This summer has seen some incredible centuries – and not all of them in the ongoing Ashes series. Cricket watchers may have been left shaking their heads in disbelief – not least at Ben Stokes’s Headingley miracle – yet back in June, here on The Value Perspective, we were reacting in a similar way to the news the Austrian government was issuing another tranche of its 100-year ‘century bonds’, which mature way off in 2117.
As Barron’s magazine noted, in a piece unambiguously headline Global bond markets are so crazy right now that even 100-year bonds are selling, the bonds yielded 2.1% when they were originally issued two years ago. This time around, an additional €1.25bn (£1.14bn) was offered for a yield of 1.17%, which Barron’s took as a sign of the “desire, or desperation” of bond investors “to earn a positive yield on a top-grade security”.
Flagging up the $13 trillion (£10.6 trillion) of global bonds with negative yields, which it saw as “a direct reflection of the sub-zero short-term interest rates imposed by the European Central Bank and other central banks outside the eurozone”, the article added: “Right now, the global bond markets are in the throes of irrationality, albeit without exuberance”.
Why anyone would buy a 100-year bond is a question we first pondered, here on The Value Perspective, in Sale of a century, after the Mexican government issued one in 2014. We then revisited the subject three years later when Argentina – which has defaulted on its sovereign debt eight times since achieving independence in 1816, including what was then the world’s largest-ever default in 2001 – successfully pulled off the same feat.
The Argentine century was also highlighted in the Barron’s article, which archly observed: “Austria isn’t the only country issuing 100-year bonds. Even Argentina, a notoriously dicey debtor, has done so. The Argentine century bonds issued in 2017 in US dollars trade around 72 cents on the dollar – bad for bond buyers, but muy bien for Buenos Aires, which locked in a 7.125% borrowing cost – pretty good for a serial defaulter.”
Yet, in the few short months since that piece was written, things have grown decidedly worse for the bonds’ owners. The surprise result in Argentina’s recent primary election, which suggested the return of a populist government in October, saw a huge sell-off in the country’s assets, with the currency down a third, many listed equities down more than half and the century bonds trading as low as 45 cents on the dollar.
As this Financial Times report notes, that has attracted the attention of distressed-debt specialists, who one might presume will be more aware of the associated risks than some of the bonds’ original buyers. Credit default swap pricing suggests the probability of Argentina missing a payment within five years is now above 90%, adds the FT, while ratings agencies Fitch and Standard & Poor’s have both downgraded the country.
Discussing the launch of Argentina’s century back in 2017, we also quoted an FT piece on the subject, which concluded: “Investors buying a 100-year bond issued by Buenos Aires are making a risky bet that this time things are going to be different.” We twinned that line with economist JK Galbraith’s famous observation: “There can be few fields of human endeavour in which history counts for so little as in the world of finance.”
We may be equity investors, here on The Value Perspective, but that does not stop us keeping a close eye on the valuations of other assets – not least in the context of the prices some investors currently appear willing to pay regardless of the associated risks. One of value investing’s greatest strengths is it helps keep its followers’ memories fresh through its disciplined focus on buying attractively valued, out-of-favour businesses.