Submitted by Mike Krieger of Liberty Blitzkrieg blog,
Yesterday, the Wall Street Journal published an article highlighting the surge in what it calls “ultralong” bonds, defined as having a maturity of more than 30 years. The findings are simply stunning. In what may seem counterintuitive, bond yields at hundred year plus lows in many countries has led major investment firms to rush into ever riskier and longer duration fixed income securities just to earn some income. This has opened the floodgates to governments and corporations looking to lock in low yields on debt they won’t have to pay back for a generation.
Just to name a few, this year we have already seen a 100-year bond sale by Mexico, two separate 50-year bond issuances by Canada, and wait for this one, Spain of all countries is set to try to sell a 50-year bond!
We learn from the Wall Street Journal that:
Global sales of sovereign and corporate bonds that mature after 30 years have reached $142.5 billion this year as of Tuesday, a 22% rise from the same period last year and a 55% jump from the same period in 2012, according to data provider Dealogic. Their growth far outpaces sales of government and corporate bonds due in 30 years or less. Those bond offerings totaled $5.236 trillion so far this year, a 4.6% increase from the same period in 2012.
France, Austria, Switzerland, Japan and the U.K. have sold ultralong bonds this year denominated in local currencies. In the developing world, Mexico sold a 100-year bond in March denominated in British pounds. Canada sold its first 50-year bond in April and sold more in July.
In the corporate world, McDonald’s Corp. sold a 40-year £300 million ($506 million) bond in June denominated in British pounds.
Caterpillar Inc. in May sold $500 million of 50-year bonds yielding 4.767%, only 1.375 percentage points more than 30-year U.S. Treasurys at the time.
But the robust demand for long bonds highlights a number of powerful factors often ignored by analysts and traders. These include the longer-term perspective of buyers such as pensions and insurers, who struggle to match future obligations with long-lived, income-generating assets, and the shrinking pool of long-term debt available to investors amid hefty Fed purchases.
“You pick up extra yields from ultralong bonds,” said Erik Schiller, senior portfolio manager on global government bonds at Prudential Financial Inc.’s fixed-income unit, which oversees more than $400 billion. “People care about income right now.”
Institutional buyers have been flocking to the debt. The California Public Employees’ Retirement System, the largest public pension fund in the U.S., this year approved investment goals that stand to boost bondholdings at the expense of stocks. A Calpers representative declined to elaborate.
Ah, Calpers. The largest pubic pension in the nation, which seems to have no clue what it’s doing. But I’ll get to that later…
There are more ultralong bonds in the pipeline. Japan is scheduled to sell a 40-year bond late this month, according to the information on the Ministry of Finance’s website.
Spain’s government has indicated in recent months that it is considering selling a 50-year bond before the end of the year. The U.S. has asked large banks whether it should consider selling ultralong bonds.
As promised earlier, Calpers once again recently demonstrated an incredible degree of incompetence. Pension360 reported that:
You probably trust your doctor with your life. But with your money? Many people might balk at the notion of their doctor making their investment decisions for them.
But back in 2007, CalPERS made a big bet: a $705 million investment in a private equity fund, Health Evolution Partners Inc., specializing in health care companies.
The CEO of the fund, David Brailer, is a nationally renowned physician who had previously been the “health czar” under George W. Bush. But this was his first foray into the investment space, and he had no experience running an investment fund or making private equity investments.
Still, he reportedly promised the CalPERS board healthy returns in excess of 20 percent.
But through seven years, the fund has never managed to exceed single-digit returns. And portions of CalPERS’ investment have actually experienced negative returns.
CalPERS paid the fund over $18 million in fees in the fiscal year 2011-12, according to the System’s financial report.
Naked Capitalism added this perspective to the whole thing:
The reason for belaboring this particular bad deal is that CalPERS is widely seen as savviest public pension fund investing in private equity. Yet there’s no justification for this self-inflicted wound. A much smaller investment could have been justified as an interesting experiment. Brailer’s past prominent role leads one to suspect that there’s more to this story than the press has ferreted out. And if CalPERS can get itself in a costly mess like this, imagine what lurks at other public pension funds.
Although this investment occurred in 2007, we know for a fact that public pensions have been rapidly increasing their investments in “alternative asset managers” using secret deals, including a wide swath of private equity firms. As I noted on Twitter earlier today:
I strongly believe the biggest disasters waiting to happen will be centered around relationship between public pensions and private equity.
— Michael Krieger (@LibertyBlitz) August 6, 2014