"I suppose it makes sense to start thinking about funding it now, while Treasury rates are uncommonly low."

Felix Salmon shops 100 Year Bonds, and doesn't seem a buyer:

"Ah yes, Social Security. I remember that; I suppose it makes sense to start thinking about funding it now, while Treasury rates are uncommonly low.

That said, however, I'm not a fan of Fisher's idea. Have a look at David Merkel's list of US government obligations which trade very wide to Treasuries -- and note that the spreads involved are only getting wider. Anything which is illiquid, and anything which needs to be explained, trades at a significant discount. Any century bond would fall into that category -- especially if it had some weird amortizing structure where principal was paid down over the second 50 years."

Leave the spreads to me, and we'll deal with the details later.

"If Fisher had dealt with international rather than domestic finance, he would remember the Brady market, which was full of weird and wonderful sovereign debt instruments, foremost among them the Brazilian C bond. I once, for no particular reason, tried to find out exactly how the C bond was structured, and asked a bunch of people who actually traded it for a living. None of them could tell me. Unsurprisingly, Brazil's plain-vanilla global bonds traded at much tighter spreads than its Brady bonds, and a lot of investment banks made a lot of money in the late 1990s structuring swaps whereby Latin American countries issued new global bonds and bought back the Bradies which nobody wanted or understood."

Come now. How hard can this be? You just tried explaining Senior Tranches and you're worried about simple 100 year bonds?

"The Treasury market has no interest in trading anything clever -- that's one reason why TIPS are trading at such ridiculous levels right now. Investors in Treasuries know what they want, and that's large, liquid issues of bullet bonds at round-number maturities like 10 years. Even the 30-year long bond is out of favor these days."

That's because it's not long enough.

"In any case, Treasury has its hands full these days funding TARP, and whatever stimulus plan is going to be enacted sooner rather than later. Social Security may or may not be a problem in the long term, but it's relatively low on the list of priorities right now."

Hands full with TARP? I've just read the GAO report for the second time, and I can't figure out where their time goes. It certainly isn't spent in planning. I'm not asking them to write Finnegans Wake, just construct a few simple bonds. Perpetuals and 100 Year Bonds. I'll tell you what, they can e-mail me, and I'll write up the proposal for free. William Gross said he'll work for free ( Of course, he's got about a billion dollars more than I do ), and I will as well. Is that fair enough?

Here's my comment:

Posted: Dec 03 2008 3:30pm ET

I'm not having a good day. Last night, I went to bed, and dreamed about perpetuals and 100 year bonds. I'd really like perpetuals, but I'll take 100 years.

So, what do I find today. Two of my favorite blogs, yours and Alphaville, are stabbing be in the back to my face, and, I'll tell, that's not a comfortable position to be in.

So, get on board and start talking these things up. I'm not much of an investor, but I really love the idea of bonds that are a bet on how long I'll live. That's right, I plan on being around to turn these bonds in myself. Even the perpetuals.

By DonthelibertarianDemocrat

" Pity us youngsters if it does. "

I greatly respect Sam Jones, and I'm enamored of Stacy-Marie Ishmael, and usually I'm a big fan of Tracy Alloway, but Alphaville has added another atrocity to their list which began with the Fact/Parody Jinx. No sooner had I called for Perpetuals and 100 year bonds, than these youngsters starting whining about paying my interest in the future:

"Thought a 25-year lock-up was a long-term investment? How about 100 years?

Ok, it’s not quite the same, but BlackRock’s Peter Fisher is recommending the US Treasury start selling 100-year bonds.

His reasoning? From Bloomberg:

“If you issued a 100-year bond and had principal and interest pay down smoothly over the last 50 years, you create a great borrowing device for the Treasury that would let us move this hump of borrowing over the generational retirement that’s coming up,” Fisher, managing director and co-head of fixed income at BlackRock in New York, said in a Bloomberg Radio interview.

