The concept of buy and hold could reach extreme levels in the government debt market as U.S. officials are contemplating the issuance of ultra-long Treasury bonds that could span 50 to 100 years.
Per a report in Barron’s, “U.S. officials have revived a conversation about issuing ultra-long Treasury bonds, which would mature in 50 to 100 years, now that long-term borrowing costs have fallen to record lows. Treasury Secretary Steven Mnuchin recently told Bloomberg News that his staff is ‘actively revisiting’ the idea of issuing an ultra-long bond, ‘and it is something that is under very serious consideration.'”
That same report said that strategists at global investment firm J.P. Morgan are skeptical about its feasibility in today’s bond environment.
“Strategists at JPMorgan aren’t convinced about the feasibility of an ultra-long bond, however,” the report said. “In an Aug. 29 note, they argued that a 20-year bond would be more reasonable and that longer-term bonds would be expensive, and may not garner sufficient demand to support regular issuance.”
Flocking To Safe-Havens
Market volatility is opening the pathway for investors to flock to safe-haven government debt, which is causing yields to fall. As such, a yield curve inversion—a typical sign ahead of a recession—is forming with respect to the 2- and 10-year Treasury yields.
Given the latest market volatility, getting that bond exposure is still a must. Investors looking to gain broad-based exposure to bonds can look at funds like the ProShares S&P 500 Bond ETF (NYSEArca: SPXB). The fund seeks investment results that track the performance of the S&P 500®/MarketAxess Investment Grade Corporate Bond Index, which consists exclusively of investment-grade bonds issued by companies in the S&P 500.
Investment-grade corporate bond-focused fixed-income ETF options include the iShares Intermediate Credit Bond ETF (NASDAQ: CIU), iShares iBoxx $ Investment Grade Corp Bd ETF (NYSEArca: LQD) and Vanguard Interm-Term Corp Bd ETF (NASDAQ: VCIT). Investors looking for broad-based core bond exposure can look to a fund like the iShares Core US Aggregate Bond ETF (NYSEArca: AGG).
At this point, fixed income investors are simply hungry for yield.
“There’s just a huge Asian bid for any kind of yield,” said Tom di Galoma, head of Treasury trading at Seaport Global Holdings. “It’s kind of my feeling that you just don’t have enough fixed income in the world to actually satisfy the demand. It’s kind of a one-way trade.”
“But my feeling is that interest rates are telling you that there’s some very bad news down the road,” he added. “We don’t know what that is, but that’s what’s being signaled to me.”