skip navigation

Blog

Stay up to date on timely topics and market events. Subscribe to our Blog now.

CREDIT
December 16, 2019

Our Great Grandchildren Will See These Bonds Mature

By Alex Warren, Alan Nadel, PhD

Stay up to date on timely topics and market events. Subscribe to our Blog now.

Are we about to witness a new generation of bond issuance that will take a full century to mature? The concept of a bond that matures in 100 years is challenging for many US investors to comprehend, with perhaps the exception of life insurers. Until the last few years, the number of fixed-income securities in the US with maturities longer than 30 years has been limited, prompting many institutional investors with long time horizons to allocate elsewhere. However, the low interest rate environment since the financial crisis has prompted a number of high quality universities, hospitals and corporations to issue “ultra-long” bonds, with maturities of 50-100 years. For example, last month we saw a taxable bond issued with ratings of Aa3/AA- (Moody’s/S&P) and a maturity date in 2119.

While insurers fret about low rates and the flat shape of the yield curve, ultra-long issuance may actually be a boon for some life insurers. New ultra-long issues may offer the following benefits:

  • Attractive regulatory capital charge: Issues are typically investment-grade rated (NAIC 1 and 2) so they have a lower risk-based capital charge.
  • Higher yield than US Treasury (UST) STRIPS: Ultra-long issues would offer yields higher than typical UST STRIPS.
  • Familiarity: Issuers are those that most US life insurers are already familiar with due to large muni and corporate general account portfolios.
  • Convexity: The higher convexity of these bonds could help to hedge long-dated insurance business lines, such as long-term care policies. Using a sample long-dated liability cash flow stream, you see large cash flows that go past the traditional 30-year bond issue window. While only representing 4% of present market value, our analysis suggests a combination of 100-year securities, and UST STRIPS does a better job hedging the sample cash flows past 30 years than does a STRIP alone.

Exhibit 1: Comparison of Ultra-Long New Issue vs. UST Principal STRIP
Explore the comparison of Ultra-Long New Issue vs. UST Principal STRIP
Source: Bloomberg. As of 5 Dec 2019. Select the image to expand the view.

It remains to be seen if ultra-long bond issuance will continue to gain steam in the US. In fact, the US Department of the Treasury is currently researching the topic to determine if it will issue ultra-long bonds itself. The Treasury solicited feedback from market participants this August, as it also did so in 2017. No determination has yet been made but if ultra-long issues from the government and private issuers do become more commonplace, it may be a silver lining for life insurers in today’s low rate environment.

Exhibit 2: Sample Long Duration Liability Cash Flow Stream
Explore the projected annual cash flows.
Source: Western Asset. As of 31 Oct 19. Select the image to expand the view.
© Western Asset Management Company, LLC 2020. This publication is the property of Western Asset and is intended for the sole use of its clients, consultants, and other intended recipients. It should not be forwarded to any other person. Contents herein should be treated as confidential and proprietary information. This material may not be reproduced or used in any form or medium without express written permission.
Past results are not indicative of future investment results. This publication is for informational purposes only and reflects the current opinions of Western Asset. Information contained herein is believed to be accurate, but cannot be guaranteed. Opinions represented are not intended as an offer or solicitation with respect to the purchase or sale of any security and are subject to change without notice. Statements in this material should not be considered investment advice. Employees and/or clients of Western Asset may have a position in the securities mentioned. This publication has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information, you should consider its appropriateness having regard to your objectives, financial situation or needs. It is your responsibility to be aware of and observe the applicable laws and regulations of your country of residence.
Western Asset Management Company Distribuidora de Títulos e Valores Mobiliários Limitada is authorised and regulated by Comissão de Valores Mobiliários and Banco Central do Brasil. Western Asset Management Company Pty Ltd ABN 41 117 767 923 is the holder of the Australian Financial Services Licence 303160. Western Asset Management Company Pte. Ltd. Co. Reg. No. 200007692R is a holder of a Capital Markets Services Licence for fund management and regulated by the Monetary Authority of Singapore. Western Asset Management Company Ltd is a registered Financial Instruments Business Operator and regulated by the Financial Services Agency of Japan. Western Asset Management Company Limited is authorised and regulated by the Financial Conduct Authority (“FCA”). This communication is intended for distribution to Professional Clients only if deemed to be a financial promotion in the UK and EEA countries as defined by the FCA or MiFID II rules.