Ultra-long bonds with maturities of 50 and 100 years are back – a symptom and result of today’s historically low interest rates. For financial advisors, these issues offer an opportunity to produce big gains for clients in the bond market if interest rates fall further, or to lock in interest payments for what could be generations of investors’ families.
These bonds have a past. They were first issued by British governments in the 19th century when the country was in the midst of a long, slow slide in interest rates. These issues were then redeemed slowly during the course of the 20th century; by the new millennium, they were gone. Now, they’re back as issuers – both government and corporate – look to lock in debt at today’s historically low interest rates for a very long time. And there’s a market for these bonds as life insurance companies (lifecos) and pensions funds like to have them in their portfolios to match their liabilities.
Growing life expectancy is part of the reason that lifecos and pension funds have an appetite for ultra-long bonds. And issuers of debt – mainly governments and very large companies with sufficient assets and credibility to issue these bonds – can do it with relatively little cost increase over conventional 10- and 30-year bonds. The yield curve that links interest rates and maturities from one day to 30 years and beyond is very flat, so the incremental cost of going very long is small.
One could argue that issuers are just delivering a solution to a problem a long time in the making. In some cases, demand for ultra-long bonds is so strong that the yield for 50-year bonds is a little lower than that of 30-year bonds.
“These very long bonds provide risk-hedging [which is the liability to pay pensioners and beneficiaries] for very long periods,” says Chris Kresic, head of fixed-income and asset-allocation at Jarislowsky Fraser Ltd. in Toronto. “These bonds are a powerful tool for lifecos and pension funds.”
Still, ultra-long bonds are few and far between. In April 2019, the United States Department of the Treasury posted a note on its website saying that it would conduct “broad outreach to refresh its understanding of market appetite” for 50- and 100-year bonds.
One of the concerns brought up was that 50- and 100-year Treasury bonds might attract money that would otherwise go toward conventional 10- and 30-year Treasury bonds. That would result in a crowding-out effect. Then, yields on bonds with terms of 10 or 30 years would have to rise, which would have the effect of causing U.S. borrowing costs to rise. That would be counterproductive from the U.S. Treasury’s point of view.
For investors, the biggest risk of holding 50- and 100-year bonds is their duration. With a 100-year stream of interest payments, any drop in central banks’ benchmark interest rates would make the cash flow very attractive; however, an increase in interest rates would have the opposite effect. There’s also high price volatility to consider. There would be big gains in these bonds’ prices if fresh bonds have lower interest rates than existing long bonds or large drops in prices if those new bonds have higher interest rates. And as major bond markets are running historically low or even negative interest rates, there’s more room for interest rates to go up rather than down. That means 50- and 100-year bonds would likely show large losses over time.
“[Bond] buyers can lock in a long rate and it also means that they will have a good deal if interest rates continue to fall. [But] if inflation rises, the low finance rate will look good for the issuer,” says Michael Gregory, deputy chief economist and head of U.S. economics at BMO Capital Markets in Toronto.
European issuers, several of which have issued negative-yielding bonds, have sold “century bonds” in recent years. The current model for these century bonds is Austria’s 2.1-per-cent bond, due in 2117. Since the bond’s issue three years ago, its price has risen by about 200 per cent as interest rates have dropped.
In all, 14 countries in the 34-member nation OECD – including Mexico, Ireland and Belgium in addition to Austria – have issued bonds with maturities ranging from 40 to 100 years. In the corporate world, Coca-Cola Co. and the Walt Disney Co. have issued 100-year bonds as have non-profits like the Cleveland Clinic and the University of Pennsylvania.
In 2014, Canada issued a 50-year bond due Dec. 1, 2064. The $1.5-billion issue carries a 2.96 per cent coupon. It has tended to trade at a slight premium to the 30-year Canada bond because of the scarcity of this very long debt.