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Long-dated bonds are the new black

Long-dated bonds are the new black

Demand for long-dated bonds is on the up. Bonds with a maturity of 50 years or ‘Methuselah’ bonds (so called in reference to the oldest man in the Hebrew bible) are increasingly being issued in Europe. France and Belgium issued 50-year bonds in the past month and Italy is likely to join the fray soon. 

This is all about the constraints that pension funds and insurance companies are under to buy certain assets. Fixed income assets make up the majority. Some have fixed annual payment targets and so require a certain yield on their investments. However, in Europe, a weak economic outlook and low central bank rates have pushed the yield on some investments below zero. This has forced these types of investors to buy bonds with longer maturities to obtain the yield they need to meet pay-outs.

No one can predict how any one country’s economy will look in 30 or 50 years

Regulation means these investors are limited to investing the majority of their assets in the less risky sovereign bond market. However, long-dated bonds are inherently more volatile than bonds with a shorter maturity. They are far more vulnerable to changes in interest rates and risks posed by changes in the economy from which they derive. No one can predict how any one country’s economy will look in 30 or 50 years. 20 years ago, the eurozone hadn’t even been created. It would be very unwise to guess how Europe’s economy will look in another 50 years.

Long-dated bonds are here to stay. Spain has joined the Methuselah party too, issuing a 50-year bond last week. They dipped their toe in the water last year when they issued a 50-year bond through private placement (probably when investors themselves approached the Spanish government asking them to issue long-dated bonds). Ireland and Belgium also issued privately placed 100-year bonds just last month.

So there’s clear demand and the issues have performed relatively well post issuance. However given this, there will likely be a more concerted supply response from Debt Management Offices which may see the sheen come off the sector.

Image credit: Movie Poster Image Art / Moviepix / Getty Images

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