Is This in Our Future?

I ran across this JPMorgan press release earlier today and it kind of put a shiver down my spine. While there are already a couple of baby bonds outstanding with maturities in 2101, 2102 and 2103 from Assured Guaranty (NYSE:AGO) to see more of them coming to market—ANYWHERE is kind of frightful.

Here is the press release–The Return of the Century Bond

25 thoughts on “Is This in Our Future?”

  1. Ugh. Treasury considering 50 to 100-year bonds. Your fear, Tim, may be coming to pass.

    bloomberg.com/news/articles/2019-08-16/u-s-treasury-to-do-market-outreach-again-on-ultra-long-bonds-jzejo2qu?srnd=premium

  2. I have a idea. Let’s cut revenue, blow up the deficit, fight some trade wars, raise the debt ceiling, cut interest rates, and devalue the dollar. Then let’s wait to see what happens.

  3. The most important concept in finance is Time Value of Money. Do away with that and you are in a twilight zone. The distortions taking place throughout the economic system are not a good thing.

  4. About a year ago, my niece bought a small house near Lake Garda in Italy and got a zero percent mortgage. I did not read the other aspects of the contract in a fee crazy, “if ya wanna do business” country, but sounds like Deflation has overcome Capitalism. Not trying to be freaky, but print mortgages and hand them out?? I thought we tried that in early 2000s and they wanted the asset back as future good collateral. I have to forget everything I thought I knew, maybe even working which goes to help maintain the house of cards. Maybe it’s all a Thank You Card from Hank “Don’t Worry I’ve Got This” Paulson?

    1. A Danish bank is offering mortgages at a 0.5% negative interest rate — meaning it is basically paying people to borrow money. Jyske Bank, Denmark’s third-largest bank, said this week that customers would now be able to take out a 10-year fixed-rate mortgage with an interest rate of -0.5%. To put the -0.5% rate in simple terms: If you bought a house for $1 million and paid off your mortgage in full in 10 years, you would pay the bank back only $995,000. It should be noted that even with a negative interest rate, banks often charge fees linked to the borrowing, which means homeowners could still pay back more.
      Many investors fear a substantial crash in the near future. As such, some banks are willing to lend money at negative rates, accepting a small loss rather than risking a bigger loss by lending money at higher rates that customers cannot meet.

      1. I’m just not understanding negative interest rates from a bank. Unless there are substantial fees that help them earn something…why would they do this? How is that a sustainable business concept? I sort of understand countries doing this, but I really don’t get commercial institutions doing it. Can someone shed some light on it?

        1. Steve,

          The following from the Danish National Bank:
          “The loans are solely financed by issuing bonds – mortgage banks do not accept deposits – and for that reason the mortgage banks are the largest bond issuers in Denmark. Households can only obtain mortgage loans of up to 80 per cent of the value of properties used as permanent residences.” So long as theissuing bonds also have a negative yield the bank has no risk. Also the borrowers must pay a risk and administration fee to the mortgage bank. More information here : https://www.nationalbanken.dk/en/financialstability/danish_financial_sector/Pages/default.aspx
          and here: http://www.housingfinance.org/uploads/Publicationsmanager/Europe_mortgage%20finance%20in%20denmark.pdf

  5. Speaking of meat on the bones, the busted converts BAC-L & WFC-L don’t hit 5% yields until 1450 and 1500, respectively.

    Are they on their way?

    1. I own both and WFC-L is one of my sock drawer securities (I was fortunate to buy a significant position below par and I wish I had broken my sizing rule on this one).

    2. I own both, and wish I’d bought 4x as much back on 16. I agree.. they could continue their run to sub-5%. But, doesn’t that make SLMNP even more attractive?
      I picked up a little bit of BML-L as well recently.

