Why U.S. Treasuries remain an attractive safe haven investment: Economist

The Treasury Department will launch a 20-year bond later in May in an effort to fund America's record level of borrowing. UBS Chief US Economist Seth Carpenter joins Yahoo Finance’s On The Move to weigh in on the economic outlook for the U.S. and the latest developments from the Treasury.

Video Transcript

ADAM SHAPIRO: And we had a huge announcement from the US Treasury this morning that since the end of March, they've already borrowed $1.4 trillion, and now they're going to raise even more money as the binge continues to borrow, with a new 20-- 20-year bond. And to help us understand the impact of that, I want to invite in Seth Carpenter, UBS's Chief US Economist.

He's joining us, I believe, on the telephone. And I'm going to need you to star six to unmute your phone, Seth, just to make sure that you we can hear everything you have to say. But what is the impact going to be with this huge borrowing, not only on the 10-year, but overall?

SETH CARPENTER: Yeah, so I think there are a couple of things to keep in mind. One, I think everybody in markets knew that borrowing was going to have to come up. So the fact of their borrowing so much in and of itself isn't a shock. I think one number that does stagger me every so often is that the Treasury has $1.1 trillion of cash right now just sitting, waiting to be deployed in their account at the Fed. So that reflects the debt they already issued last month.

I think the news today, though, was how heavily they're hitting longer-dated issues. You know, the 20-year, brand new, issue this year, they performed our expectations in terms of how much they're going to start issuing there. The ramping up they've done in the 7-year issue is also notable, because they seem to be disregarding the typical Treasury management practice of thinking about which issues can take the increase in supply easiest to reduce volatility, and that sort of thing. And they really do seem like they're ramping up the 7, 10, 20-year sector pretty aggressively.

JULIE HYMAN: Hey Seth, it's Julie here. So what is the demand out there? Is it inexhaustible for all of this supply that's coming out? And then what effect is all of this going to have on yields in the long run?

SETH CARPENTER: Yeah, so that's-- that's obviously a key question. So just today on the announcement, we saw pretty big moves, in as far as these things, in Treasury yields-- you know, several basis points higher yield. So the price came down some as people realized, huh, they're going to be issuing more of the long end than was anticipated.

So there's some movement in that direction. But to keep things in context, the 10-year is now trading at about 72 basis points. So it's not as though this extra debt issuance is expected to drive US interest rates through the ceiling.

And in fact, with so much of the rest of the world, especially the developed markets, sovereign yields, negative rates, treasury-- treasuries are really attractive. They're super safe relative to everything else, super liquid. And paying a positive yield just means that I think we're going to be able to keep a cap on things.

Our interest rates strategists here at UBS are looking for the 10-year to be around 75 basis points at the end of this year. We'll see how that goes with this extra issuance to the longer end. But there does seem to be a lot of demand, both in the US and globally.

ADAM SHAPIRO: When you talk about that demand, you're mentioning possible, what is it, total 2020, $5.3 trillion in bills from Treasury? Isn't it at some point the world is going to say enough is enough?

SETH CARPENTER: Yeah, I mean, I think-- I think there has to be a limit on everything that gets done. The tricky part for markets, the tricky part for policymakers is are we anywhere near that level? And I think given where we are with this recession being so sharp, so deep, and the tail of it potentially being very, very long, there is going to be a demand for very, very safe assets.

And then when you think globally, across the whole world, where there are investors looking for places to put their money to work, you've gotta put them somewhere. You gotta put it somewhere. And treasuries are safer than lots of other securities. And they're still paying strongly positive yields.

So I don't think we're in the dangerous part yet. Next year, we're going to have another big issuance here as well. At some point, it's going to matter.

But the Fed, they're in the wings. So the Fed's already bought $1.5 trillion worth of bonds. They're probably going to buy another half trillion as this year goes on.

JULIA LA ROCHE: Hey Seth, it's Julia La Roche. Thanks so much for joining us. I want to ask you about the deficit. How focused should we be on that? How much does that matter?

SETH CARPENTER: So again, it's sort of tricky. I would have said the deficit in and of itself is a useful summary statistic, but it doesn't give you the whole picture. And there are all sorts of technical accounting tricks.

So if you think about the Congressional Budget Office-- right, hardworking civil servants trying to figure out how much the different legislation that Congress passed is going to cost-- they looked at $500 billion that the Congress appropriated for the Treasury to backstop the Fed. They said, you know what? We're-- at least our preliminary estimate, net present value of zero for that for the deficit.

But so I think what the Treasury reported on [AUDIO OUT] so that the Treasury is actually deploying the cash that's backstopping the Fed. So it's actually getting issued. So that's an example where the deficit number might be zero, but Treasury is going to issue what looks like just enough debt to raise cash to backstop these. So it can get tricky.

I really think the key statistic to look at is what is going to be issued? And today's refunding report I think is key there. How much is going to get issued to the market? How much will the market have to take down?

What maturity is getting issued? And again, the news this morning is it's longer maturity. So the market has to buy more duration than you might have thought before.

And then the big question is always going to be what's the Fed going to do on the back of this? The Fed's been paring back their purchases at the same time that the Treasury has been wrapping things up, hence a little bit of upward pressure going forward.

So the deficit to me is only a starting point. There's so many other details that are going to matter a lot more than the deficit itself.

ADAM SHAPIRO: And that's why we're going to have you back on. Seth Carpenter, UBS Chief US Economist, good to have you here today. Stay well.