May 3, 2017 / 12:38 PM / 3 months ago

U.S. Treasury studying ultra-long bonds, demand queried

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FILE PHOTO: Steve Mnuchin, U.S. Treasury Secretary, speaks during the Milken Institute Global Conference in Beverly Hills, California, U.S., May 1, 2017.Mike Blake

WASHINGTON (Reuters) - The U.S. Treasury said on Wednesday that it is studying the possibility of issuing ultra-long-term bonds a day after its advisory committee questioned investor enthusiasm for such a change.

In its quarterly refunding statement, the Treasury also said it will keep coupon auctions steady in the upcoming quarter and would auction $62 billion in coupon debt next week.

Yields on long-dated Treasuries slipped after the announcement as some investors had expected the department to increase the issuance of longer-dated securities.

U.S. Treasury Secretary Steven Mnuchin said in a Bloomberg Television interview on Monday that his department was looking at ultra long-term bonds, or those with maturities of more than 30 years.

"We have a working group looking at it," Mnuchin said. "We think that it's something that could absolutely make sense for us at Treasury."

An ultra-long bond would fit in with the Treasury's objective to fund the government at the least cost over time.

Acting Assistant Secretary for Financial Markets Monique Rollins said in the refunding statement that Treasury "continues to meet with a broad variety of market participants in order to assess the costs and benefits." An update will be provided at a future refunding meeting following the completion of an internal review, she said.

A Treasury official, who spoke with reporters on the condition of anonymity, would not comment on when the internal review was expected to be completed.

"I think a lot of people were expecting the Treasury to commit to an ultra-long issue, and they basically said they're reviewing it but remain non-committal," said Gennadiy Goldberg, interest rates strategist at TD Securities in New York.

In minutes of Tuesday's Treasury Borrowing Advisory Committee meeting, also released Wednesday, the committee said regular and predictable coupon issuance should remain the central consideration.

"While an ultra-long is most likely to be demanded by those with longer-dated liabilities, the committee does not see evidence of strong or sustainable demand for maturities beyond 30 years."

The committee advised against issuing a 100-year bond and suggested other ways Treasury might tap demand from long-duration investors, such as considering issuing a zero coupon 50-year bond, and reintroducing the 20-year bond.

The borrowing committee also noted that Treasury would need to increase issuance when the Federal Reserve begins unwinding its balance sheet.

On Monday, Treasury said it expects to raise $26 billion through credit markets during the April-June quarter, up $24 billion from its initial estimate early in the year.

Reporting by Lindsay Dunsmuir; Additional reporting by Dan Burns; Editing by Andrea Ricci

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