  6. Tim – you would think from an issuer’s point of view, issuing 100 year bonds today at a positive rate of return is a bet a against rates dropping further and staying there, right? Unrelated but in the same ballpark, did you see this too? https://www.bloomberg.com/news/articles/2019-08-07/nordea-offers-20-year-mortgages-at-zero-interest-as-rates-plunge. It’s hard to wrap my head around an incentive for a capitalistic bank to be willing to offer to lend money for 20 years to someone to buy a house and not get anything in return….. What a world

    1. 2WR–no I hadn’t seen that – very scary. I don’t know if issuer’s think this is the bottom in rates–we have thought that type of thing in the past only to see them moves lower yet.

    2. 2wr, Most of us at one time or another have considered current and future US debt expansion as a lever for higher rates. Financial engineering by the CBs appears to be altering that narrative. Our own Fed has already telegraphed their intent to shift a much greater portion of their purchases to US Treasuries. This is the “just push a button” creation of cash to subsidize govt debt. Meaning of course – they won’t require us to help in that regard.

      I know nothing of the future, but do suspect we will be dragging along the zero-bound for more than a cycle-bottom. If you can create money for free, why would any govt agree to pay for it. Case in point: Greece and Italy 10-year were recently yielding less than US. That’s EU creating cash for free. This of course makes no sense (zero cents too).

      Looking forward, one concern I have is to what lengths our pfd debtors will go to extricate themselves from 5%-7% debt in a 0%-1% world.

    3. But they are getting something – their money back. We may not know what kind of inflation effects will occur there will be changes in defaults but they fear the alternative. Negative rates, FDIC premiums will all be costs to the banks. Sometimes banks just like getting rid of the money.

  7. Not sure why this is a concern. Almost every preferred issued is the equivalent of a forever bond. If rates go up, they will never be called.

    1. kapil–the point is that if the US were to get to this level that in general higher quality preferreds would get called and we would have refinancing issues at much lower levels than they are at even today. Everyone has looked for higher rates for years and years and we are still looking–maybe they will go higher at some point–but maybe it will be decades away.

      1. Would it be a good idea for the US to issue some of these long-lived, low-rate bonds to fix our crumbling infrastructure?

        Nah, prolly not…

        1. camroc—I hope that is impossible, because it would indicate what a basketcase our economy would be in–just like European countries.

        2. Camroc…rather than borrow more money, just reallocate the $50 billion per year of military spending in Afghanistan toward whatever infrastructure projects Congress can agree on. Bring the troops home and prioritize the hiring of veterans for the jobs the infrastructure projects create.

          1. I think this is about to happen. Not sure the savings would or should go to infrastructure given our deficit and competing needs, but I think the troops will come home next year.

            That’s wandering a bit too much onto the political side of things for my taste though so probably best to stick to modern monetary theory (which is bad enough).

          2. I think our past military efforts have, in some part, been to keep unrealistic country borders in place at a great cost to the US. I’m okay with there being just a few dozen countries 50 years from now. Get it over with. Defending someone else’s sovereignty does not make ours more safe in the long run.

            As to lower rates for longer, credit expansion and demand for money make rates higher but we fight the less efficient flow of money into things like health care, etc. Ray Dalio is a big supporter of moving more money towards things that produce rather than just satisfy a need and, sorry to say, health care is fairly inefficient from a productivity perspective.

        3. For a portion of the US debt, they should go very long and match their assets and liabilities.

      2. Tim
        I own AGO-E. I am happy with the yield, could earn a profit equal to more than one year’s payout if I wished to, and I expect to be here when the issue is called in at maturity. The scientists are working wonders with longevity ! But, seriously, I am earning 6.25% and am happy to maintain my hold as long as the payments arrrive or the issue is called. My wife or heirs will own the issue long after I am gone ( if they are smart ). What’s 100 years among friends ? The way my portfolio is set up the holding could last 100 years
        or until the issuer folds, whichever comes first. Those with reservations about this type issue should of course not purchase it and I respect the position of those that are uncomfortable with this type of issuance.

        1. Howard, I wouldnt recommend you selling out the longer duration AGO-E for the “shorter” 2097 duration debt of the JC Penny baby bonds on the exchange, lol…

        2. Just looked at this issue….callable in 2007? I must have missed something in my cursory review, it should have been called by now….

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