Hundred Year Bonds? Are You Kidding?

SoThe Wall Street Journal reports 100 year bonds are back.  As you can probably guess, I am not a fan...unless I'm an issuer!

Very simply, corporate bonds have two components to their value: time and credit risk.  Lending money for a long time should pay higher interest than lending money for a shorter period--there's fundamentally more risk involved.  (This is why the yield curve slopes upward.)  Then there's risk of default by the issuer.  This often means the greater risk of lending to a company than the US government.

By extension, bond holders are short a put on the equity of the company.  Why?  Straight bonds do not share in the upside of company performance.  Bonds will only perform as promised or worse.  Never better.  No CEO ever said, "Gee, we did really well, let's send some extra coupon payments to our debt holders as a reward." 

On the other hand, if the equity of the company goes to zero, that means you start eating into what the bond holders own.  That's downside.

So, back to 100 year bonds.  Chances are, one hundred year bonds will default.  There's no reason to believe any economy, on average, has a chance of surviving 100 years.  Look at history.  War, revolution, runaway inflation.  Something gets them.  Then, layer on idiosyncratic risk of individual companies? 

So wait a second, if this is so obvious, why aren't 100 year bonds priced so that they have equity like returns, since they own all the equity downside, and they own that risk, more or less, forever?

As the WSJ says, 100 year bonds in the past have been purchased by insurance companies with very long tail liabilities, (like life insurance.)  These guys should know they're short a put, forever.  Some may, some may not.  In either case their regulators, investors and rating agencies tell them to hold bonds; holding stocks has higher costs, both direct and indirect.  Therefore, even for a worse deal, they're better off holding "inferior" equity that they can legally call a bond rather than holding equity they have to disclose. 

Get it?  Okay, so will someone please give me a 100 year mortgage??  Hmmm...wait...way back in 2007 couldn't we call get our negative amortization option ARMs?  I guess I missed my chance.