You hear a lot about how much debt there is in the world, but here’s a warning. If you think it can’t go higher, you might have to reconsider.
With interest rates so low, the carrot of debt is dangling in front of everyone to take it on. For example, over in the UK, the University College London has just taken out the biggest loan in British university history.
These are some major debt issues happening. And the maturities seem to be stretching ever longer periods, too.
Today we’re looking at some of the recent deals, pondering how long it can last. A lot of that depends on interest rates.
And one man believes that interest rates could stay relatively low for a very, very long time to come…
Long-term debt at low rates could run for a long time
You don’t have to go very far to see maturities stretching out in action. The Australian Financial Review reports this morning that Prime Minister Turnbull’s government wants to cash in on low interest rates to ramp up borrowing.
That’s for building infrastructure around the country. That’s apparently with private investors ‘riding shotgun on the Commonwealth’s AAA balance sheet’.
But here’s the interesting part within the context of today’s discussion. This so-called ‘crack team’ of Turnbull’s is apparently pushing the Treasury Department to issue Commonwealth bonds as far out as 30 years.
Here’s the key quote: ‘That would allow the government to tap huge global demand for highly-rated investments that have already driven down the current interest bill on a 20-year bond to 3.14 per cent.’
There is no doubt the demand is there. And in a world with negative interest rates, any yield is beginning to look tempting.
And if you think 30 years might be a long time to invest in (Australian) debt, check out the recent news from Europe.
The Financial Times reports that Belgium has recently issued a rare ‘centennial’ bond. This has come after Ireland issued 100-year paper last month as well.
These were private deals brokered through investment banks. But the Financial Times says the coupon on the Belgian debt is 2.3% a year until 2116.
We can also note that France issued a 50-year bond paying just 1.9% recently.
These haven’t been completely limited to government as borrowers either. In fact the biggest deal of all was Brazilian energy firm Petrobas, borrowing US$2.5 billion for 100 years.
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It was only a few years ago when many, many commentators said that the central bank money printing would drive interest rates sky high. I believed it myself for a time. They’ve gone nowhere but down basically the entire time.
They’ve even gone negative. Who could have imagined such a thing then?
Why would any investor accept such low returns (indeed, if any)? That’s the question hanging over this discussion. There can only really be two reasons for this.
Either the market is pricing in very low inflation for a very long time to come. Or the pension funds and insurers who buy this type of debt don’t have much choice.
They have to get yield from somewhere to match their liabilities.
Negative rates around the world make that much more difficult. But there are also regulatory hurdles and risks that mean they often have to buy bonds regardless of the rate of return.
The world of finance is going topsy-turvy
Because fixed income investors often have billions of dollars in cash to invest, their credit policies can mean they can’t simply leave it in the bank. It’s too much counterpart risk if the bank fails.
Government bond are at least nominally secure, in the sense that the central banks can always print the money to pay them off.
It’s interesting to note that one fixed income manager sees the ‘Japanification’ of Europe. The Australian Financial Review reported on bond investor Guy Cameron on April 19.
He argues that Europe is showing the same symptoms that lead to Japan’s stagnation: weak banks, low inflation expectations and weak growth. For him that means, ‘bond rates are going to linger at their ultra low levels.’
With oil and gas still at historically low levels, inflation could stay subdued for a long time to come. My colleague Phillip J Anderson says there’s enough evidence around to suggest that interest rates could stay (relatively) low for the entire 21st century.
This is one reason why, over at Cycles, Trends and Forecasts, we keep saying things are on track for the biggest boom of all time. Because all this debt feeds into asset prices.
The debts keeps ratcheting up and up. It’s all part of the set up. By the time the central banks try to reign it in, it will be too late. It’s a question of timing. Go here for more on that.
Associate Editor, Cycles, Trends and Forecasts
Ed note: This article was originally published in Money Morning.