Time for US Treasury Consols?

With Treasury yields being so low, here’s an idea to consider—let’s have the U.S. Treasury consider floating some long-term debt, some very long-term debt, like a 100-year bond. Hey, Norfolk Southern (NSC) just floated some 100-year paper and the yield was under 6% so why not Uncle Sam? Perhaps not a big auction at first, but it’s certainly worth dipping our toes in the water to see what demand is like (in other words, will China approve?). This could save taxpayers huge amounts of money.
In fact, why stop at 100 years? In the 18th century, the British government issued consol bonds which are perpetuities—bonds that never mature. The word consol refers to the fact that the issue consolidated all of the governement’s debt into one issue. The bonds are callable and the British government has lowered the coupon a few times over the past 250 years. The yield is so low now (2.5%) that they’re not worth redeeming which means the Brits did well off them.
I say let’s float some Treasury perpetuities. Start with a small auction at first to see how it goes. We used to have redeemable Treasury bonds although none is currently outstanding. But for political cover, we can say that these perpetuities aren’t callable for the next, say, 50 years. We could even call them “Obama Bonds.” I wouldn’t be surprised if we could lock-in 4%.
Students of finance will also be happy because once the maturity of a bond becomes infinite, the yield-to-maturity equation gets a whole lot easier. Just divide the coupon by the price and you’re done.

Posted by on August 24th, 2010 at 1:00 pm


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