FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
April 28, 2020

IN THIS ISSUE:

1. Overview – Let’s Change the Subject Today

2. An Opportunity to Restructure Our National Debt

3. Do We Need a Historic 50-Year Treasury Bond?

Overview – Let’s Change the Subject Today

There is no shortage of negative economic and financial news that has been announced over the last week that I could continue to write about today. But the truth is, I’m tired of being all negative all the time. So today, I want to shift gears and tackle a topic that most Americans probably haven’t thought about, but one that I think we should.

That topic is whether the US should be moving to significantly restructure much of our $24 trillion in national debt into much longer-dated Treasury securities while interest rates are the lowest in our nation’s history. Consider today’s discussion an effort of thinking outside the box. I don’t claim to have all the answers, but this concept should be part of the national debate.

Much of our national debt is held in shorter-term US Treasury securities that mature and have to be rolled over every so often – such as Treasury bills, Treasury notes and T-bonds. The longest-dated bonds we offer mature in 30 years. Much of our debt was issued years ago at significantly higher interest rates.

But late last year, Treasury Secretary Mnuchin floated the idea that we should consider creating longer-dated bonds, including 50-year T-bonds and refinance our massive national debt for much longer to take advantage of today’s historically low interest rates. His idea didn’t garner much, if any, attention in the mainstream media or elsewhere. He hasn’t pushed the idea since.

But the more I think about it, the more sense it makes to me. Why not, is the question. While I have been an outspoken critic of our ballooning national debt and out of control federal spending all my career, our $24+ trillion national debt is what it is, and it’s only going to get bigger, increasingly bigger with the current unprecedented federal spending over coronavirus.

So, while I’m not ready to 100% endorse restructuring our national debt to much longer maturities, I am seriously considering it. Today, I’ll share with you the issues surrounding doing so and hopefully, get you to thinking about it as well. I don’t know about you, but that sounds so much better to me than continuing to harp on the very negative economic and financial issues of the corona crisis. There will be plenty of time to do that just ahead. Let’s jump in.

An Opportunity to Restructure Our National Debt

The coronavirus crisis has radically changed things around the world. Central banks have slashed short-term rates to near zero, even negative in some countries. I think we all know that interest rates won’t stay this low. With that in mind, more economists are suggesting this may be a great time for the US to refinance much of its now $24.7 trillion outstanding debt.

This is not a new concept. Americans regularly take advantage of declines in interest rates to refinance their mortgages to lower their payments or shorten the loan duration, or both. President Trump is not new to this idea. As a longtime real estate developer in New York, he routinely repositioned his sizable debts to take advantage of lower rates – and wrote two popular books on the subject, The Art of the Deal and The Art of the Comeback.

During a recently televised forum, the moderator asked the president if he still cares about the national debt. Mr. Trump responded that it is “very important” to him and made clear that he wanted to refinance it. This may be a historic opportunity to do so.

As the coronavirus pandemic has spread, we have already seen the Treasury issue over $3 trillion in new Treasury debt. Likewise, the Federal Reserve has increased its balance sheet by several trillion as well. Obviously, there is plenty of demand for Treasuries from investors and corporations seeking a safe haven.

The main reason to refinance much of our debt to longer-term securities is to save money. Retiring older debt that was issued with significantly higher interest rates and replacing it with new securities at substantially lower coupon rates could save trillions over the next few decades.

Do We Need a Historic 50-Year Treasury Bond?

When I first heard Treasury Secretary Steve Mnuchin float the idea of a new 50-year Treasury bond last September, my first thought was: That’s crazy… and dangerous! Like most bond dealers, I initially thought it was a bad idea.

Since the mid-1970s, when I became intently interested in politics and how the government worked, I became a serious “deficit hawk.” Ever since I started my newsletter back then, I have routinely railed about the federal budget deficits and how our ever-increasing national debt is a threat to our kids and grandkids.

I remember issuing warnings and criticism when the national debt hit $5 trillion, then $10 trillion and $15T. I remember criticizing President Ronald Reagan, my hero back then, for running budget deficits. Yet every US president since Reagan, with the exception of President Clinton for a few years, has run annual budget deficits, and they just get bigger and bigger.

Late last year, before we had any idea about the coronavirus, the US Office of Management & Budget (OMB) predicted annual budget deficits would run $1 trillion or more annually starting this year and for as far as the eye can see. Yet at the rate we’re going with repeated huge stimulus packages, the budget deficit could hit $3-4 trillion or more this year alone. Nevertheless, bond yields have moved to historic lows.

Few politicians in Washington truly care about our rising debt. Sure, some have cliched comments about it being a problem for our kids and grandkids to court certain constituencies, but then they vote for an ever-larger federal budget every year. It’s now a “given” and those few who argue against it are often labeled “barbarians.”

Years ago, it was the Democrats who were considered the Party of big spenders, and Republicans were viewed as the Party for smaller government and less spending. Well, that’s all changed! The Republicans have proven in recent decades that they can spend with the best of them!!

With that said, let’s talk about the feasibility of the Treasury offering a new 50-year T-bond. Reportedly there was renewed talk within the Trump administration of a new 50-year bond when they were considering how to pay for the $2.2 trillion CARES Act which was recently passed. But the idea apparently was not pursued.

Whenever talk of a 50-year bond comes up, bond dealers and issuers around the world are said to be skeptical, even labeling it as a dangerous undertaking. While there are justifiable reasons to question the viability of a 50-year bond, creating such a security is not rocket science. The US Treasury is the most efficient agency in the world when it comes to issuing debt. No problem.

And they don’t have to try it initially on a grand scale. The Treasury could even call it a “test run.” They could create these new bonds on a limited scale, sell them to bond dealers who could then see if there is adequate demand from US and global investors. While I would certainly not be a buyer, I think the Treasury might be surprised at how much demand there could  be for 50-year T-bonds.

The bigger question is what interest rate would be required to illicit demand for a 50-year T-bond. The current yield on a 30-year T-bond is around 1.2%, a historic low. Certainly, the yield on a 50-year T-bond would have to be higher. Maybe it would have to be 1.8% or 2.0%. Some believe it might have to be as high as 3%, but I doubt that given how much demand there is for US Treasuries today.

While I was initially skeptical of the possibility of launching a new 50-year Treasury bond, I am warming up to the idea. While I remain a deficit hawk (having lost all hope, of course), I do believe without a doubt that the US government should take advantage of today’s historically low interest to refinance much of our national debt and do it ASAP.

Whether there would be a lot of demand for a new 50-year Treasury bond remains to be seen, but I do not see a good reason not to try it.

In closing, and just to be sure I’m not misunderstood, I am not in any way endorsing more government debt. I still wish there was an iron-clad balanced budget amendment, but I don’t see that happening again in the foreseeable future.

But we can refinance much of our national debt of $24+ trillion at today’s historically low interest rates and save the government (ie – we, the taxpayers) a bunch of money – with or without a new 50-year Treasury bond.

** It feels so good to write about something that’s not gloom-and-doom today! I hope you found this change of pace interesting. Let me know.

Late Breaking: A series of CBS News Polls released late last week found that the vast majority of Americans will not be comfortable going back to many public places, even after the stay-at-home restrictions are lifted. 71% said they would not be comfortable going to a restaurant or bar; 85% said they would not be comfortable getting on an airplane; and 87% said they would be uncomfortable going to a large event. There were many more interesting poll results which you can read in the link below. But beware, it’s a little scary!

Wishing you strength and good health,

Gary D. Halbert

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