January 17, 2020 / 4:43 PM / a month ago

Investors expect strong demand for 20-year Treasuries

Jan 17 (Reuters) - The U.S. is likely to see solid demand for its first sale of 20-year bonds in more than three decades, investors and analysts said Friday, as the Treasury Department looks for fresh ways to raise revenues in the face of yawning budget deficits.

The decision, announced by the Treasury on Thursday, comes on the heels of a years-long effort by U.S. officials to assess investor demand for various potential bond issues, including 50-year and 100-year bonds.

Some investors were surprised by the timing of the announcement. While the introduction of the 20-year bond has been widely expected, some had not expected it until later in the year.

Several older vintages of Treasury bonds maturing in 20-years’ time, which could see weaker demand with the arrival of the new debt in their midst, saw the largest jump in yields on the day.

“One of the reasons they are targeting the 20-year sector is that it is a natural source of expanding demand, particularly from some of the liability-driven investor community,” said Jon Hill, an interest rate strategist at BMO Capital Markets in New York.

The U.S. is looking for ways to expand its debt options as its financing needs grow due to ramped up budget spending. Primary dealers expect the Treasury’s borrowing needs to grow to $1.20 trillion in fiscal year 2022, from $1.09 trillion in fiscal year 2020.

Other countries including Japan, the UK, France, China and Australia already issue 20-year bonds, while the U.S., Germany and Canada do not.

The Treasury Borrowing Advisory Committee (TBAC), a group of banks and investors that advise the United States on its borrowing strategy, said in October that while the sale of the 20-year bonds is likely to weigh on demand for 10-year notes and 30-year bonds, it would also reduce the need for the Treasury to increase the size of these auctions.

The government stopped issuing 20-year bonds in 1986 after the debt suffered from liquidity issues, with the yields paid on the debt being higher than those of the longer-dated 30-year bonds for much of their five-year lifespan.

Today’s Treasury market, however, is much larger, with a broader range of investors and more modern trading processes. Demand for yield has also surged with many bonds in Europe and Japan trading in negative territory.

The Treasury is also expected to introduce a 1-year floating-rate note that is linked to SOFR, the new benchmark rate that was selected to reduce the role of the London Interbank Offered Rate (Libor). It has further said it is looking at new inflation-linked debt and ultra-long bond options.

The introduction of a 20-year Treasury will also likely encourage companies to sell debt at that maturity, where there is currently little corporate supply due to the lack of the Treasury benchmark.

“There is a tremendous amount of demand for a benchmark 20-year, especially as it relates to credit,” said Tom di Galoma, a managing director at Seaport Global Holdings in New York. “That’s always been a part of the credit curve that’s been somewhat no man’s land as they don’t have a benchmark, and I think that there is a lot of demand coming from asset managers and insurance companies.”

The 20-year part of the Treasury yield curve currently offers relatively better value than other maturities, though this gap could close as demand increases for the bonds. (Additional reporting by Kate Duguid; Editing by Ira Iosebashvili, Dan Burns, Chizu Nomiyama)

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