"Century Bonds" -The Most Absurd Bonds On The Market: Cashable Only After You're Long Since Dead

 

                    Austria's diminished century bond value post-2020 (WSJ)

The recent WSJ Finance article ('These Very Popular Bonds Sound Ridiculous', Feb. 13, p. B13) reminded me of our first financial advisor back in 1993 in Columbia, MD.  This guy, out of AMEX, actually tried to get us to add a "long term bond" to our portfolio.  Maturity date?  2039.  When I confronted him about what seemed nuts, his response was: "No problem! Just be sure you have beneficiaries lined up to collect if you both should croak before!".   This was just before my brother Mike - also then working as an advisor - advised us to get hold of his ADV Form Part II. Therein we found multiple disciplinary actions against him which we'd never have learned otherwise.  Needless to say we dropped him and I became our financial advisor after reading a host of finance books, magazines.

In the case of the WSJ article one reads in the intro paragraph: 

 "Unless you're a really young reader, we regret to inform you that 'being dead' is probably on the agenda.  That hasn't stopped Google parent Alphabet from offering a bond maturing in 2126."

I.e. 100 years from now. So if you are 30 now and invest in it, you ain't gonna collect unless you hit 130. So why, despite being risky as hell - given even today's longevity freaks won't make it that far- are these bonds desirable in certain corners of finance?  According to the WSJ:

"Companies, countries and universities that issue them have snagged very attractive rates. That creates a potentially nasty combination for the bond's price because of a concept called duration -  how distant most of its promised cash flows are.   Higher duration equal more sensitivity to  prevailing yields. When the seller of a century bond offers a historically low coupon then interesting things can happen."

I'll bet!  We're than asked to consider the plight of those poor souls who bought Austrian government century bonds issued in 2020. They seemed a good idea at the time Covid hit, delivering extremely low yields.  These coupons had a 0.85% rate at the time - far far less than the Covid -spawned inflation. However, they now fetch just 30 cents on the euro. Can you say chump change? So Cui bono?

Well, insurers and pension funds! Since the bonds carry extremely long-dated liabilities for them, the fund managers crave them. Imagine all the holders croaking before the pension funds and insurance companies have to pay up.  I mean, here you have good, old fashioned  dog-eat-dog capitalism in its rawest form.

And let's not forget the hedge funds - also drooling about the prospects of getting suckers to buy them. The upside for the hedge funds? If they suspect bond yields might go down, even a bit, they can reap huge gains trading them.

Why not copy the hedge funds? Go ahead, just be sure you are also able to trade these beasties - oh and you can predict interest rates.

But in the end, the prospect for century bonds might not warrant much confidence. As the WSJ piece alerts us: 

 "Highly indebted Western governments will need to either slash spending or raise taxes substantially to cope with their growing pile of IOUs. Politicians will be tempted to let inflation whittle them down, incinerating the value of any long term bonds."

Words to the wise, as we say.

See Also:

Is 'Financial Repression' The Solution to the Trillions In Unpaid Debt Arising From The Pandemic?

And:

What You Can - And Can't - Believe Regarding Inflation. And Is There A Long Term 'Financial Covid'?