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When a Bond Gives Equity Like Returns…

Oxford University is planning to increase the size of their 100-year bond issuance.

The Financial Times reported that the university successfully raised 750 million pounds in 2017. This was a period where rates are low and they were able to issue at an interest rate of 2.54%.

This issuance may be priced close to 2.65% and is unsecured. This means that in the case of default, the borrowers will have no recourse over Oxford University’s assets.

There are some institutions that are in a unique situation. They can be likened to our Keppel or ST Telemedia. While they may not be a government organization, their strategic importance gives investors the impression that in case anything, someone would bail them out.

Oxford University happens to be in such a position.

What captured my attention was a crazy price chart of an Austrian 3.5 billion 100-year bond issue. This Austrian bond was issued at a yield closer to 2.3% a year. This is a pretty low rate already.

The price change since issuance

The bond trades closer to a prevailing yield of 1.1%. The price chart is so beautiful.

For those who think 2.3% is overvalued and madness, they probably missed out on a 60% gain in capital value (I take it the bond was issued at par of 100)

Different bonds are sensitive to the movement of the market interest rate. A rough way to measure how much they would move will be their maturity period.

A bond with 5-year duration will swing around 5% if interest rate swings 1%. A 10-year will swing around 10%. The relationship is not always equal. As the maturity increases the relationship should be more concave, meaning a 20-year bond will swing around 20% but likely less (15-20% range).

So a 100-year bond will have…… some crazy swing. This may make a great trading instrument without leverage lol.

I do wonder in what right mind would I invest in a 98-year bond at a 1.1% yield. It will take like near a century for my family to earn back the money!

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Tuesday 21st of January 2020

Obviously not planning to hold 100 years but buying to flip in short term.

On another note, many euro gov bonds has 0 or -ve rate, thus making the many +ve yeild asset very attractive. Euro REIT such as CNNU has huge spread which I don't totally understand how this is happening. I imagine the yield on these REITs should go down as more people chase these assets?


Tuesday 21st of January 2020

Mostly it's the institutions, insurance funds, endowment funds that need to allocate some percentage to these low-yield IG bonds.

The very good returns over the last couple years, especially in Europe, is thanks to NIRP. I think nobody could predict back in 2017 the extent &duration of -ve yields. Even European junk bonds hit -ve yields for a time in 2019.

Europe is trying to dial out of NIRP --- that's why you see the Austrian century bond dropping from over 200 to 160 in the chart.

But who knows? Maybe another big European or global crisis in 1 year or 2 will drive it back over 200 & higher.

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