Would you buy a bond that will only mature after you're long gone?
The latest Treasury Borrowing Advisory Committee meeting included discussion of issuing ultra-long bonds with maturities from 40 years to as long as 100 years. This ultra-long Treasury bond discussion follows actual issues of such bonds in the corporate bond market last year. Last summer, Norfolk Southern (NYSE: NSC) sold bonds that won't mature until 2105. Goldman Sachs (NYSE: GS) followed in October with a 50-year bond issue.
Long-dated bonds are available on the market, but they aren't very common. A search at FINRA.org for bonds maturing 50 to 100 years in the future turned up about 130 corporate bond issues and almost 60 municipal issues. One bond issued by the federally owned Tennessee Valley Authority comes due in 2060.
Even though ultra-long Treasuries may never be issued, the prospect does have some takeaways for investors. Few individual investors have investment horizons stretching out over a century, so ultra-long maturity bonds are typically sold to institutional investors with long time horizons. Even though most individuals would not be interested in owning these bonds, there are at least two reasons they should be interested in the very long end of the bond market.
First, if corporations increase issues and if the U.S. Treasury starts selling very long bonds in significant amounts, they'll extend the average maturity of bond indexes. That would push the maturity out for exchange-traded funds such as Vanguard Total Bond Market (NYSE: BND), iShares Barclays Aggregate Bond (NYSE: AGG), and other funds that track those indexes. A longer maturity makes the fund more sensitive to interest rate changes. That's not necessarily a problem, but it is something investors should be aware of.
Next, and more important, longer issues are a signal that smart money wants to lock in interest rates while they're low. Even if the Treasury doesn't issue any ultra-long paper, it already wants to increase the average maturity of debt outstanding. The Treasury Borrowing Advisory Committee minutes pointed out that long bonds would be "consistent with Treasury's goal to continue to extend the average maturity of outstanding debt."
There's only one likely reason a major railroad, an investment bank, and the U.S. Treasury are all moving toward longer-term debt. They want to lock in before rates head higher.
What's your opinion? Are rates done climbing or are they headed higher? Tell us in the comments box below.
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