100-year bonds are a dangerous temptation

Two 100-year bonds for countries that start with the letter A. Other than that, there’s pretty much zilch in common between the century maturity debt issued by Austria and Argentina, as we’ve seen over the past few weeks.
Nothing illustrates the desperate hunt for yield among high-quality global issues better than Austria’s 100-year bond. The debt was issued at just below “par” (the nominal value of 100 used when first issuing bonds) in 2017, but in the two years subsequently it has more than doubled in worth to 210.
That’s an annualised return of nearly 50 percent. The price has risen 30 percent since June alone, when Austria reopened the bond to new buyers.
Argentina also issued an ultra-long dated bond in 2017 but things haven’t gone quite so famously. It plunged by one-third in value last week to a low of 45 after a primary election loss for the market-friendly reformist President Mauricio Macri, before recovering slightly to 50. About the only good thing that can be said about this bond is that at least it was issued in dollars, and not in Argentine pesos which have dropped by about 20 percent against the greenback since Macri’s setback.
So are there any lessons to be drawn here for market participants, especially with the news that the US Treasury Department is assessing possible appetite for 50- or 100-year bonds?
Instant hindsight tells us that plumping for Austrian quality has paid off more than flirting with Argentine danger, but there are mitigating factors at play. Still, this type of debt carries heavy risks. After all, it will only redeem at 100 percent of its face value (or par) so investors who have bought in at much higher prices would suffer if yields returned to levels seen as recently as the start of this year — and price of the bond fell. Furthermore, while interest might not be the priority for many investors in ultra-long maturities, the Austrian paper is only yielding 60 basis points currently. That won’t butter many parsnips.
Equally, one can sympathise with those who punted on Argentina back in 2017. Yes, it may seem a little foolish to bet that country would manage to pay this bond back, or keep paying the coupon, given its hi-story of defaults. But a 7.9 percent yield in 2017 was sufficiently enticing for $2.75 billion to be sold. The theory for investors would be so lo-ng as those coupons rolled in for a decade then initial investment would be recouped and anything more would be free money for as many years as the payouts continued.
So what’s better, piling into ultra-safe Austria-style long bonds or chancing it with an Argentina-type offer? The answer, sadly, is neither. Circumstance is everything in the
financial markets. Yes, something that looked as alluringly cheap as Argentina’s century bonds has proven to be be cheap for a reason. But the seductive expense of the Austrian equivalent shouldn’t bring any false sense of comfort. Risk takes many forms.

—Bloomberg