The federal government's first ever 50-year bond issue was snapped up by buyers, highlighting investors' growing willingness to lock up their money for decades in exchange for a low but safe yield.
The bond, which matures in December, 2064, attracted so many orders Monday that the deal was supersized. Instead of selling the $750-million of bonds that it had originally planned, the Government of Canada wound up selling $1.5-billion.
The deal allows the federal government to lock in today's low interest rates for a small portion of its financing needs. It also caters to the appetite among many pension funds and life insurers for longer-term investments that can fill the investment demands of a population saving for retirement.
Ottawa had not previously issued bonds with maturities of more than 30 years, but demand for the new 50-year issue was so strong that its yield of 2.96 per cent is actually slightly below an equivalent 30-year bond that matures in 2045. That reverses the normal pattern in which bonds of longer maturities pay out higher yields.
Bond prices and interest rates move in opposite directions, so one risk with such long-lived bonds is that interest rates will rise in the years ahead, making the bonds less valuable. Another danger is that a flare up of inflation will eat into investors' returns.
But pension plans and life insurers, which have obligations that extend for decades into the future, see the bonds as a natural way to match up their investments with distant liabilities.
"This is a welcome development for the Canadian marketplace," said Doug Gardiner, portfolio manager of Canadian and U.K. public fixed income at Sun Life. "Sun Life is supportive in the deal – and participated in it – as it helps us invest against our long-term liabilities, as well as improving overall market liquidity."
The Ontario Teachers' Pension Plan was also glad to see the issuance, and would like to see more 50-year bonds, both of the conventional variety as well as ones that link their payout to inflation, said Wayne Kozun, senior vice-president of fixed income and alternative investments at Teachers.
"This was kind of a one-off that [the government] did," Mr. Kozun said. "We'd like some clarity, and we'd like them to issue them on a regular basis so they can become a regular part of the portfolio of the debt of the federal government."
It took the Finance Department several months to organize its first offering. The government had previously said it was waiting for "favourable market conditions" to launch its syndicated offering. It wants to take advantage of strong demand for long-term bonds at a time when yields remain well below their historical averages.
"In the current environment, it is both advantageous and prudent for our government to lock in additional long-term funding," Joe Oliver, Minister of Finance, said in a statement. "This 50-year bond will help us meet our goal of raising stable and low-cost funding to meet Canada's financial needs and best serve taxpayers."
But these long-term investments won't be ideal for all investors should interest rates and inflation rise.
"The government may be the winner, and the investors may be the losers," Mr. Kozun said. "We've been very cautious in the last couple of years as interest rates have been really low. Now they have gone up a bit in the last year, but we always keep our eye on the level of yield and the interest rate exposure we have as an organization."
The ultra-long bond comes on the heels of other 50-year offerings in recent years from provinces such as Manitoba and Nova Scotia, and municipalities have issued 40-year bonds. "The more the merrier, from our perspective," Mr. Kozun said.
France was the first of the Group of Seven nations to issue such a bond nearly a decade ago, and the country has issued such long-dated securities as recently as 2012. Other countries such as Greece and Spain have also floated the idea of issuing debt with such a long maturity more recently.
The U.S. government has not yet issued a 50-year bond, but some corporations have sold ultra-long term debt. Investment bank Goldman Sachs sold $1.3-billion (U.S.) of 50-year bonds in 2010. And Walt Disney Co. issued bonds with a 100-year maturation date back in 1993.
Mr. Oliver noted that Canada, unlike any other G7 country, has the "highest possible credit ratings, with a stable outlook, from all the major credit rating agencies."
In the 2014 to 2015 year, the Government of Canada's gross bond issuance is estimated at $95-billion (Canadian) – about $7-billion more than the previous year.