Let’s imagine a nation with the following characteristics:
- Large but not unmanageable amounts of long-term debt.
- A very high credit rating.
- Low or even negative interest rates.
- A stable but slow-growing economy.
- Deteriorating and outdated infrastructure.
- An aging population that entails rising health-care and retirement spending, and
- A tremendous demand for fixed-income securities, the longer the maturity the better.
Don’t leap to the conclusion that the nation is the U.S.; if it were, I would have had to add a bullet point describing it as having a dysfunctional government paralyzed by partisanship.
But regardless of the nation in question, the appropriate approach to financing this debt suggests a long-term bond – whether with a 30-year or even 50-year maturity.
What country does the above describe? It could be any of the following:
All of them now finance some portion of their debt with 50-year bonds; Ireland and Belgium are even offering 100-year bonds, as is Mexico. And 100-year mortgages have been around in Japan since the 1990s. More and more companies have been issuing 100-year bonds as well.
Which raises the obvious question: Why isn’t the U.S. selling Treasuries with longer maturities while it tries to get its fiscal house in order? We learned the hard way during the credit crisis that financing long-term debt by constantly rolling over short-term paper is a recipe for disaster. Or perhaps that is an overstatement – Congress hasn’t learned the most important and obvious lesson of the crisis; otherwise the U.S. would be refinancing its long-term debt to take advantage of today’s low interest rates while avoiding exposure to a sudden rise.
I have been thinking about this recently after a) visiting Europe, where the 50-year bond is increasingly in vogue, and b) reading about the $3 billion revamp the Port Authority of New York and New Jersey is undertaking for LaGuardia airport using 30-year bonds.
There’s no mystery about the advantages of long-term financing at this point, though they do seem beyond the grasp of the U.S.’s national political leaders. It is a very simple formula:
Take the steady demand for safe, high-grade sovereign debt, of which there is a major shortage; add in ultralow rates, which make refinancing debt very attractive; note the negative interest rates around the world, which makes even a 1 percent U.S. Treasury yield appealing; consider the future costs of Social Security, Medicare and Medicaid; be aware of the costs of refinancing almost $19 trillion in existing federal debt should rates rise; finally, add in the need to repair and upgrade dilapidated bridges, shipping ports, tunnels, airports, roads and a creaky electrical grid. Note this is before we even begin to think about what rising sea levels will mean to coastal cities in the future.
This can all be reduced to a simple formula that looks like this: Demand for Treasuries + ultralow rates + big and persistent U.S. funding needs = 50-year bond.
The case against long-term financing doesn’t make much sense. By financing longer-term debt inexpensively, this bizarre argument goes, the U.S. would end up encouraging even more government spending. That almost sounds reasonable until you rephrase it. If anyone actually said, “The U.S. should make sure its debt remains expensive to discourage future spending,” you would think them mad. But this is actually one of the arguments made against use of long-term refinancing.
I have been trying to find sound arguments against refinancing U.S. debt with longer-dated securities. The only half-decent case that comes up is that maybe rates will go even lower than they are today. But that’s a timing issue, not a valid reason against more long-term paper. All the other arguments are irrational screeds made by anti-government conspiracy theorists and those who think Ayn Rand novels should be used to guide U.S. economic policy.
Congress needs to do its job, however unlikely that may be: Start financing the U.S. government at the lowest rates in several generations, and with debt whose maturities match the country’s long-term obligations.
Barry Ritholtz, a Bloomberg View columnist, is the founder of Ritholtz Wealth Management. He is a consultant at and former chief executive officer for FusionIQ, a quantitative research firm. firstname.lastname@example.org, www.ritholtz.com/blog