Trills Just Don’t Make Sense

David Merkel has written a few on Robert Shiller’s idea of GDP-linked US Treasury bonds, or trills (see here, here and here). In his first post, David wrote:

My interest rate models indicate that if the US were to issue a consol, a perpetual bond, it would have a yield near 4.4%. Here’s the question: what do you think nominal GDP growth will be on average forever? If it is above 4.4%, one should be willing to pay an infinite amount to buy it. At lower rates of nominal GDP growth, the security will have a finite value that declines rapidly with lower nominal GDP growth.

I think he’s exactly right. The rational price for a trill would be an infinite amount which is another way of saying that trills don’t make sense. The Treasury can get the same thing for a lower price. Trills would be a waste of taxpayer money.
Here’s a comment I left on David’s most recent post:

A few quick points.
There’s no way to pay off a trill except by running a budget surplus or by issuing conventional debt, thus negating the need for trills.
There might also be a slight risk premium due to the uncertainty of each coupon payment. It might be small but even a small amount comes of out taxpayers’ wallets.
The Q3 GDP for 1983 has been revised 10 times since it first came out. The last time was in 2009. Imagine the headache for trills.
I keep coming back to your point that trills would be worth an infinite amount. I think that’s exactly right. For the borrower, trills are irrational. The US Treasury can get the exact same thing for less.

Posted by on January 8th, 2010 at 1:28 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.