Such bonds are a rather rare market phenomenon, but ultra-long bonds have been issued with increasing frequency in recent years. The driver for these extremely long-dated bonds is the historically low interest rate level. Due to the continued expansionary monetary policy of the central banks worldwide, interest rates have been at lows for years. For particularly creditworthy issuers, including the Federal Republic of Germany, even negative interest is paid.
In order to secure these particularly favorable conditions and log in for decades, states are increasingly resorting to long-term bonds. But not only states, but also companies and institutions such as Walt Disney, Coca-Cola or even Oxford University take advantage of this.
Quelle: Ginmon, Thomson Reuters Eikon; Stand 31.01.2021
Very attractive for the issuer, such extremely long-dated bonds are more like the last emergency nail for investors. Hardly any investor would like to invest 1% of their money for 100 years. But for those who have to invest in government bonds, such long bonds are sometimes the lesser evil, as they yield comparatively higher returns than shorter-term bonds. Compared with a return of 0.25% on 30-year German government bonds, 0.53% on an Austrian one-year bond seems relatively attractive – the debtor has a similarly high quality, but the current return is more than twice as high.
For institutional investors such as pension funds or insurance companies, government bonds are an essential investment component that is sometimes required by regulations. In the current market environment, it is difficult for them to find an investment that suits their long-term liabilities and still delivers a minimum level of return. Ultra-long bonds represent such an instrument. The high demand for such bonds is therefore mainly explained by the lack of alternatives, not by the attractiveness of the bonds themselves.
In addition to relatively low yields for comparatively risky bonds, another factor should not be forgotten: the risk of interest rate changes. In the current market environment, investing in a 50-year government bond with a 1.5% annual return may seem interesting for a pension fund, but what happens if interest rates rise again in the medium term? Then the bond loses its value enormously depending on the interest rate level. Because if there are better returns for shorter terms elsewhere, then hardly any investor will want to give his money for almost 100 years to countries with a relatively poor bond rating such as Mexico or Peru.
The historically low interest rate environment makes one thing more than clear: if you want to generate returns, you have to invest in shares. Tying up money in a junk bond for decades just to get a mediocre return does not represent a satisfactory risk / return ratio. Bonds should therefore serve one purpose in a portfolio: They should represent a risk buffer and calm in one Bring portfolio. They are not intended as performance drivers and should not be treated as such.
As Chief Investment Officer, Fabian Knigge heads the Investment & Wealth Management department at Ginmon. Previously, he worked in portfolio management in the European equities division at Union Investment. He holds a Masters Degree in Finance from Bocconi University in Milan and is a CFA Charterholder.
Image Sources: Ginmon
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