(Bloomberg) — If the US Treasury had tried to act tactically, like a company, to lock in low long-term borrowing costs during the pandemic, it would have damaged bond markets and the dollar, a former Treasury official wrote in a blog post.
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Rebutting a point of view put forth last month by billionaire investor Stan Druckenmiller, Amar Reganti wrote that unlike a company, the US needs to consider how its issuance will affect overall debt markets. Selling bonds predictably allows the US to keep its borrowing costs lower over time, wrote Reganti, now a fixed-income strategist at Wellington Management.
Druckenmiller last month called Treasury Secretary Janet Yellen’s failure to issue more long-term debt when rates were near zero during the pandemic “the biggest blunder in the history” of the department. The US could have locked in low borrowing costs for years, similar to homeowners that refinanced their mortgages at the time, the investor said at a conference.
But if the US had ramped up its long-term borrowing, debt markets would have been destabilized, wrote Reganti, a former deputy director of the Treasury’s Office of Debt Management. With fewer short-term Treasury bills being sold, the short-duration debt that is crucial for keeping the US dollar as a reserve currency would have become less liquid and more prone to steep changes in price, Reganti wrote in a post on the website of the Official Monetary and Financial Institutions Forum, a research organization.
For longer-term US debt, there probably wouldn’t have been demand for much more of the bonds, because the securities carry more interest-rate risk, which investors only want to take so much of, Reganti wrote. That’s why the US elected not to sell 50-year or 100-year securities.
“Moreover, if the Treasury had decided to dump duration into the market as the Fed was buying, it would be working at cross purposes with monetary policy,” according to Reganti.
And the US debt load is so large that changing its duration could take years, Reganti wrote. There’s more than $23 trillion of marketable debt, and anywhere from 28% to 40% will often come due in a given year.
Being a regular and predictable issuer makes US securities more liquid, allowing financing costs to be lower through an interest-rate cycle than they’d otherwise, Reganti wrote.
Yellen said earlier this month that the US Treasury has been lengthening the average maturity in its bond portfolio, and that its duration is close to the longest it’s been in decades. She added that Wall Street market professionals in discussions with the Treasury have continually emphasized the importance of deep and liquid markets for US securities across the yield curve.
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