Treasury’s 20-year bond struggles to capture investors

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 cost. However, over the past few weeks, investors have been demanding an additional payment to hold the government’s longest maturity debt, 20-year bonds instead of 30 years.

It shouldn’t work that way. Typically, investors insist on a higher return for holding bonds that will be paid back in the future to compensate for additional time in which inflation may accelerate or the Federal Reserve may raise interest rates. Yields on longer-term bonds sometimes fall below those of short-term bonds — known on Wall Street as the inverted yield curve — as investors worry about the economic outlook and think the Fed will cut rates. Can do.

But now this is not happening. The Treasury yield curve looks basically normal except for the 20 to 30 year section. The key issue, say analysts, is that 20-year bonds have never quite caught on with investors who are accustomed to placing their bets 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 Simmons, a money-market economist at Jefferies LLC. This preference then reinforces the loss of the 20-year bond, ensuring that it continues to trade less frequently than the 30-year bond.

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

Right now, demand for 30-year bonds is particularly strong relative to 20-year bonds, analysts said as investors are rushing into a niche bet.

Most investors think the central bank will raise short-term interest rates next year, which will slow inflation. Higher interest rates will affect the appeal of short-term treasuries. Also, slower inflation may reduce the need to increase interest rates in the future, making comparatively longer-term Treasuries more attractive.

As a result, investors are effectively selling short-term Treasuries and buying longer-term bonds. But in doing so, they have focused on buying 30-year bonds with somewhat shorter maturities than the newer option.

As of Tuesday, the yield on the benchmark 20-year bond stood at 2.071%, compared to 2.022% for the 30-year bond.

The problems of 20-year bonds may not be inevitable. The Treasury Department first announced it would bring back bonds in January last year, days before the Centers for Disease Control and Prevention publicly confirmed the first COVID-19 case in the US. There will be strong demand for new protection from the likes of pension and insurance companies looking for assets to match their liabilities.

As it turned out, however, Treasuries did not have the opportunity to reduce 20-year bonds in the market by first issuing smaller amounts and then gradually scaling back, as is often the case when introducing a new type of security.

That January, analysts at TD Securities estimated the first 20-year bond auction in May would be $12 billion. Instead it was $20 billion and rose sharply to $27 billion by November as the Treasury was forced to fund massive coronavirus relief programs.

More recently, as those programs end, the Treasury has been able to reduce borrowings. Not surprisingly, it has reduced the size of each 20-year bond auction by $4 billion – more than any other maturity.

Still, further reductions may be needed.

“A year or two from now, we may be looking at 20 year old very small auctions that are more competitive,” Mr Simmons said. The fact that a 20-year bond is yielding higher than a 30-year bond is “the biggest red flag that this is an adjustment that needs to happen.”

This story has been published without modification in text from a wire agency feed