With policymakers around the world concerned about how the Coronavirus will affect the health of their citizens, the strength of the global economy, and what this pandemic means for their country’s fiscal future, I’d like to take the proverbial glass half full approach by reminding readers of one rather propitious byproduct of crises — something both consumers and governments would be wise to take advantage of: lower interest rates.
Now it may seem rather callous to discuss fiscal policy when the world is on edge about how to best navigate a global health crisis, but the reality is that, even though interest rates are already positioned at alarmingly low levels — allowing many governments to borrow for free (as is the case for Japan), or, in some cases, earn a small profit by borrowing from the public (Germany, Netherland, Switzerland,) — governments will be able to capitalize on further reductions in interest rates. There are few upsides to what we are going through, but this is one of them.
So keeping this in mind, should the Treasury Department issue a 50-year bond, locking in low rates for the next generation of federal outlays? Absolutely. Issuing an intergenerational Treasury bond will ease the costs associated with containing the Coronavirus, while reducing the long-term cost of interest on the debt. And given the US is running a $1 trillion peacetime deficit — and will likely spend another $2 trillion on the coming stimulus package — such an issuance would be a welcome refinancing.
But Treasury isn’t the only one who would benefit from the new security. Based on what we have seen in the markets recently, investors need the 50-year Treasury. The world needs it. Volatility is spiking, the yield on the 10-year treasury has been below 1% for the first time ever, and automated circuit breakers at the New York Stock Exchange have halted equity trading so many times it’s becoming almost customary. Institutional traders are dumping equities, reallocating their fixed income portfolios, and piling on Treasury securities until they can get a better sense of how this crisis will unfold.
The problem, though, is that there are simply not enough Treasuries to go around.
Typically a paragon of efficiency, Treasury markets have experienced some strange events as of late. London market-makers have noticed instances where not a single ask price (what a trader is willing to accept for selling a security) was listed for certain Treasury securities during the trading day. In essence, investors are hoarding these securities rather than demanding a higher price, forcing other investors, looking to buy Treasuries, to seek riskier securities in a time where risk tolerance is next to nonexistent. (Treasury prices have seemed to settle a bit since then, but we have no idea if this will continue or if there will be further disturbances in this market.) And, if you couple this with the fact that the Fed is going to ratchet up its asset purchase program, purchasing primarily long-dated Treasuries, there will be even fewer Treasuries available to investors.
But if I can take as step back for a moment and speak plainly about what we are going through, economists really have no idea what the Coronavirus means for the world economy. Anyone who claims they do is lying. We have no idea how fast it will spread or how large an impact the virus will have on global output. We have no idea how long quarantines will last or how many people will be forced out of work to no fault of their own. What we do know is that government will need to be ready to step in and provide economic assistance in any way possible. This is where Treasury, and the 50-year bond, can step up.
With each passing day, institutions around the world are proving their malleability, doing what they can, within their mandates, to ameliorate the impact of the Coronavirus. Over just the last two weeks, for example, the US Federal Reserve cut interest rates, purchased long-dated Treasuries, intervened in commercial paper markets, and even agreed to buy corporate debt, all in the name of fighting this crisis. The Fed acknowledged that doing these things would do little to assist global health, but it did so because it felt the need to assuage fears of being asleep at the wheel and not doing all it could to help. Treasury can do the same.
Yes, I’ll admit, there is little the US Treasury can do directly to impact global health; I’m not suggesting Treasury can fix all of our problems, but it can do more. Treasury has already stated that it wants to issue the 50-year security; it just needs to move up its timeline for doing so. If it did, such an action would do a great deal to allay the growing fears that this moment is the end of capitalism as we know it, and it would let investors feel more secure navigating this period of unmitigated uncertainty. Not to mention, it would help Treasury finance what is likely to be a very costly crisis.
We are in an all hands on deck situation that calls for brave action. It’s time for the 50-year Treasury.