What the heck is happening in the bond market? When the Belgians, Irish, and Mexicans dangled the 100-year carrot in front of investors a couple of years ago, it was thought to be an anomaly. But, like Roy Moore talking to teenage girls at shopping malls, governments are flirting with the unconventional fundraising tool. Policymakers are behaving more like matchstick men than paragons of fiscal responsibility.
In a binge-spending ZIRP world, can you blame them?
Forging a Bond
It has been two years since the federal government examined the idea of selling 50- and 100-year bonds on the open market. The Trump administration was warm to the concept because of historically low interest rates and an accumulation of debt. Treasury Secretary Steven Mnuchin defended the proposal by arguing that it would save taxpayers a lot of money if traders scooped up century bonds.
The idea was shelved after receiving a lukewarm response. But the Treasury Department recently confirmed that it is reaching out to investors again to determine what they think about these investment instruments that go way beyond the 30-year maximum. The government noted that it has not made a final decision on these long-term Treasuries, adding that it is attempting to “refresh its understanding of market appetite.”
Ostensibly, the biggest challenge for Washington would be to find the right balance between offering a yield that is appealing to the average investor and that limits the cost of borrowing.
Reports suggest that the yield on a 50-year issue would provide a median 20-basis-point advantage over the 30-year rate (2.023%).
However, the Treasury Borrowing Advisory Committee (TBAC), the department’s group of market consultants, banks, and money managers, is not keen on the idea. According to its May 2017 minutes, TBAC officials say there is no guarantee that the note would reduce the government’s debt burden, adding that there is little evidence to support huge demand for these products.
The Name’s Bond. Century Bond
In recent years, nations across the globe, thanks to bloated budgets, have contracted the need for century bonds. It is understandable why they are attractive: Governments refuse to cut spending and interest rates are at historic lows. By locking in these rates now, politicians can continue to kick the can down the road and let their grandchildren worry about all this debt.
Austria and Argentina are the two most famous examples of countries marketing ultra-blonds in financial markets. In 2017, Vienna offered 100-year debt with a 2.1% return, and Buenos Aires attracted buyers with a yield of 7.3% – both generated billions of dollars in sales. Two years later, they are traveling down different paths. Austria’s 2117 note has surged 60%, prompting the government to issue another 1.2%-yielding century bond. Argentina’s has cratered 38% so far this month, and investors warn it could crash to 40 cents in the event of a pending default.
Like hipsters making something cool before it goes mainstream, Belgium, Ireland, and Mexico usually get credit for starting the 100-year trend before it was popular. But it was actually corporations that got the ball rolling back in the 1990s. Disney and Coca-Cola, two companies that have turned it around in the last decade, issued 100-year bonds in 1993.
In any event, 14 other markets are considering adopting this strategy.
The Great Swindle
The obvious question is: Why would an investor buy bonds with a maturity rate of 100 years? Well, to answer that query, it is important to understand who is lending out for a century?
In Austria, for instance, pension funds are scooping up these instruments, mainly because it is required by law to own government debt. Elsewhere, pensions and insurance companies are purchasing longer bonds because they can lock in long-term returns, and they can better cover their future liabilities since minor interest rate adjustments can lead to major changes in longer-dated investments.
Put simply, John Q. Public is not parking his money in these investments.
Now, let’s see if governments have the audacity and temerity to issue negative-yielding 100-year debt!
Suffice it to say, if governments can get away with selling 100-year bonds, then they are pulling the greatest swindle on investors the world has ever seen. It is even more fascinating than the Social Security Ponzi scheme.
The century bond surpasses the average human lifespan, suggesting that economies entertaining the idea are no longer fundamentally sound or growing at a reasonable pace. For some countries that have either sold these notes or are considering it, who knows if they will even be around after 2100? Isn’t the world ending in 12 years anyway? Well, I guess the cockroaches will have to cover the tab.
So, what’s next? A perpetual bond that never matures and pays interest into eternity? Oh, wait. Never mind. The Treasury already tabled the proposal earlier this year.