Would You Buy a 100-Year Bond?

Government bonds have stood as a reliable long-term investment for decades, but the idea of “long-term” investing may be taken to a new extreme soon. In early February 2010, the Treasury Borrowing Advisory Committee (TBAC) announced the Fed is considering issuing bonds that mature as far out as 100 years. Well, it isn’t hard to figure out that the odds of outliving a maturity date that far off are slim-to-none.

Why would the Fed consider issuing a bond with a 100-year maturation date and why would anyone even consider purchasing this type of bond?

T-Bonds Are Attractive for Investors

Many investors are attracted to Treasury bonds (T-bonds) because they are generally less risky than stocks. In fact, they are considered to be one of the safest investments because they are backed by the U.S. Government and typically have a very slim risk of default.

These government bonds come with interest rates that are fixed and if you hold them to maturity, you will receive the face value plus two predetermined coupons paid semi-annually that promise a decent return on your investment.

There’s no doubt T-bonds make investing in bonds attractive, but the idea of stretching the bond maturation date out 100 years is another thing altogether.

Why the Fed is Considering Longer-Term Bonds

Currently, the longest T-bonds available for purchase mature in 30 years. So why would the Fed consider selling even longer-term bonds?

According to the TBAC, the bonds would not necessarily be marketed to individual investors. Instead, the Fed would look to issue these 100-year bonds to institutions like banks, insurance companies, pension funds and maybe even retail investors.

The Treasury says by issuing these bonds, it could possibly tap into $2.4 trillion of latent demand that could come in handy during a time when economists expect the U.S. to outspend its means by about $3.5 trillion.

The TBAC believes issuing longer bonds could be a smart move, especially if sold to asset managers who are most concerned with matching their assets with their liabilities.

Governments in France and the U.K. have already started issuing 50-year bonds. While not as long a term as the 100-year bond, the TBAC believes the U.S. might be able to follow the same path.

Is it Worth It to Purchase a 100-Year Bond?

Believe it or not, this is not the first time that 100-year bonds have been considered in the bond market. Both Coca-Cola and Walt Disney Company have issued these bonds in the past and they actually worked reasonably well because they contained an option that allowed the debt issuer to partially or fully repay the debt long before the scheduled maturity.

In the case of Walt Disney’s bonds, which were issued in 1993, they were supposed to mature in 2093. However, since the company can start repaying the bonds any time after 30 years, bond holders can actually start receiving payments as early as 2023.

Depending on the goal of purchasing the bond, long-term bonds could be beneficial. They could be used to lengthen the duration of bond portfolios, especially if the investor is looking to fulfill certain duration-based goals.

If you want to pass down investments you know could be valuable over the next several decades, you might consider buying these bonds as gifts for children. Of course, there are benefits of purchasing short-term bonds as well, so it’s good to learn more about how bonds work before buying either type.