Two years ago, heavy short-term debt issuance drove the average maturity of outstanding U.S. Treasurys to a 26-year low of 49 months. As stimulus and bailout spending has rolled off, so too has the need for short-term cash, sending the average maturity back to 58 months. The Treasury expects it to extend further, minutes of Tuesday's Borrowing Advisory Committee meeting show, but at “a slower pace.”
That's unfortunate. While Treasury's debt-management office can't control how much it has to borrow, it can control how the debt is financed. Dire budgetary forecasts driven by huge Medicare and Social Security commitments mean fiscal concerns won't soon recede. The risk is that, when huge slugs of debt must be rolled over, bond vigilantes one day gain the upper hand, increasing borrowing costs.
This could happen sooner rather than later. FTN Financial estimates that, excluding short-term bills, $1.2 trillion of debt will have to be rolled in 2012. That would be a record, and nearly double last year's amount. Pushing out debt maturities would reduce supply that will have to come to market in the next few years.
The borrowing committee still recommends the Treasury increase the average maturity, but given progress thus far, some members say that, now that borrowing requirements are falling from their peaks, it makes sense to reduce issuance across the curve.
This could prove clever. Continued weakness could push rates even lower. After all, yields on Japan's 10-year government bonds dropped below 1% this week, the lowest in seven years. Yields on similar Treasuries have dropped back below 3%, but nearly touched 2% during the depths of the crisis. So they could go lower. And if bond vigilantes haven't yet hit Japan, despite its debt-to-gross-domestic-product ratio approaching 200%, they are arguably a way off attacking the U.S., with a ratio of 60%.
James Bullard, president of the St. Louis Fed, recently suggested as much writing in a recent research paper, “the U.S. is closer to a Japanese-style outcome today than at any time in recent history.” But, as Alan Greenspan taught us over the past couple decades, 'talk is cheap,' especially when it comes to Fed heads.
The fact that the Treasury is committed to the shorter end of the yield curve means the feds are actually putting their money where there mouths are. And surely this means they are taking the warnings of Richard Koo very seriously at this point in time.