The U.S. Treasury has succeeded in extending the average maturity of its debt to 62 months, out from less than 50 months in 2009. That process needs to continue.
One sign that investors are more nervous about longer-dated bonds is that the yield gap between 10-year notes and 30-year bonds, currently the longest U.S. maturity, is trading at 137 basis points.
This gap has risen from less than 20 basis points in mid-2007 and is less than 30 basis points from its record wide of 160 basis points reached in November 2010.
If this gap continues to expand, the government may look at alternative maturities such as 20-year bonds, rather than extending to ultra-long maturities, said Denzler.
This leaves the country extremely vulnerable to any shift in investor sentiment at a time when its debt load has almost doubled in four years.
Marketable U.S. debt has risen to over $9 trillion, from around $5 trillion in late 2007, before the government increased spending to bail out struggling financial companies.
If sentiment were to shift quickly, it could send the cost of refinancing the country’s bonds sharply higher. This would, in turn, eat into its budget and ability to meet long term obligations.
In a worst-case scenario the country might not be able to refinance at all.
The U.S. benefits from bond investments by foreign central banks, funds and other investors that has made Treasuries one of the largest and most liquid markets in the world.
This investor interest has helped benchmark 10-year rates fall near 2 percent, among the lowest rates in the world.
There is no guarantee, however, that demand will continue. U.S. debt demand is closely linked to the dollar’s reserve currency status, and this is slipping.
The Treasury Borrowing Advisory Committee, which comprises 14 industry representatives from banks and asset managers, has warned about the dollar’s reserve currency status.
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Shayne Heffernan
Shayne Heffernan oversees the management of funds for institutions and high net worth individuals.