Bond Swap

The U.S. Treasury debates new-for-old bond swap, reports FT. The Treasury will issue more of the popular 10 year bonds, and then buy them back at some point before they mature.

The idea is to make treasury markets more uniform and liquid. Once bonds get several years old, they tend to sit in proverbial sock drawers, and they're harder to buy and sell (they are "off the run.") To the extent that this illiquidity lowers their value, the Treasury can buy them back cheaper.

“By buying cheap issues and funding the buybacks with issuance of rich on-the-run securities, the Treasury could enhance liquidity in these issues, while decreasing its borrowing costs,”

There is a lot of writing about "safe" and "liquid" asset shortages, so issuing more of a few popular issues and leaving less outstanding otherwise is beneficial to markets.

Comment.  I like the idea, but I think the Treasury should go further. Coincidentally, I just happen to have recently written an article called "A new structure for U.S. Federal Debt" that explains it all in detail.

When you think about it, the treasury ends up in a strange place. Why would you constantly issue 10 year debt, and then buy it all back when it's (say) 8 year debt? What is the question that this structure solves? (Other than the desire of dealer banks to double their earnings on buying and selling treasury securities!)  

My proposal is simpler: Issue perpetuities. These securities pay $1 coupon forever. Buy these back, not on a regular schedule, but when (!) the day of surpluses comes that the government wants to pay down the debt. Then there is one issue, with market depth in the trillions, and the whole on the run vs. off the run phenomenon disappears. I hope the Treasury will someday at least try selling some perpetuities.