Would You Buy a Bond That Outlives You?

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United States Treasury (EE Savings) Bond - Horizontal Close-Up
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By Jenny Cosgrave

Why would anyone want to buy a bond that last longer than they do?

These ultra-long-dated assets fell out of favor in the fallout from the financial crisis, as investors shifted to shorter-duration bonds to protect them against unpredictable spikes in interest rates. But now the "century bond" is returning to prick investor interest.

Canada has become the latest to sell long-dated debt, with its auction of 50-year bonds. At the sale of bonds maturing in 2064 earlier this week, the Canadian government doubled the minimum target size of the sale, raising $1.36 billion.

Century bonds tend to be issued by governments and well-established companies, but both have to pay a premium to investors over a 30-year bond, which tends to the longest dated debt available from most firms.

Recently issued century bonds currently pay yields of around 6 percent, making them attractive to some yield-hungry investors, as interest rates are currently at historical lows.

This compares to 10-year U.S. government paper, currently yielding 2.66 percent, while interest rates on 30-year U.S. debt sit at 3.47 percent. But the risk that the value of an ultra-long dated asset will diminish as interest rates rise over time, remains.

%VIRTUAL-article-sponsoredlinks%Demand for long-dated debt is usually from institutional investors, such as pension funds, which aim to lock in long-term returns. However, fund managers are growing increasingly interested in century bonds following the issuance of a 100-year sterling denominated bond from Mexico last month and a 100-year bond sale from electric utility group EDF in January.

EDF became the first company to sell such debt in the U.S. in more than two years according to data firm Dealogic, offering $700 million in 100 year bonds at a yield of 6.1 percent. The Mexican century bond sale raised £1 billion ($1.68 billion) selling bonds at a yield of 5.75 percent.

Coca-Cola (KO) and Walt Disney (DIS) also issued century bonds in the 1990s, with yields at around 7.5 percent.

Richard Woolnough, fund manager at M&G who manages four funds overseeing over $43 billion, has also recently added both the Mexican government bond and the EDF bond to his funds but said it was not as simple as "we like ultra-longs".

"It very much depends on the issuer and we're only happy taking the duration risk if we think pricing is attractive. The EDF bond is a good example, where it came at a spread of 260bps over gilts, which we thought was cheap," Woolnough told CNBC.

Not all managers are so keen. In his latest investment update, Pimco bond star Bill Gross advised investors to stay away from longer dated bonds and has been recommending shorter-maturity debt for a number of months as a way of alleviating interest rate sensitivity in portfolios.

Pimco has suffered severe outflows last month, with the Total Return Fund (BOND) -- the largest bond fund in the world with $232 billion in assets under management -- underperformed 94 percent of its competitors in March, according to Morningstar (MORN).

But investment grade bond fund manager Euan McNeil said ultra-long dated debt had been "extremely beneficial" for the fund's performance so far this year. McNeil added the EDF bond to his fund, making it one of its largest holdings.

"As the first 100-year sterling deal to come to market, we felt there was an attractive new issue premium for investors," he said in an investment update.

Would You Buy a Bond That Outlives You?
"Your daily habits and routines are the reason you got into this mess," writes Trent Hamm, founder of TheSimpleDollar.com. "Spend some time thinking about how you spend money each day, each week and each month." Do you really need your daily latte? Can you bring your lunch to work instead of buying it four times a week? Ask yourself: What can I change without sacrificing my lifestyle too much? 
Remove all credit cards from your wallet and leave them at home when you go shopping, advises WiseBread contributor Sabah Karimi. “Even if you earn cash back or other rewards with credit card purchases, stop spending with your credit cards until you have your finances under control,” she writes.
If you do a lot of online shopping at one retailer, you may have stored your credit card information on the site to make the checkout process easier. But that also makes it easier to charge items you don't need. So clear that information. "If you’re paying for a recurring service, use a debit card issued from a major credit card service linked to your checking account," Hamm writes.  
Reward yourself when you reach debt payoff goals. "The only way to completely pay off your credit card debt is to keep at it, and to do that, you must keep yourself motivated," Bakke writes. Just make sure to reward yourself within reason. For example, instead of a weeklong vacation, plan a weekend camping trip. "If you aim to reduce your credit card debt from $10,000 to $5,000 in two months," Bakke writes, "give yourself more than a pat on the back." 
“Establish a budget,” writes Money Crashers contributor David Bakke. “If you don't scale back your spending, you'll dig yourself into a deeper hole." You can use personal finance tools like Mint.com, or make your own Excel spreadsheet that includes your monthly income and expenses. Then scrutinize those budget categories to see where you can cut costs.    
Sort your credit card interest rates from highest to lowest, then tackle the card with the highest rate first. "By paying off the balance with the highest interest first, you increase your payment on the credit card with the highest annual percentage rate while continuing to make the minimum payment on the rest of your credit cards," writes Mint.com spokeswoman Hitha Prabhakar.
To make a dent in your debt, you need to pay more than the minimum balance on your credit card statements each month. "Paying the minimum -– usually 2 to 3 percent of the outstanding balance -– only prolongs a debt payoff strategy," Prabhakar writes. "Strengthen your commitment to pay everything off by making weekly, instead of monthly, payments." Or if your minimum payment is $100, try doubling it and paying off $200 or more. 
If you have a high-interest card with a balance that you’re confident you can pay off in a few months, Hamm recommends moving the debt to a card that offers a zero-interest balance transfer. "You’ll need to pay off the debt before the balance transfer expires, or else you’re often hit with a much higher interest rate," he warns. "If you do it carefully, you can save hundreds on interest this way."
Have any birthday gifts or old wedding presents collecting dust in your closet? Look for items you can sell on eBay or Craigslist. "Do some research to make sure you list these items at a fair and reasonable price," Karimi writes. “Take quality photos, and write an attention-grabbing headline and description to sell the item as quickly as possible." Any profits from sales should go toward your debt. 
If you receive a job bonus around the holidays or during the year, allocate that money toward your debt payoff plan. "Avoid the temptation to spend that bonus on a vacation or other luxury purchase," Karimi writes. It’s more important to fix your financial situation than own the latest designer bag.
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