Market likely to push back after Yellen revives idea of 50-year bonds

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Jan 19 (Reuters) - Any proposal by the U.S. Treasury Department to sell 50-year bonds may face push-back from dealers and investors, who have not shown enthusiasm for suggestions that the United States sell ultra-long debt, analysts said.

Janet Yellen, U.S. President-elect Joe Biden’s nominee for Treasury Secretary, on Tuesday said in answer to a question about issuing a 50-year bond that she would be pleased to look at the issue and the possible market for bonds of that maturity. Yellen said there are advantages to long-term debt issuance.

But analysts say that if the Treasury follows through in investigating the sale of ultra-long bonds, it is likely to find the same answer it has received multiple times before - there isn’t enough demand.

“There’s no natural buyer of 50-year bonds. They’ve done the study many, many times in the U.S.,” said Subadra Rajappa, head of U.S. rates strategy at Societe Generale in New York.

Historically low interest rates have led governments to issue more ultra-long debt, and current Treasury Secretary Steven Mnuchin considered the sale of ultra-long bonds several times.

The Treasury Borrowing Advisory Committee (TBAC), a group of banks and large investors that advise the U.S. government on its funding, have not recommended the strategy. In a 2017 presentation, the TBAC said https://www.treasury.gov/resource-center/data-chart-center/quarterly-refunding/Documents/Q22017CombinedChargesforArchives.pdf it did "not currently see evidence of notably strong or sustainable demand for ultra-longs in the US market."

The Securities Industry and Financial Markets Association, which includes the TBAC, was not immediately available for comment.

One issue is that the government will have to pay a significant premium to account for inflation and other risks of ultra-long debt to attract buyers.

“It’s a very good idea on paper to lock in that amount of debt, but the amount of demand out there and the price that you pay for it make that idea not quite as good,” said Gennadiy Goldberg, an interest rate strategist at TD Securities in New York.

While foreign governments have increased sales of long-dated debt, there are different dynamics in place in the United States.

In Europe, for example, there are rules for insurance companies and pensions to match assets and liabilities, which creates a need for ultra-long debt.

But in the United States, many pension funds do not have liabilities in the 50-year area, said Goldberg. They also have more aggressive investment targets and would be more likely to buy riskier assets such as corporate debt to generate higher returns, he said.

The Treasury last year reintroduced the sale of 20-year bonds for the first time since 1986 after receiving feedback that they would be better received than ultra-long bonds.

(Reporting By Karen Brettell; editing by Megan Davies and Dan Grebler)