The insatiable hunger for yield is burgeoning. Previously, bonds ventured to the “impossible” when rates turned negative. Now it is going a step further by stretching bond maturity to a century. Over the last two months, both Ireland and Belgium issued 100-year bonds.
Having recently celebrated my birthday, bonds issuance at 100 years maturity makes me feel young again! I will only be at 130+ years old when the 100-year bond matures in 2116. The world’s oldest person, Susannah Mushatt Jones, recently passed away at 116 years old. So, it will be great to beat that age, live to 2116 and receive my bond principal before I pass on.
Besides the above existential thoughts, we highlight three other thoughts on the issue of 100-year bonds:
Insane hunt for yields
- High duration risk
- Canary in the coal mine
- Insane hunt for yields
The hunger for yield is reaching delirious levels. The Methuselah bonds are back in vogue with UK, France and Belgium issuing 50-year bonds last month. These 50-year bonds are referred as Methuselah bonds, named after the oldest person recorded in the Bible. Typically, countries only issue bonds at a maximum maturity of 30-year but the Europeans are pushing the boundaries by issuing 50-year government bonds.
The demand for these bonds is so strong that Ireland and Belgium has even gone a step further by issuing 100-year bonds in private placements. These 100-year bonds are issued with coupons of 2.35% and 2.30% respectively!
Long-dated bonds in Europe
2. High duration risk
The downside risk of these long maturity bonds is the high duration risk.
In a rising interest rate environment, longer-dated bonds will suffer a greater drop in price compare to a shorter-dated bond. Thus, in a rock-bottom interest rate environment, these long maturity bonds favour the borrowers instead of the lenders. Only pension funds and insurers will have the need for these bonds as it provides a better matching to their long-duration liabilities.
3. Canary in the coal mine
Since the start of the Euro sovereign crises in 2011-12, economic growth has been lacklustre while inflation has generally come in lower than expectations. The issuance of these long-maturity bonds could be canaries in the coal mine as it demonstrates a lack of confidence in the policies of ECB to revive economic growth.
Capital prefers to hide in the safety of bonds instead of equities – even at a miserable sub-3% yields for 50 to 100 years.
John Maynard Keynes remarked that “In the long run, we are all dead.” Economic growth appears dead in the long run. At least this is what the bond market is implying.