Governments and companies around the world are borrowing
cash they won't have to repay for at least three decades, seizing upon this
year's unexpected fall in interest rates to lock in cheap financing for as long
as possible. 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. 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.
The sales of so-called ultralong bonds represent a small
corner of global financing markets, but fears that rates will soon rise have
drawn several borrowers to the market. Investors such as pension funds and
insurance companies are the main buyers, gobbling up the bonds to help match up
payment obligations down the road with funds they will collect far in the
future.
The fervor is surprising at a time when investors are
anxious the Federal Reserve is inching closer to raising interest rates as the
U.S. economy grows, ending almost seven years of a nearly zero-rate policy.
When rates rise, the value of longer-term bonds typically falls because newer
debt is issued at higher yields, which is typically more attractive to
investors.
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.
The sales also come as the pool of long-term bonds available
for investors has been shrinking. The Fed, through its bond-buying stimulus program,
has been buying most of the newly issued long-term Treasury bonds since the
start of 2013.
While many investors are downbeat about buying bonds with
yields near record lows, the rise of ultralong bonds shows some observers
believe the market will prove resilient. The yield on the 30-year U.S. Treasury
bond was 3.279% late Tuesday, down from 3.97% at the beginning of January.
U.S. Treasury bonds maturing in 20 years or more have posted
a total return of 14.4% this year through Monday, according to data from Barclays PLC.
That is much higher than the 2.89% return from the overall Treasury debt
market. Total return in bonds includes price appreciation and interest
payments.
There are more ultralong bonds in the pipeline. The
U.S. has asked large banks whether it should consider selling ultralong bonds.
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