Note that these would be different to the war bonds discussed here yesterday. The war bonds, or perpetuals, issued by the British government, have no maturity date — they continue paying coupons forever. Fisher’s bonds, as outlined above, would start really paying out (interest and principal) after 50 years. The US government will have moved the debt burden from one generation to the next.

Will Fisher, currently in his 50s, be around in another 50 years? Probably not. But much of the FT Alphaville team will (hopefully) — possibly still paying taxes, so we’re none too enthused about this particular idea. Mish at Mish’s Global Economic Trend Analysis is not very impressed either:

Sadly, I am confident that many Keynesian and Monetarist currency cranks will be quick to support Fisher’s perpetual motion idea on the grounds ‘we will owe the money to ourselves’ or some other nonsensical reason. In fact, they will probably want to spend the ’savings’ in interest for other proposals. The whole thing makes as much sense as me sticking an IOU in my piggy bank for $1 billion and attempting to spend it."

Of all the nerve. Let's mash Mish, if you don't mind. Her whole line of argument is a mishmash. It's a deucedly fine idea to get people buying bonds and funding the government to pay for its expenses, in a time of zero, I repeat, zero interest. Well, we're almost there. Turns out we've been keeping our powder dry.

"Fisher of course, besides being MD of fixed income at BlackRock, was also Treasury undersecretary from 2001-2003. During that time, he eliminated auctions of 30-year bonds — currently the US’s longest-dated security, to help reduce government borrowing costs following four years of surpluses. Interestingly, the US hasn’t had a surplus since — even after reviving 30-year sales in 2006.

Also of note, is that 100-year bonds have been here before, notably among corporates like Walt Disney, Coca-Cola, Ford and the Canadian Pacific Corporation (which, amazingly, actually did a 1,000-year bond). They’ve been popular too — Ford’s sold out within 25 minutes, according to the Bloomberg story.

So will the Treasury’s be as successful? Yields on shorter-term bonds are collapsing and there’s still a general flight to “safe investments,” suggesting investors –those with a very long-term view– might well look upon the idea favourably. Pity us youngsters if it does. "

Pity us old codgers who believed that the younger generation would appreciate all the sacrifices we've made for it. Running up bubbles just so you could buy the things that the ads told you that you needed.

Here's my comment:

Posted by Don the libertarian Democrat [report]

Firstly, Does anyone know if I can buy Perpetuals?
Second, I want everyone behind this 100 yr bond idea because I want to buy some.
Third, I'd like the Fed to create US Perpetuals, because I'd like to buy some.

Are you all telling me you're more frightened of the future than the generation that was fighting WW I?

By the way, I'd buy them because I plan on sticking around for a very long time indeed. That's why I want Perpetuals.

"BlackRock Inc.’s Peter Fisher said the U.S. Treasury should consider selling 100-year bonds"

I just read this, and, well, I should be working on my novel, but I'm terribly excited. It's not a perpetual, but I'll take. From Bloomberg:

"By Thomas R. Keene and Michael J. Moore

Dec. 2 (Bloomberg) -- BlackRock Inc.’s Peter Fisher said the U.S. Treasury should consider selling 100-year bonds to ease the federal government’s borrowing costs as it faces a budget deficit expected to top $1 trillion.

“If you issued a 100-year bond and had principal and interest pay down smoothly over the last 50 years, you create a great borrowing device for the Treasury that would let us move this hump of borrowing over the generational retirement that’s coming up,” Fisher, managing director and co-head of fixed income at BlackRock in New York, said in a Bloomberg Radio interview."

Please God, yes.

"The Treasury last month tripled its estimate of planned debt sales in the final three months of the year to a record $550 billion as it attempts to fund bailouts for banks and fiscal stimulus programs to jump start economic growth. Treasury Secretary Henry Paulson told a conference in Washington Nov. 17 that the U.S. will issue some $1.5 trillion worth of Treasury securities in the fiscal year that began Oct. 1.

