Issuing 50 to 100-Year Bonds
Journal of Applied Finance, Spring 2012
11 Pages Posted: 9 Jan 2012 Last revised: 5 Mar 2012
Date Written: January 9, 2012
In 2010-2011, investment-grade borrowers such as the California Institute of Technology (Caltech), Norfolk Southern Corporation, Rabobank Netherlands, United Mexican States (UMS), the Massachusetts Institute of Technology (MIT), and the University of Southern California issued 100-year bonds with no call provisions; and the Tennessee Valley Authority (TVA) issued a 50-year bond with no call provisions. AAA-rated TVA’s 50-year bond, and BBB-rated UMS’s 100-year bond had coupons of 4.625%, and 6.125%, respectively. Also in the same period, Goldman Sachs twice issued 50-year bonds with attractively-priced five-year call provisions, as the retail market traditionally under prices bond call options. Similar to Goldman Sachs, Telephone and Data Systems Inc, and its subsidiary United States Cellular Corp issued retail-targeted 49 NC-5s (non-calls) with attractively priced call provisions. The confluence of record-low 30-year Treasury yields and relatively tight corporate spreads are among the factors driving the issuance of bonds with 50 to 100-year maturities. The market for 50- and 100-year bonds (ultra-long, or super-long bonds) was invigorated in 1992 and 1993 by the: first-of-its-kind deal-of-the-year TVA 50 NC-20 (50-year non-call 20), Texaco 50 NC-20, Boeing 50 NC-L (non-call life), Walt Disney 100 NC-30, and Coca Cola 100 NC-L bonds. Typically, asset-liability managers such as insurance companies buy ultra-long bonds to match the duration of their assets and liabilities. The duration and, thus, the quarterly mark-to-market sensitivity of such bonds are only marginally higher than 30-year bonds. Asset managers may also buy ultra-long bonds to mitigate the negative convexity of their mortgage portfolios. Therefore, even small amounts of additional yield may tend to compensate investors for the incremental risks that they undertake.
Keywords: super-long bonds, liability management, corporate finance, fixed income
JEL Classification: G30, G39
Suggested Citation: Suggested Citation