News that the cadre of bond dealers influencing U.S. Treasury decisions have just suggested the government add “ultra-long” bonds with maturities of up to 100 years was stunning.
On Feb. 2, The Treasury Borrowing Advisory Committee, or TBAC, told government officials that these ultra-long bonds—defined as debt with a maturity of 40-, 50-, or 100 years—would be in huge demand. According to a presentation from one TBAC member, there would be an estimated $2.4 trillion in potential demand for these bonds over the next five years from institutions like banks, insurers, pension funds, and even retail investors.
It’s the latter demographic that’s got me worried.
According to money manager Doug Fabian, whose firm Fabian Wealth Strategies manages over $100 million in retail investor assets, these ultra-long bonds would be a very poor investment.
“For the retail investor, there are just too many unknowns with such a long-term bond. One of those unknowns is inflation. Inflation is the bond holder’s worst enemy, and with the government seemingly committed to debasing the U.S. dollar via printing more and more money, inflation is liable to rear its ugly head in the years to come. That would be murder for holders of these very long-term bonds.”
Interestingly, Fabian says that though the ultra-long bonds are a bad choice for retail investors, they are good for firms such as JP Morgan Chase (NYSE: JPM), Goldman Sachs
(NYSE: GS) and other big Wall Street bond issuers. He also says they’re good for the big spenders in Washington.
“For the issuer, this is a good idea because it can generate millions of dollars in fees. For the government, it gives them another way to raise more money so they can finance their out-of-control debt,” Fabian said.
Herein lies the real issue, and perhaps the true motivation behind the recommendation to issue century-long bonds. The big banks can collect on new bond issues, and the government gets more money to finance its gigantic spending sprees. That’s a win-win for the banks and the Treasury — but most likely a bad bet for investors.
At the time of publication, Jim Woods held no positions in any of the securities mentioned in this article.
