Should you buy a 100-year bond?


Conventional wisdom holds that bonds are the safety net of an investment portfolio. They provide a guaranteed rate of return with relatively little risk. This makes them attractive to institutional investors, like retirement funds and insurance companies, who know they will need to make payouts.

These companies were the chief target of a new Trump administration idea: the 100-year bond. The administration’s motives are quite simple. It’s cheap to borrow right now, so locking in these rates will save the government money in the long run. This bond issue could be used to fund infrastructure improvements and other needed capital-intensive projects.

The only hiccup for the administration has come from the supposed buyers of this debt. They just aren’t buying. According to a committee of Wall Street advisors, these investors aren’t interested in tying up capital for 100 years.

The reason why is simple. Interest rates are likely to go up in the near-to-mid future. They’re still at historically low levels. The Federal Reserve has sent several signals indicating a desire to return to normal at some point, assuming economic indicators continue to tick in positive directions. Investors see locking in an interest rate now as something of a sucker’s bet.

As much as it might appear counterintuitive, a bond’s value decreases as interest rates rise. That’s because new bonds are more attractive in comparison. Investors may disagree as to when interest rates will rise, but it seems safe to say it’ll occur sometime in the next century. When that happens, the value of these bonds will tumble, leaving institutional investors in a rough spot if they buy in.

If interest rates were near historic averages, a 100-year bond might make some sense to investors. Interest rates will change over the span of the bond, and the predictability offered by such a note could be very attractive. Those were the conditions when Mexico and several European nations issued their ultra-long term bonds. However, in the current economic environment, they just don’t make sense.

Beyond the present, the US hasn’t had much demand for ultra-long term bonds. While the US Treasury currently offers a 30-year bond, most institutional investors prefer the 20-year for its greater price volatility. Even institutional investors try to buy low and sell high to maximize returns for their shareholders. A 100-year bond just doesn’t have that much upside at the moment.

Leave a Reply

Your email address will not be published. Required fields are marked *

Please wait...

Subscribe to our weekend edition newsletter and receive a free special edition copy of my upcoming book.

Sign up for Stewnomics Weekend Edition. Get all of your weeks news in a single email! Link will be emailed to redeem copy of book upon release.