A Misfit in the Market or Why Time’s Up for the 20-Year.

In this buzz: The main problem with the 20-year Treasury bond and why it’s time to go.

The 20-year Treasury bond become a sore spot in the bond market lately. Back in 2020, the government brought it back to give investors more options and manage the U.S. debt more effectively. But now, it’s not really pulling its weight.

The main problem with the 20-year Treasury bond is its awkward position on the U.S. bond yield curve, leading to higher yields than the 10-year and 30-year bonds. Here are some reasons why the 20-year bond isn’t performing as hoped and why Steven Mnuchin suggests it might be time to discontinue it:

Higher Yields, Higher Costs

Here’s the deal: the 20-year bond is costing the government more than they’d like. It’s got higher interest rates compared to the popular 10-year and 30-year bonds, which means Uncle Sam is shelling out more cash to keep it going. This adds up to an extra $2 billion each year, which isn’t pocket change—especially when it hits taxpayers with a $40 billion tab over the bond’s life.

Why does this matter? Higher interest rates mean increased borrowing costs for the government, which ultimately affect taxpayers nationwide. This situation creates an additional financial burden that could be avoided by using more cost-effective bond options.

Why It’s Not Catching On

Investors love bonds that are easy to trade, such as the 10-year and 30-year options. These are the favorites in the market because they’re reliable and easy to move around. The 20-year bond, however, is more of a misfit in the market. It doesn’t have that same appeal. It’s less liquid, meaning it’s not as easy to buy and sell, and that drives up costs even more.

In the fast-paced world of trading, bonds need to be traded quickly and efficiently. The 20-year bond struggles to gain traction because it lacks the popularity and ease of trading that investors seek. This lack of demand makes it an expensive and less attractive option.

Budget Blues

With the U.S. budget deficit nearing $2 trillion, every extra dollar counts. Dropping the 20-year bond is basically cutting out a monthly subscription you don’t need—it helps save money and keeps the financial pressure in check. Every little bit helps when you’re managing such a large deficit, and eliminating unnecessary expenses is a straightforward way to ease the burden.

Strategy Shift

When the bond was reintroduced, it seemed like a solid move to add some variety. But as the market evolves, so do strategies. The financial world is dynamic, with trends shifting and investor preferences changing over time. Right now, focusing on the bonds people actually want makes more sense. By letting go of the 20-year bond, the government can streamline its approach and reduce costs.

It’s simply clearing out the garage of tools you never use, making room for the ones that actually get the job done. In this case, those tools are the 10-year and 30-year bonds, which are performing well and meeting market demands.

So, what’s the takeaway?

The 20-year bond isn’t delivering like it was hoped. It’s time to stick with the options that make financial sense and ensure taxpayer money is being used wisely. It’s all about finding the right balance to keep the economy running smoothly.