100-year Treasuries could be tough sell

August 24, 2010

If U.S. railroad Norfolk Southern can issue 100-year bonds, why not the U.S. Treasury? Longer maturities than the current 30-year maximum would reduce refinancing needs and appeal to institutions. But investors might well demand more return for the risks than Treasury would be willing to pay.

Norfolk Southern’s new bonds yield about 0.9 percentage points more than the company’s 30-year debt. There’s a similar spread between yields on Britain’s perpetual War Loan paper and 30-year gilts. Based on the current 30-year Treasury yield of around 3.6 percent, the government would probably expect to sell 100-year bonds at a yield of no more than about 4.5 percent.

But investors could look at the 1960-2010 average inflation rate of about 4.1 percent and demand a real return of 1.7 percent — in line with today’s yield on 30-year Treasury inflation-protected securities. So they might expect a yield nearer 5.8 percent. That gap could be tough to close.

Aside from pricing, there’s the credit problem. By early next century, lithium-powered skateboards may serve for transportation. But Norfolk Southern has 37,000 miles of track and associated land holdings, assets that will retain real value. The U.S. government, however, has a $15 trillion actuarial deficit on Social Security over 75 years and an $88 trillion gap on Medicare. In 100 years, those shortfalls will be current. The feds can print money at will. If tempted to do that to excess, the real value of 100-year bonds could erode rapidly.

Finally, there’s liquidity. Ultra-long maturity bonds are not traded much, because institutions buy and hold them. Norfolk Southern reduced this problem by reopening an old issue that matures in 2105. But if the Treasury started annual sales, it would create 70 new maturities before new 30-year issues started coinciding with the 100-year bonds’ remaining time to repayment.

Perpetual paper is more liquid, because new issues are identical to those outstanding. British Consols, sold repeatedly since their invention by Samson Gideon in 1751, formed the bulk of the government’s financing in the 19th century and are still outstanding. If the U.S. Treasury has the ultra-long term in mind, perpetuals could be a better answer than 100-year bonds. The pricing gap might still be there. But at least they would be more liquid and would avoid focusing investor attention on America’s potential solvency in 2110.

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