The U.S. government is> now considering selling debt that would stretch out for 40 years, 50 years or even 100 years, according to minutes from last week's regular Treasury meeting. With interest rates so low, there's a growing belief that the government could benefit from locking in today's borrowing costs by pushing trillions in debt obligations decades into the future.
If buying a bond that matures in January 2111 seems perilous, consider that longer-dated bonds, often called "ultra" bonds, are quickly becoming more common. Last fall Goldman Sachs (GS)sold a 50-year bond
Ultra-T Bond futures, which mimic the longest-dated U.S. bonds with at least 25 years remaining to maturity, recently marked their one-year anniversary at the CME (CME) as
Because long-term bonds are the most sensitive to changes in rates, endowments, pension funds and other institutional investors with investment horizons spanning generations buy them to manage their funding, liability and interest rate risk.
But right now those long-term rates continue to notch persistently higher. Last Friday, the yield on the government's 30-year bond jumped to 4.74%, the highest level since April and up from 4.3% last fall when we profiled funds like ProShares Short 20+ Year Treasury (TBF)
As we always point out, markets have all the time in the world. Gold's trek from $290 to $1,350, for example, occurred over a decade, with numerable corrections and major news headlines -- including Enron's implosion, the Iraqi War, terror warnings, elections, the weak dollar and Mexican swine flu.
Time to Borrow Long
CBOE 30-Year Treasury Index (47.37 = 4.737% yield) - 17 years
A bet on higher interest rates shouldn't be predicated on a complex estimate of Fed policy or nuanced analysis of President Barack Obama's budget proposals, all of which will ultimately change if this trend continues to persist over time.
Rather, I look at my existing portfolio and take my cues from the market itself. In terms of big-picture ideas on which to focus new capital, the sharp jump in long-term rates is impossible to ignore.
Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC . At the time of writing Hoenig's fund held positions in many of the securities mentioned.