PMC Weekly Review - September 23, 2019

A Macro View: Keeping it 100

Stop for a moment and imagine the year is 2100, the world has been fossil-fuel free for two decades, flying cars are at the cusp of attaining commercial viability, and Wall-E 1.0 has just been released. And now remember your government still has 19 years left on the ultralong, 100-year bond it issued in 2019. Sounds pretty crazy, right? Well guess again, as the last part of that future is an almost certain reality: 100-year government debt is not only being discussed as a possibility but already being issued in several countries.

Although not exactly a rare occurrence, the practice of issuing ultralong bonds is rare. Governments (mostly long-standing European countries) have been issuing ultralongs for hundreds of years. However, other countries, municipalities, and even corporations have started pushing their debt out to the next generation. Most notably, the US has recently flirted with issuing either 50- or 100-year bonds, but it is not the first time it has done so. The US issued 50-year, 3% coupon bonds in 1911 to fund the construction of the Panama Canal. And even though the US has not yet decided to issue any ultralong bonds, several European countries (Austria, Belgium, and Ireland) successfully issued 100-year, “century” bonds in the last several years. Curiously, Argentina, which has defaulted twice in the last 15 years, is among those who have issued 100-year bonds, doing so in 2017.

Municipalities and corporations also have been getting in on the action. Universities such as Rutgers, the University of Virginia, and the University of Pennsylvania have chosen to issue 100-year bonds to help pay for campus capital improvements. Coca-Cola and Walt Disney are two of the most well-known corporate examples, with both having decided in the early 1990s to fund operations through 100-year bonds. French energy company, EDF, and Brazilian energy company, Petrobras, are more recent examples of private entities selling ultralong debt, which they did in 2015.

So what is the driving force behind these recent ultralong issuances? For one, it stems from institutional investor demand, such as pensions and endowments seeking longer durations to match their longer, often perpetual, time horizons. Additionally, hedge funds are common buyers of ultralong debt, as its increased convexity can make for attractive asset-allocation opportunities. But far and away the largest driver behind ultralong issuance is that governments, municipalities, and corporations believe the current low-interest-rate environment makes for an attractive opportunity to lock in low rates. The Austrian and Belgian century bonds mentioned earlier were issued with annual coupons of 2.10% and 2.30%, respectively, just above inflation targets and only possible due to the negative-interest-rate environment that has taken hold in much of Europe.

The inevitable question retail investors, tax-paying citizens, and market observers come to is this: What is the implication of issuing debt that will be the next generation’s obligation? So far, the entities that have offered such bonds, outside of the regularly defaulting Argentina, are those with the willingness and ability to service such an ultralong obligation. And as most of these issuances are still relatively small in size compared with each government’s or corporation’s total debt, we have not seen a test case of ultralong issuance taking up a greater share. But that could change the longer we remain in this low-inflation, low-interest-rate environment, and the knock-on effects are relatively unknown.


Eric Halverson

AVP, Investment Analyst

The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this weekly review is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. All investments carry a certain risk, and there is no assurance that an investment will provide positive performance over any period of time. An investor may experience loss of principal. Investment decisions should always be made based on the investor’s specific financial needs and objectives, goals, time horizon, and risk tolerance. The asset classes and/or investment strategies described may not be suitable for all investors and investors should consult with an investment advisor to determine the appropriate investment strategy. Past performance is not indicative of future results. Information obtained from third party sources are believed to be reliable but not guaranteed. Envestnet|PMC™ makes no representation regarding the accuracy or completeness of information provided herein. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice. Investments in smaller companies carry greater risk than is customarily associated with larger companies for various reasons such as volatility of earnings and prospects, higher failure rates, and limited markets, product lines or financial resources. Investing overseas involves special risks, including the volatility of currency exchange rates and, in some cases, limited geographic focus, political and economic instability, and relatively illiquid markets. Income (bond) securities are subject to interest rate risk, which is the risk that debt securities in a portfolio will decline in value because of increases in market interest rates. Exchange Traded Funds (ETFs) are subject to risks similar to those of stocks, such as market risk. Investing in ETFs may bear indirect fees and expenses charged by ETFs in addition to its direct fees and expenses, as well as indirectly bearing the principal risks of those ETFs. ETFs may trade at a discount to their net asset value and are subject to the market fluctuations of their underlying investments. Investing in commodities can be volatile and can suffer from periods of prolonged decline in value and may not be suitable for all investors. Index Performance is presented for illustrative purposes only and does not represent the performance of any specific investment product or portfolio. An investment cannot be made directly into an index. Alternative Investments may have complex terms and features that are not easily understood and are not suitable for all investors. You should conduct your own due diligence to ensure you understand the features of the product before investing. Alternative investment strategies may employ a variety of hedging techniques and non-traditional instruments such as inverse and leveraged products. Certain hedging techniques include matched combinations that neutralize or offset individual risks such as merger arbitrage, long/short equity, convertible bond arbitrage and fixed-income arbitrage. Leveraged products are those that employ financial derivatives and debt to try to achieve a multiple (for example two or three times) of the return or inverse return of a stated index or benchmark over the course of a single day. Inverse products utilize short selling, derivatives trading, and other leveraged investment techniques, such as futures trading to achieve their objectives, mainly to track the inverse of their benchmarks. As with all investments, there is no assurance that any investment strategies will achieve their objectives or protect against losses. Neither Envestnet, Envestnet|PMC™ nor its representatives render tax, accounting or legal advice. Any tax statements contained herein are not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state, or local tax penalties. Taxpayers should always seek advice based on their own particular circumstances from an independent tax advisor. © 2019 Envestnet. All rights reserved.