A 50 year bond is bad news for investors

I haven’t been alive for 50 years.  I can’t imagine locking myself into an investment product for that long.  Apparently some Canadians, namely institutional investors don’t feel the same.

According to one recent report, our government has successfully sold $1.5 billion in 50-year Government of Canada bonds to take advantage of historic, dirt-low interest rates to get some money.  According to the same report I read, the debt will mature on December 1, 2064 at an interest rate just shy of 3%.  Previously, our longest government bond was a 30-year term at a rate of 2.94%.   This means over government just basically gained twenty (20) interest-free years.  While this is great deal for our government I think this 50-year bond issue signals bad news for all investors for a few reasons:

  • While $1.5 billion purchased was gobbled-up by big pension funds and insurance companies, this signals to me that growth prospects over the next few decades might be meagre.
  • Low bond yields could create a perverse incentive for our government to spend money instead of paying down our debt.  I suppose time will tell if they do the right thing.  For a fun (and depressing fact) did you know that every man, woman and child in our country owes about $20,000 for their share of our debt?
  • The Bank of Canada could always print some money to repay our national debt but this would reduce the value of our money and interest rates would climb.  We might start solving one problem only to create a few other new ones.
  • Over the next 50 years, inflation could run much higher at times than the 2.96% this bond will yield.  In other words, this bond could be big time loser to inflation.

As our national debt increases so does the interest payments to service it.  It’s like a line of credit some folks keep piling on.  The more money needed for debt payments, the more money needed through revenues to pay for any government expenses.   For future generations, this news story will probably not have a happy ending.

What’s your take on our 50-year government bond?

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19 Responses to "A 50 year bond is bad news for investors"

  1. For institutional investors, 50 years bonds are a great news. Insurance companies for example often have “known” (at least in expected value) future liabilities that are not really affected by inflation. A 50 years bond allows them to get a known amount in 50 years, a 30 years bond followed by the purchase of a 20 years bond does not as they do not know the interest rate the 20 years bond will have at the time of purchase.
    30 years or 50 years bonds don’t really change the incentive on the government, in 30 years most of the politicians will be long gone from politics.
    As for the Bank of Canada printing money, well they can do that with or without 50 years bonds anyways so I don’t really see how this is relevant to the issue.

    Reply
    1. Hey Leo,

      I think 50-year bonds is good from the perspective that the investor gets his/her known amount. The premise of a bond.

      The incentive of the government is good, raise money, on the cheap for the next 50 years. The incentive for the investor is what I don’t get. I could see inflation running 2-3% (because of Boomer spending, other factors) for the next 20 years. Just a guess of course. This means the investor (of this 50-year bond) is essentially making zero money over that time.

      I wouldn’t touch it but maybe insurance companies are using it as a big hedge for more fat loans themselves? I would like to understand more their motivation…if you find something let me know 🙂

      Reply
      1. First of all, as I wrote, some future expenses may not be inflation related (for example on a whole life insurance, the death benefit does not grow) so there is no reason to protect themselves against the inflation.
        Also, depending on the type of assets held and how much they could be affected by interest rate changes (as I said, holding a 50 years bond instead of 30 years makes you immune to the interest rate in 30 years), the insurance company may need to hold more or less capital (minimum continuing capital and surplus requirements). Holding a 50 years bond at only 3% can help them free capital for investors.

        Reply
  2. Interesting stuff. And I agree with your assessments. I would not touch this product either.

    There’s one point I would like to make though:
    There is a chance that buying this bond could work out for the buyer.

    A few years ago I read about historic inflation rates, and was completely surprised about it.
    Yes, in the 20th century (and 21th so far), it’s pretty much all inflation.
    But did you know that in the 1800s, most of the years saw deflation? (!)
    In the 19th century, deflation was the norm, and inflation was the exception.

    Whoa! If that were to happen in the next 50 yrs, then a bond paying interest would be a blessing. It could happen, as the inflation is close to zero. Also see Japan.

    Reply
    1. I did not know about the 1800s Bram, so thanks for that.

      Do you see deflation as a real possibility in Canada’s financial future? Deflation seems to be a rather simple problem to prevent, print money, increase supply therefore get people to spend. I find it hard to believe consumer spending will be an issue going forward. It’s certainly not an issue now.

      The Boomers are arguably the wealthiest generation in our history, and the generation that likes to spend money the most.

      Thoughts?

      Reply
      1. I agree it is unlikely for Canada.
        But it happened to Japan.
        I don’t know much about JP economy.
        All I know it had an aging population and constant deflation.
        If they are related Canada could be better off due to immigration keeping population young? Yes, printing money should be easy fix, but somehow it did not work or it was not practiced in Japan.

        Reply
        1. “Yes, printing money should be easy fix…”

          Should be….I think that’s the thing…we don’t know eh Bram?

          I would think inflation is more of a risk vs. deflation in the years to come…but as always, time will tell.

          What’s your vote?

          Reply
  3. Governments issue bonds completely independent of if they are running a deficit or surplus. Even if the country had no debt and was running surpluses, it would still be wise for the government to issue debt. Don’t confuse people with institutions or companies.

    With companies and governments the most prudent course of action can be to have some debt. The question is, is it sustainable or not.

    Incidentally, Canada has the lowest Debt/GDP of the developed world.

    Cheers

    Reply
    1. I don’t have the numbers in front of me right now, but is it possible they do not count the provincial debt when calculating that ratio for Canada? Remember that many countries in Europe will not have debt on the provincial/regional level (or at least not nearly as high as Canada). And then there’s municipal debt, crown corporations debts, hospital and school debts, etc.

      Reply
      1. I thought municipalities in Canada could not run a deficit or debt?

        I thought municipalities can take on debt to fund large-scale infrastructure projects but that’s about it…?

        Reply
  4. Agreed. Terrible for investors but great tool for the government to raise money on the cheap.
    Matt’s comment above captures it well – that it doesnt matter if theres a deficit or surplus, the government always independently issues debt and raises money.

    regards
    R2R

    Reply
  5. With that rate, my 100grand will be worth $247000 in 50 years ($100,000 + $147,000 interest). And an average house will cost $3M. And I’ll be dead. 🙁

    And don’t get me started on the fact that interest is taxed at a much less favourable rate than dividends…

    Reply
  6. A 50 year bond may make sense from 2 perspectives for the Government. 1) Cheap Debt and 2) The value of unclaimed/matured Canada Savings Bonds sitting in the Bank of Canada already exceeds $420 Million so the possibility of Canadians losing track of a 50 year bond I would imagine would be even higher. Sad but true. Sorry I’m sarcastic but advocating for Unclaimed Intangible Property Legislation across the Land is exhausting,.

    Reply

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