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?