More Duration May Be Necessary in Today’s Bond Market

Investors looking for yield have been searching high and low the past few months, but with safe haven government debt barely at 2% for the benchmark 30-year note, more risk is necessary to get that added extra. With this in mind, investors may need to assume more risk via duration.

“Rather than taking on the risk of corporate default at a late stage of the economic expansion, investors may want to take on more interest-rate risk,” wrote Alexandra Scaggs in Barron’s. “In other words, they might want to bet that U.S. interest rates will fall by increasing the duration of their bond portfolio. That means buying safe bonds with longer maturities; duration isn’t the same thing as maturity length, but they are related.”

As more investors pile into safe haven government debt as a default risk-off maneuver, Treasury Secretary Steve Mnuchin said last month that a 50-year bond offering is under serious consideration. It’s something the Treasury department has been mulling for some time, but Mnuchin confirmed the idea could actually come into fruition.

“This is something I have talked about over the last two years, it is something we are very seriously considering,” he said on “Squawk Box.” “We’re looking at issuing a 50-year bond, what we could call an ultra-long bond. We think there is some demand for it. It is something we’ll very seriously consider for next year.”

One route to take in order to quench investors’ thirst for yield via duration is to offer a 100-year bond. It’s something that is common for universities and hospitals, but the idea wouldn’t be out of the question for Treasury notes.

“Muni century bonds do come with higher default risk than Treasuries, of course,” Scaggs wrote. “But there are a few reasons that muni century bonds are a better way for individual investors to bet on duration.”

One of those advantages, of course, is the higher yield. Another advantage is the added protection, especially if interest rates happen to go higher—something the capital markets don’t expect given the last two rate cuts, but something to consider given the better-than-expected jobs report last week.

“While long-term munis and Treasuries alike will experience paper losses if interest rates rise unexpectedly, the structure of the muni market provides individual investors with a bit more protection,” wrote Scaggs. “Treasuries are an ultraliquid, standardized, and safe investment, which makes it easier for leveraged hedge funds and high-speed traders to speculate in that market.”

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