The US Treasury has been considering issuing 100-year bonds for some time. Based on recent comments by the US Treasury Secretary this may actually happen this year. These are unusual monetary times that allow the government to lower its financing costs. But what are the implications for US individual investors? Do bonds due in 2120 make sense for you?
Current long-term rates in the US
For experienced bond investors the idea of 2% money for 30 years in the US is a staggering idea and sounds like a great deal for our country. Keeping our interest payments low and predictable for extended periods is a big plus, and 100-year bonds would make that easier to accomplish. For all the money the US Treasury currently borrows the weighted average maturity is just six years. Even if we issued more 30-year bonds it would take a massive issuance to raise that average maturity to seven years. Yet another big issuance could bring it to eight years. A significant 100-year issue could push the average maturity out considerably.
The US can borrow money cheaply with any maturity. Yes, the deficit and total amount of debt is high but the cost of servicing it is unbelievably low. Imagine having $5 trillion of 30-year debt at 2%. That is only $100 billion a year of debt service for a long time. Now imagine having $5 trillion (much larger than currently discussed) of 100-year debt at 3%. That is $150 billion of annual debt service well into the next century. I suspect most investors would suggest the US go ahead and issue 100-year bonds; we can afford it and will look back in wonder someday that we could do it.
Risks to us
Critics of the US 100-year bond point to reputational risk if there is weak demand. They also think 100-year bonds will drive up 30-year financing rates. There is no evidence to support either view. We have survived the US credit downgrade intact. There seems to be infinite demand for Treasuries of all types given the alternatives anywhere in the world. Dealers, financial institutions and long-term institutional buyers will get another instrument to build out their businesses and investments.
The 100-year bond is not a new idea. Other countries and companies have used it for a long time. Britain has used it most recently during World War I. In fact, they have even issued “consols” or perpetual bonds that have no maturity. Consols have been issued for 270 years at rates of 2.5-4%. Consols are like forever stamps issued by our US Post Office. Forever stamps can be used forever regardless of the current price of a single stamp. We don’t need to go that far, in my view. One hundred years is far enough and well beyond the view of generational minded investors. Much weaker credits like Austria, Argentina and Mexico have issued 100-year bonds. Even individual companies like Disney and Coke have issued 100-year bonds.
Although it is a great idea for the US – or anyone, really – to issue 100 year bonds, it is not a good idea for individuals to buy them. The risks for individual investors are many and long-lived. Let’s dismiss credit risk since there is none for a US investor in Treasury securities. There is, however, considerable market and inflation risk when locking into a rate for a century. A 3% annual payout would be disastrous if inflation ran at 8-10% for an extended period.
There is just no need to create worry about inflation for your heirs 50-100 years from now. Even if you are very pessimistic long-term about investing, a healthy amount of 10-year Treasury bonds would be plenty.
As always, please call us if you would like to discuss how to structure bond portfolios for your needs. As your interests are quite different than those of bond issuers, it’s important to be a careful and informed investor.
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