Oh-laaa-laaaa!

Was very happy when I saw Google doing the century bond shit last month (#1430666, #1434288) since I've been writing on occasion about these sorts of topics now and again (#945143)

My jam, alright!

background:

Century bonds are exactly what they sound like: a bond, often issued by a government or a long-lived institution like a university, that runs for a hundred years, often at interest rates somewhat above prevailing market rates or reference rates. For the issuer, they make a ton of sense, generationally and actuarially: They receive funds for investments right now, lock in financing costs for a long time, and face no financing rollover risk.

Relevance:

With Alphabet/Google’s placements in November, and now its Swiss franc and sterling placements, it’s the first time a big tech company has dared to come back to this perilous market since the 1990s.
What’s so odd about this hunger for long duration is that in the 2010s and during the pre-inflation pandemic years, at least bond investors collectively were starved for yield, ready to do anything to eke out a few extra basis points of return. In 2026, there are still positive yields to be had. The mystery, then, is not why Google issued but why investors rushed in.

The $20-billion USD placement finalized at treasury yields+95 bps, while the GBP bond of £5.5, about $7.5 billion, placed at 120 basis points above gilts; the £1 billion century bond was ten times oversubscribed, according to Reuters, and carries a coupon of 6.125 percent until 2126. With the fairly recent history of century bond investors burning obscene amounts of money on mistaken duration bets, the question remains:

CONUNDRUM:

"Why were these long-maturity debt placements massively oversubscribed, at rate spreads of only about a hundred basis points above safe assets?""Why were these long-maturity debt placements massively oversubscribed, at rate spreads of only about a hundred basis points above safe assets?"

1. "defined-benefit pension funds are extremely hungry for long-dated debt." Explains why the issuance was in London (and Switzerland)
2. Capital efficiency of a peculiar kind:

"the large embedded rate-leverage is kind of capital efficient. Bond funds don’t buy individual issuances in isolation, but compose a portfolio with a combined desired outcome, constantly micromanaging exposure and duration vis-à-vis a benchmark index"

3. Short memories/extreeeeme trust in the low-rate monetary regime

this time is different and bond investors have inflation fatigue. Many might just believe that what happened during the pandemic was a once-in-a-generation one-off event and that central bankers will do better going forward. If inflation settles back near its more usual two to three percent, or indeed rates fall back toward zero in an easy/easier monetary policy regime, locking in long real duration today at slightly higher rates might look clever rather than reckless.

"Investors got the memo about AI capacity building needs, loud and clear. With collective bond market amnesia, that was about the only meaningful bit they took away.""Investors got the memo about AI capacity building needs, loud and clear. With collective bond market amnesia, that was about the only meaningful bit they took away."