Fisher, Treasury undersecretary from August 2001 to October 2003, eliminated 30-year bond auctions in 2001 to reduce government borrowing costs after four years of federal budget surpluses. The U.S. hasn’t been in the black since. The government revived sales of the security in February 2006.

Treasury yields have plummeted as investors have flocked to the safety of U.S. government debt during the worst financial crisis since the Great Depression. Bonds rallied for a fourth day yesterday, sending yields on two-, 10- and 30-year debt to the lowest since the Treasury began regular sales of the securities."

You've seen the 10 year tumble on the Bespoke Graphs.

"100-Year Bonds

Federal Reserve Chairman Ben S. Bernanke said yesterday that he may use less conventional policies, such as buying Treasury securities, to revive the economy.

The 30-year Treasury bond, the U.S. government’s longest maturity debt, has higher borrowing costs because of the uncertainty caused by a lump-sum payment of the bond’s principal at the maturity date, Fisher said. He said the Treasury would have to eliminate that volatility on a 100-year bond by paying down the principal over time.

In 1993, Walt Disney Co. became the first company since at least 1954 to issue 100-year bonds. In 1997, Ford Motor Co. sold $500 million of 100-year bonds, exploiting a decline in Treasury yields. Demand for the Ford bonds, priced to yield 7.81 percent, was so high that it sold out within 25 minutes of the start of the sale.

“There are a lot of investors, pension funds, endowments, who would love to get a long-term annuity like that,” Fisher said. “They love to get an interest-only stripped off the 30- year, and they’d love to get something even longer. I think there would be a lot of demand from investors for that.”

Okay. Here's the plan:

1) I want to buy 100-year bonds

2) I want to buy British Perpetuals

3) I'm calling, here and now, for US Perpetuals

Who's with me? Or, at least, can anybody tell me if I can buy those British Perpetuals? I want to do my part in defeating The Hun.

"You can’t be forced out further on the yield curve than a perpetual.”

You just never know what you're going to read these days. From Bloomberg:

"By Tom Cahill

Dec. 1 (Bloomberg) -- Hugh Hendry, who oversees about $500 million as co-founder of Ecletica Asset Management in London, said he’s buying World War I debt on the bet the U.K. is due for its worst round of deflation since the Great Depression.

The gilts, known as perpetuals because they have no maturity date, have a coupon of 3.5 percent compared with the U.K.’s 4.5 percent inflation rate. Investors hold about 1.9 billion pounds ($2.9 billion) of the securities that still pay interest 90 years after the end of the Great War, according to the U.K.’s Debt Management Office.

“If you have a deflationary shock, the only instrument that will perform will be government debt,” said Hendry, 39, whose Eclectica Fund returned 38 percent this year, putting it in the top 1 percent of 1,817 funds tracked by Bloomberg. “Inflation is going to be back some day. But forget the next 12 years; it’s the next 12 months that matter.”

Here's a bit on Hendry:

"I antagonise people,' says Hugh Hendry. 'It's part of my skill set.' This single-minded attitude has helped Hendry to develop a successful contrarian investment style. His Odey Continental European fund had an impressive run towards the end of 2002, he decided equities generally 'were just not working' and cut the fund's equity exposure from 100% to 50% with 35% in bonds and 10% in non-European gold stocks. His career got off to a difficult start when he joined Baillie Gifford in 1990 as one of the firm's first non-Oxbridge educated recruits. After four years on the US desk, he fell out with his superior, a Baillie Gifford partner. After a short stint at Credit Suisse, his idiosyncratic talent was spotted by Odey founder Crispin Odey. He spent six years with the group before moving to his current home of Eclectica Asset Management, where he now heads up their European and agriculture mandates."

I bet you guessed that his first quote is going up on my blog somewhere.

