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This week, like Mexico years ago, the Argentinean government issued 100-year bonds. That’s right, they issued debt that they don’t have to payoff for 100 years. Who’d buy such very long-term debt? And why? Quite a few folks, as it turns out. Argentina’s 100-year paper was over-subscribed by 3.5X, and offered a yield of 7.9%. Compared to U.S. corporate CCC-rated paper default risk and recovery rates, maybe it’s not such a great deal (see chart below which shows current, higher CCC yields). Even though Argentina is considered B-rated today, just a couple of years ago it was CCC. Has that much changed in so short a period to warrant making a 100-year bet? I don’t think so.
What makes this more interesting, is that Argentina is a country that’s defaulted multiples times throughout recent and distant economic history. Why would so many investors be that excited to loan money to a country with such a terrible track-record? One thought is that there’s a broad enthusiasm for Latin America getting more competitive with Asia. Similarities can be drawn to the US and UK getting more competitive with Continental Europe. Greater competitive trade begets more capitalism which begets more economic growth. And, with greater economic growth comes stability and the probability of default decreases.
Another attractive idea is that an 8% yield means that if Argentina can make it 12 years before defaulting again, at least investors will get their money back. But, I’d take my chances on global equities delivering a much higher total return after 10 years with less risk of permanent capital loss. This is precisely what Argentina was hoping global investors would not conclude, given the risk, time horizon, and total return forecasts. They instead found a very hungry market.
So, let’s jump on this band-wagon! I’ve been advocating for U.S. 100-year bonds in these Equities.com articles for some time, and prior to Treasury Secretary Mnuchin’s mention of it publicly. He’s increased the rhetoric, now is the time to pounce. Use long-dated debt to match long-dated liabilities like Social Security and Medicare. Both programs are trillions of dollars under-funded. I bet the U.S. could sellout hundreds of billions issuing 4.0% yield on 100-year bonds. This would make a solid down payment on funded entitlements.