In recent weeks, there has been a good deal of chatter about the possibility of the US Treasury issuing 100-year bonds for the first time–the rationale being to lock in at the current low interest rates. And although the size of the issuance is unlikely to amount to much more than a rounding error in the national debt, it raises an interesting question: if the Treasury thinks it’s a good deal to sell these ultra long-term bonds, who is willing to buy them and why?
For most of us, buying a Treasury bond that matures in 2119 with a 2.5-3% coupon doesn’t seem to make a whole lot of sense. After all, who wants to lock up their money for longer than their children’s lifetimes for what is essentially the rate of consumer price inflation? In addition, the obvious budgetary challenges which face the United States as well as the unforeseeable ebb and flow of world history and financial regimes make placing a long-term bet on the dollar’s continued success as a currency problematic. So who will buy these bonds, and why? Who is on the other side of the Treasury’s trade?
Bond traders. Most of us think of the returns from bonds as coming from the interest payments that borrowers make, but for traders and fund managers, the appreciation in the price of a bond has more appeal. We will not get into the nitty-gritty of bond pricing here, but suffice it to say that bond prices rise as interest rates fall, and longer-term bond prices rise more with falling interest rates than shorter term ones (all other things—issuer, call provisions, etc.—being equal). Thus, very long-term bonds provide a leveraged way to bet on the direction of interest rates, and the potential for capital gain (and loss) is magnified the longer the maturity. For example, Austria issued a 100 year bond yielding 2.1% in 2017. When interest rates on European government bonds tumbled to near 0%, this superficially unattractive bond almost doubled in price! (Of course, if rates had risen, the fall in value would have been severe.) The point is that the returns from long-maturity bonds are more about price changes and less about interest payments. Hence, the bonds are purchased by those who have little expectation of holding them to maturity.
While 100-year Treasury bonds would be a first for the United States, European governments frequently issued this kind of long-term debt in the eighteenth and nineteenth centuries. They even occasionally sold “perpetual” bonds without any maturity date at all (they could usually be called by the government at will, however.) One famous example were the British “consols” which originally were issued to consolidate the debt used to fund the United Kingdom’s struggle against Napoleon. Consols were highly desired as a safe and stable source of income for the British upper-classes in the nineteenth-century—readers of Thackeray or Wilde may recall the value placed on capital held “in the funds.” However, consol prices suffered during the twentieth century–particularly during the inflationary 1970’s–but recovered as rates fell after 2008. The British government finally redeemed the last ones in 2015.
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