Would You Buy US Debt That Matures in 100 Years?

Investing

Published: August 17, 2019 9:30 am

Last Updated: January 11, 2020 4:47 am

Several media report that the U.S. Treasury Office of Debt Management has started to consider whether the government should issue 50-year and 100-year bonds. Treasury Secretary Mnuchin confirmed this. Although the primary target of these bonds would be institutions, individuals could buy debt that would outlive them.

100-year debt is often issued by troubled nations, such as Argentina, which may default on its debt soon, based on an analysis by credit agency Fitch. These bonds have become poison to investors who fear a default, and they trade for pennies on the dollar. However, Austria issued 100-year bonds in 2017. They carry a yield of 1.17% and have been attractive to bond buyers.

Some large corporations have issued 100-year bonds, including Walt Disney and Coca-Cola. Companies have the right to pay off this debt sooner, so, from a practical standpoint, they may not be 100-year bonds at all.

Institutions buy the bonds to get long-term yield as a hedge against yields of 10-year and 30-year bonds. Investors also need to take the risk that corporations, and nations, will be around in 100 years. If not, the principal of the bonds could be lost, probably decades from now.

Among the reasons the Treasury may issue the bonds is to extend the period over which the United States would need to pay its massive debt, which stands well above $15 trillion. The Economist wrote about the need for extended-period bonds:

How can governments borrow most cheaply? The answer matters hugely for taxpayers. Take America: it has $14trn in outstanding national debt, fully three-quarters of GDP. Interest payments alone are expected to reach $280bn this fiscal year—ie, more than three times the combined budgets of the Departments of Education, Labour and Commerce.

A 100-year bond may cost the government much less than a bond issued during a period of inflation when the payout may need to be well above what it pays now. Currently, 10-year Treasuries yield 1.6%.

Individuals who buy 100-year bonds may do so as a means to pass the safe debt to their children and grandchildren. Otherwise, it is hard to imagine a reason to do so.