When a Bond Gives Equity Like Returns…
Oxford University is planning to increase the size of their 100-year bond issuance.
The Financial Times reported that the university successfully raised 750 million pounds in 2017. This was a period where rates are low and they were able to issue at an interest rate of 2.54%.
This issuance may be priced close to 2.65% and is unsecured. This means that in the case of default, the borrowers will have no recourse over Oxford University’s assets.
There are some institutions that are in a unique situation. They can be likened to our Keppel or ST Telemedia. While they may not be a government organization, their strategic importance gives investors the impression that in case anything, someone would bail them out.
Oxford University happens to be in such a position.
What captured my attention was a crazy price chart of an Austrian 3.5 billion 100-year bond issue. This Austrian bond was issued at a yield closer to 2.3% a year. This is a pretty low rate already.
The bond trades closer to a prevailing yield of 1.1%. The price chart is so beautiful.
For those who think 2.3% is overvalued and madness, they probably missed out on a 60% gain in capital value (I take it the bond was issued at par of 100)
Different bonds are sensitive to the movement of the market interest rate. A rough way to measure how much they would move will be their maturity period.
A bond with 5-year duration will swing around 5% if interest rate swings 1%. A 10-year will swing around 10%. The relationship is not always equal. As the maturity increases the relationship should be more concave, meaning a 20-year bond will swing around 20% but likely less (15-20% range).
So a 100-year bond will have…… some crazy swing. This may make a great trading instrument without leverage lol.
I do wonder in what right mind would I invest in a 98-year bond at a 1.1% yield. It will take like near a century for my family to earn back the money!
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