It may have escaped the attention of many an investor, but last week, in the fixed income space, a somewhat remarkable bond auction took place. I cannot help but be amazed at the lengths some investors will go to, in order to obtain an income in the current low yielding market environment, where a Sovereign lender with a long and extensive history of defaults that only returned to the capital markets 14 months after its last failure can issue a 100 year bond and, incredibly, be oversubscribed. Renowned for the quality of its diminutive footballers – Maradona and Messi, its Malbec grape and the quality of its steaks – the country in question? Argentina of course.
The US$2.75 billion tranche (denominated in US dollars) was issued with a coupon of 7.125% and was priced for investors to receive a yield of circa 8% – as mentioned above; the issue was subsequently oversubscribed with total orders of US$9.75 billion.
It is not the first time a country or a company for that matter (Coca-Cola, Walt Disney for example) has issued a 100-year bond; both Ireland and Belgium have issued in the past and Mexico, was the first Latin American country to do so, in 2010. Where this particular bond issue differs from its predecessors, however, is that all the issuers in the past, not without their own economic problems of course, were rated as investment grade on issue, whereas Argentina is firmly in the junk or speculative category (currently rated single B). Though the country has stabilised somewhat under the leadership of President Macri and is undergoing various market-friendly reforms, it is astonishing (to me at least) that investors would loan money to a country that has seen a great amount of turmoil in the past and that investors seemingly believe the debt won’t be defaulted upon before June 28, 2117.
For me, a major concern is that one of the primary buyers of the bonds were pension funds, where historically, in an effort to match future liabilities, investing has principally been through (perceived) safer, longer duration investments, displaying stable, predictable return characteristics. Conventionally this has been through property and long-dated developed market government bonds. Now, however, due to an unwelcome combination of shifting demographics and a period of ultra-low interest rates, many of these pension funds have seen their deficits (a measure of how much their liabilities exceed their assets) increase substantially in the last few years. As such, some pension fund managers have been forced into increasing risk by obtaining higher yielding (and lower quality) assets.
As Albert Einstein is famously alleged to have said, “the definition of insanity is doing something over and over again and expecting a different result”. I am sure that I am not alone in thinking that Investing in a country as historically volatile as Argentina has been in the last century – it defaulted in 1930, 1955, 1976,1989, 2001 and 2014! – and expecting to be repaid in full in 100 years is not a sensible proposition. Nevertheless, what it does highlight is the never ending hunt for yield in an increasingly yield-starved investment landscape. I am not sure how this one will play out, but I am happy to be on the sidelines of this particular investment.
The Hunt for Yield Intensifies