills to ensure that the maturity date of cash inflows matches the date of payment outflows.  

Source: Government Accountability Office 

The figure above corroborates the fact that the government tends to issue short-term debts. 61% of marketable securities held by the public will mature by 2023, most of which are notes and bills.  

Earlier in the year, U.S. Treasury Secretary Steven Mnuchin discussed the possibility of issuing “ultralong” bonds, ranging from 50-100 years, but was met with backlash from market participants who doubted that there was a demand for such long-term debt. Long-term debts are more susceptible to volatility associated with the economic cycle, and consumer demand may fluctuate heavily depending on market conditions. Data from Bloomberg supports this claim as yields for longer-dated Treasury bonds have exhibited a downward trend since 2000. Hence why long-term bonds are an unorthodox choice, typically posed as less favorable to T-bills.   

 Source: Bloomberg 

 However, despite reservations regarding bonds with longer maturity dates, the 20-year bond is advantageous for the Treasury due to the U.S. economy’s low interest rates. According to Nancy Vanden Houten, a leading economist at Oxford University, the Treasury will benefit from “extending the maturity of its debt and locking in lower rates for a longer period of time,” an attitude echoed by various financial advisors interviewed by Bloomberg and the Financial Times. Capitalizing on the low interest rates appear to be the primary motivating factor in issuing long term bonds. This explains why, even though ultra-long bonds were rejected, the U.S. Treasury decided to issue 20-year bonds rather than a short-term offering.   

While the effectiveness of 20-year bonds is yet to be observed, there is minimal risk associated with this attempt to offset aggressive government spending. Therefore, while reality may not perfectly reflect the best-case scenario, bonds remain a viable solution. In the worst-case scenario, consumer demand for the new bond may be low and bond yields may fall below expectations leading to an insufficient amount of funds to support increased government spending. While bonds may provide an increase in funds, they remain a short-term solution that fails to address the root cause of the government deficit. Ultimately, the U.S. government must face the task of restructuring its spending and fiscal budget.