We have all heard complaints about how lonely it is being a portfolio manager. Good decisions are celebrated by the team, but bad decisions seem to be made alone. Not that it was a bad week in credit – everything was just fine. Spreads were perhaps a touch weaker, but excess returns are still positive for the month, interest rates are cooperating, and market tone feels pretty good.
This is probably what paved the way for about $45 billion in investment grade supply, and investment grade sovereign issuers added another $8 billion. One of the notable issuers last week was EDF (Electricité de France), which globally brought over $12 billion in supply, of which about $6 billion was in US Dollars. Among the bonds issued was a new 100 year bond – the 7% of 2114. Now that is credit risk worth thinking about.
In the late 1990s, there was a spate of 100 year issuance, and some of the credits have fared better than others. Fox America (formerly NewsCorp) has improved somewhat since issuance in 1996. JCPenney, on the other hand, has sunk from being a solid, single-A rated company to a CCC company. From a credit standpoint, this underscores the perils of underwriting a bond for such extended periods. How, exactly, do you evaluate 100 years of credit risk?
The answer may be – you don’t. Beyond a certain period of time, we think insight into business fundamentals grows a bit foggy. Even so, these bonds can still make a lot of sense from a portfolio standpoint, particularly if you are hedging long duration liabilities. The duration of a 100 year bond is not much longer than that of a 30 year bond, but you generally get a lot more convexity, so you should outperform as interest rate volatility increases.
All that convexity should really make you feel better when credit quality tanks. There’s no way around it, buying a 100 year bond introduces loneliness that could be handed down from generation to generation.