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Sale of a century - Even in the best circumstances, why would anyone buy a 100-year bond?

02/07/2014

Nick Kirrage

Nick Kirrage

Fund Manager, Equity Value

Various questions leapt to mind as The Value Perspective caught up with a Bloomberg report that the Mexican government had sold £1bn of fixed income securities due to mature a century from now – in March 2114. Why, for one thing, would Mexico want to denominate a bond in sterling? Surely its own currency or, failing that, the currency of its northern neighbour would make more sense?

And why, for another thing, do 100-year bonds even exist? After all, fixed income investors are always worried about the possibility of a default and an awful lot can happen in a century. To put this question into some historical context, The Value Perspective thought it would be helpful to point out that, in the course of the last 100 years, Mexico has defaulted three times on its government debt.

In the 100-year period before that, Mexico defaulted six times so, on the bright side, the trend would appear to be moving in the right direction – perhaps we may only expect one and a half defaults over the next century.  Even in that eventuality, however, does a yield of 5.75% strike you as being remotely enough to compensate for the risk involved?

All of which leads us to pose two last – albeit pretty pertinent – questions. who is buying this stuff and what are they on? In articles such as Pep talk, we have looked before at the idea of the ‘inside view’ – where someone spends all their time focusing on the specific attributes of an individual case without obtaining any sort of objective ‘outside view’ – and maybe something of the kind is going on here.

If you held only an inside view of Mexican government debt, for example, you might arguably feel buoyed by the fact a previous issue of a 100-year – US dollar-denominated – bond was very well received by markets. However, would not any kind of outside view lead you to think twice about buying debt related to what is hardly the most stable of countries or economies or exchange rates?

For 100 years?

At 5.75%?

Author

Nick Kirrage

Nick Kirrage

Fund Manager, Equity Value

I joined Schroders in 2001, initially working as part of the Pan European research team providing insight and analysis on a broad range of sectors from Transport and Aerospace to Mining and Chemicals. In 2006, Kevin Murphy and I took over management of a fund that seeks to identify and exploit deeply out of favour investment opportunities. In 2010, Kevin and I also took over management of the team's flagship UK value fund seeking to offer income and capital growth.

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