Should Treasury Issue 100-Year Bonds?

Peter Fisher was, until 2004, the Treasury official in charge of bond issuance. So when he says that Treasury should start issuing 100-year bonds, it's worth paying attention.

"If you issued a 100-year bond and had principal and interest pay down smoothly over the last 50 years, you create a great borrowing device for the Treasury that would let us move this hump of borrowing over the generational retirement that's coming up," Fisher, managing director and co-head of fixed income at BlackRock in New York, said in a Bloomberg Radio interview.

Ah yes, Social Security. I remember that; I suppose it makes sense to start thinking about funding it now, while Treasury rates are uncommonly low.

That said, however, I'm not a fan of Fisher's idea. Have a look at David Merkel's list of US government obligations which trade very wide to Treasuries -- and note that the spreads involved are only getting wider. Anything which is illiquid, and anything which needs to be explained, trades at a significant discount. Any century bond would fall into that category -- especially if it had some weird amortizing structure where principal was paid down over the second 50 years.

If Fisher had dealt with international rather than domestic finance, he would remember the Brady market, which was full of weird and wonderful sovereign debt instruments, foremost among them the Brazilian C bond. I once, for no particular reason, tried to find out exactly how the C bond was structured, and asked a bunch of people who actually traded it for a living. None of them could tell me. Unsurprisingly, Brazil's plain-vanilla global bonds traded at much tighter spreads than its Brady bonds, and a lot of investment banks made a lot of money in the late 1990s structuring swaps whereby Latin American countries issued new global bonds and bought back the Bradies which nobody wanted or understood.

The Treasury market has no interest in trading anything clever -- that's one reason why TIPS are trading at such ridiculous levels right now. Investors in Treasuries know what they want, and that's large, liquid issues of bullet bonds at round-number maturities like 10 years. Even the 30-year long bond is out of favor these days.

In any case, Treasury has its hands full these days funding TARP, and whatever stimulus plan is going to be enacted sooner rather than later. Social Security may or may not be a problem in the long term, but it's relatively low on the list of priorities right now.