Long-Term Treasury Bond

We want to discuss treasuries and the long-term Treasury bond. It’s a topic that doesn’t come up too often because things don’t typically change in long-term treasuries. However, the reason this has become a topic, and something we think is worth exploring, is that there’s been a lot of talk with rates being so low that the U.S. Treasury is looking at issuing 50 and/or 100-year bonds.

On the Surface

On the surface this seems very positive but, it’s kind of a catch-22 in that it’s good when rates are this low to issue and lock in low debt. If you are home looking to buy a home and you could get interest rates at 1% wouldn’t you want to lock that in for 50-plus years? It would be great because your payments would be less, you would know your payment for longer and the risk of rising rates wouldn’t really impact you. There has been a lot of talk over the years, with rates being this low, if you look out 5 to 10 years would the U.S. debt become unmanageable if interest rates were to rise? Right now, roughly half of the U.S. debt is under 3 years. In 3 years from now, if interest rates are higher, can we afford to keep paying our debt? It makes sense on the surface to issue as long of dated bond as the market will buy because you can lock in these low rates.

Below the Surface

However, the other side of it is the negative potential impact on the economy. When the U.S. Treasury issues short-term bonds, those bonds mature quickly. So, that money that was locked up in the debt is matured and goes back into the economy and can be spent. If you issue long-term debt someone in the economy is giving their money to the U.S. government for 50 years. That money is effectively locked up until that 50-year term comes to fruition and therefore that money can’t be spent on buying things such as coffee, cars or investing in stocks. That buyer has given their money to the Treasury for that long period and that could potentially slow down economic growth.

Conclusion

So, it’s a very delicate balance of locking in low rates, which is good for the federal government, but also potentially bad by locking in money that the U.S. consumer could use to buy or invest or do other things that could grow the economy. So, it’s that balance that the Treasury has to decide which is more important – growth potential, or, a known risk of interest rates. This is something that we’re going to have to watch closely. There is no clear answer. There’s a lot of debate in economic circles. If you were to hear this in the news know it’s not as simple as it may sound and we hope this dialogue was helpful and informative.

 

Trey Booth, CFA®, AIF®
Senior Vice President
Wealth Consultant
Email Trey Booth here

 

Fi Plan Partners is an independent investment firm in Birmingham, AL, serving clients across the nation through financial planning, wealth management and business consulting. Fi Plan Partners creates strategies in the best interest of their clients using both fee based investing and transactional investing.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

Economic forecasts set forth in this presentation may not develop as predicted.

No strategy can ensure success or protect against a loss.
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