Here's a bit on Gilts or Perpetuals:

"Undated gilts

There exist eight undated gilts, which make up a very small amount of the UK government’s domestic debt. These are perpetual bonds. These gilts are very old: some date from the eighteenth century, such as Consols. The largest, War Loan, was issued in the early 20th century. The redemption of these bonds remains at the discretion of the UK government, but because of their age, they all have low coupons, and there is therefore currently little incentive for the government to redeem them. However at the time of writing, the yield on these gilts is higher than the redemption yield on long-dated redeemable gilts, which implies that the market may be pricing in the chance that the government may redeem these gilts at some point. Because the outstanding amounts are relatively very small, there is a very limited market in these gilts."

I agree with him about inflation, but deflation I can't yet credit.

"The Bank of England lowered its benchmark interest rate by 150 basis points last month, its biggest move in 16 years, as the credit crisis pushes the country’s economy into recession. Governor Mervyn King told lawmakers last week that failure to get banks lending again could raise the risk of deflation. As interest rates drop and investors shun risk, even government debt with a low coupon will rise in value, Hendry said.

The five-year breakeven rate, a gauge of inflation expectations as measured by the difference in yield between regular bonds and index-linked debt, has been negative for more than month, suggesting investors are betting a recession will lead to deflation. The gauge fell to minus 102 basis points today; it was at positive 105 basis points at the start of last month."

Shun risk? There exiling it!

"‘Jolly Long Bond’

The “Jolly Long Bond,” as Hendry calls the war loan, will be the most reactive to deflation because not having a maturity means it has long duration, said Charles Diebel, head of European interest-rate strategy at Nomura International Plc in London. A bond with a higher duration will increase more in value than one with a shorter duration for a given decline in yield."

Can you have a higher duration than perpetual?

“His philosophy behind it makes a lot of sense,” Diebel said. “If you have an extended period of time where inflation is not a problem, you get no yield at the front end of the curve and people will be forced out the yield curve. You can’t be forced out further on the yield curve than a perpetual.”

Try me? I love that quote: "You can’t be forced out further on the yield curve than a perpetual.” That's a keeper as well. Calling George Gamow.

"A yield curve is a chart of yields on bonds of a range of maturities. Longer-dated bonds typically yield more than shorter- dated notes to compensate investors for the risk of holding them over time. "

Holding them over time? They're timeless. They're worth their weight in gold. Of course, I suppose the B of E will still need to be around, or somebody else to redeem them. Maybe that's how you price them. You bet on the survivability of the B of E.

"The bonds trade so infrequently Hendry said he bought them for his personal account, rather than for the funds he manages.

“You’d become a bit of a hostage” by holding too much of a rarely traded bond like the perpetual, he said. “Managing a hedge fund means reserving the right to change your mind all the time.”

Maybe he bought them for the hell of it, and decided to get some publicity for doing so. Also, it must be nice to hold perpetual bonds. I'd like to buy some. When people ask me why I bought them, I'll tell them that I plan to be around for a long time.

"The biggest risk to the investment is inflation, which Hendry said ultimately will return because of the actions policymakers are taking today to thaw credit markets. "

I agree with him.

"The U.K. government sold the perpetual in 1917, as British forces deployed tanks at the Battle of Cambrai, to repay loans it had sold since the conflict started in 1914. It marketed the debt with advertisements playing on patriotic sentiment.

“If you cannot fight, you can help your country by investing all you can in 5 percent exchequer bonds,” the advertisements said, according to an account in “The Financiers and the Nation,” by Thomas Johnston. “Unlike the soldier, the investor runs no risk.”

The 1917 notes were first sold with a coupon of 5 percent, a rate Prime Minister Lloyd George regarded as “penal,” according to Johnston’s book, first published in 1934 and republished by Ossian Publishers Ltd. in 1994. Neville Chamberlain, then Chancellor of the Exchequer, cut the coupon payment to 3.5 percent in 1932, where it has remained ever since.

The U.K. is unlikely to call the debt or retire it early because it would have to buy the bonds back at par, Hendry added. The gilts trade at about 78 pence today.

“The vast majority of this is locked up with retail investors,” said Diebel. Were the government to call the loans “they would be taking it away from households, rather than banks,” he added."

I've got to have some.