Investors, Issuers Plan for 2112 With 'Century Bonds'
NEW YORK ( TheStreet) -- Investors are starting to make trades that prepare themselves for the 22nd century amid uncertainty about the U.S. economy, the direction of interest rates and the sustainability of once mighty industries.
Will railroads, Coca Cola (KO) drinks, Disney(DIS) features and IBM(IBM) IT systems be around when the 21st century draws to a close? Previous investor bets on those companies' bonds that expire at the end of the century say "yes."
Top U.S. colleges like the University of Pennsylvania are using current market worries to plan for a century of needs by selling 100-year bonds at what may amount to the cheapest financings in history. While retirement and college savers may find little benefit in those bonds, understanding the market for them may clear the air on how to navigate the investing risks that linger after the crisis.
|University of Pennsylvania takes a look at "century bonds"
In March, the University of Pennsylvania sold $300 million in bonds that expire in 2112 at what may be a cheap financing for the record books. The bonds carry an interest rate of 4.674%, roughly 1.5% above the 30-year U.S. Treasury bond and less than a previous 100-year bond sold by the California Institute of Technology at an interest rate of 4.744% in November, which the school said was the lowest ever rate at the time.
In fact, for the University of Pennsylvania, the bond may one day be seen as a money maker. The university's Treasurer Stephen D. Golding calculates that if UPenn were to return 6% annually on its endowment for the next 100-years, slightly beating the 5.3% annual return of the Dow Jones Industrial Average during the 20th century, it would need to set aside just $884,168 to repay the $300 million borrowing - near-free money, when excluding interest payments.
But Golding and prospective buyers of UPenn's 100-year debt don't see it that way. Instead, they see a recent surge in "century bonds" as a way to make plans that resolve financial challenges far beyond the current uncertainty over whether a 2012 stock surge and signs of economic recovery mark an end to a 30-year bull market in bonds.
"I think we are in an aberration right now," says Golding of current interest rates that put the 10-year U.S. Treasury yield at just 2%. After watching peer institutions like Tufts University , Ohio State University and the University of Southern California take advantage of low rates to finance expenditures, Golding says UPenn entered the "century bond" market to invest in hard to fund building modernization and energy efficiency projects that will yield cost savings.
Still, Golding downplays the notion that UPenn caught a historic low yield, which may make the borrowing virtually free. "It's not about trying to time the market, but trying to catch the market in a general condition that makes sense from a cost of capital perspective."