Your Money: A lot to question in 100-year bond

By: Marc Cuniberti/Guest Columnist
-A +A slaps the term “Ratepig” on investors who only look at yield when evaluating a potential investment.
  One of my family members does this and has been burned multiple times when the underlying investment offering the yield got into trouble.
   Basically a Ratepig’s most important criteria is how much they will get in dividends or interest no matter how economically healthy the entity offering the investment is. A  Ratepig might be attracted to the junk bonds of poorly rated companies, municipalities or even third world countries.
   The high yield of certain investments may reflect the underlying financial strength or lack thereof of the borrower.
   The high interest may be offered due to its poor credit rating or ability to pay back the debt. For the most extreme example, think a deadbeat brother-in-law or shady investment deal that entices investors by ultra-high returns. The old adage “if it’s too good to be true it usually is” comes to mind.
   Borrowers pay high rates not because they want to, but because they have to, and that usually spells risk.
   High returns do attract investors but what good is a 10 percent annual yield if the stock drops 20 percent in value? Or cuts the payment shortly after you sign on, or worse, defaults altogether.
   Cash-strapped Argentina has recently offered up a Ratepig’s appetizer in a new flavor, a bond whose term hits the century mark. What that means in laymen terms is the bond has a maturity date 100 years from now. The interest rate on these bonds stands at a healthy 8 percent.
   100-year bonds might sound like a long time and it is. The longer term the bond, the more sensitive its price is to interest rate moves. This means if interest rates move in one direction or another, the longer a bond’s term, the more violent the move up or down in the price of the bond.
   If you hold a bond to its maturity, the daily price won’t affect what you get paid in interest and when getting all your money back when it comes due, but should you have to sell early (because you can’t wait the 100 years) if things go afoul with the borrower, the bond might not be worth much.
   The upside to this equation, however, is if you get interest paid to you every year, you will recover your principal amount in about nine  years so not all is lost should the bond default in ten or longer.
   Seeing Ratepigs salivate at a 100-year sovereign bond paying 8 percent might make a good story over a strong martini by Wall Street stock brokers is one thing, but the fact that these bonds are real and up for sale is quite another.
   In fact Wall Street big boy Citigroup Inc. along with HSBC took the deal as lead book runners while Nomura Securities and Banco Santander opted to be co-managers.
   Now wait just a minute you say, who would buy such a bond? Apparently enough investors (if that’s the right word) saw it as a good enough deal to pony up $2.75 billion for these things (CNBC).
   Apparently a lot of people expect to live a long time (pun intended).
   Of course the reality of the situation is it’s likely none of the buyers intend to keep these bonds until maturity in the year 2117 and plan to off them to someone else at some point.
   But seeing as worldwide interest rates are near historic lows and some say could only rise from here, if rates do rise, the bonds with the longest terms get hit the hardest because of the math involved.
   No doubt some Ratepigs were among those who wrote checks to Argentina for the “privilege” of loaning them money, but seeing as this country has defaulted about 12 times since 1816 ( you have to wonder who else bought these things.
   Of course it may all work out in the end and Argentina will get its act together and do something it has been unable to do for about 300 years, which is to stay solvent for any reasonable length of time. And those folks that ambled up to the trough for the “juicy” yield of these century bonds will get all their money back. But it likely you and I will never know as we will be food for another kind of animal when these things come due
   Certainly at least some investors believe the country is good for the money when it comes due in 2117 and all the interest payments in between, and they may well be.  But then again, a lot can happen in a 100 years, especially in a country like Argentina.

This column expresses the opinions of Marc Cuniberti and are opinions only and should not be construed or acted upon as individual investment advice. Cuniberti is an investment advisor representative through Cambridge Investment Research Advisors, Inc., a registered investment advisor. He can be contacted at MKB Financial Services 164 Maple St No.1, Auburn; (530) 823-2792. His website is www.moneyman California Insurance License No. OL34249