When a bond reaps more than 15% returns

Oxford University is planning to increase the size of their 100-year bond issuance.

The Financial Times reported that the university successfully raised GBP750 million (S$1.23 billion) in 2017. This was a period where rates are low and they were able to issue at an interest rate of 2.54 per cent.

This issuance may be priced close to 2.65 per cent and is unsecured. This means that in the case of default, the borrowers will have no recourse over Oxford University's assets.

There are some institutions that are in a unique situation. They can be likened to our Keppel or ST Telemedia. While they may not be a government organisation, their strategic importance gives investors the impression that in case anything, someone would bail them out.

Oxford University happens to be in such a position.

What captured my attention was a crazy price chart of an Austrian EUR3.5 billion (S$5.23 billion) 100-year bond issue. This Austrian bond was issued at a yield closer to 2.3 per cent a year. This is a pretty low rate already. 

The bond trades closer to a prevailing yield of 1.1 per cent. Yields and prices have an inverse relationship, the lower the yield, the higher the price. The price chart is so beautiful.

For those who think 2.3 per cent is overvalued and madness, they probably missed out on a 60 per cent gain in capital value (I take it the bond was issued at par of 100)

Different bonds are sensitive to the movement of the market interest rate. A rough way to measure how much they would move will be their maturity period.

[[nid:474368]]

A bond with 5-year duration will swing around 5 per cent if interest rate swings 1 per cent. A 10-year will swing around 10 per cent. The relationship is not always equal. As the maturity increases the relationship should be more concave, meaning a 20-year bond will swing around 20 per cent but likely less (15-20 per cent range).

So a 100-year bond will have…… some crazy swing. This may make a great trading instrument without leverage lol.

I do wonder in what right mind would I invest in a 98-year bond at a 1.1 per cent yield. It will take like near a century for my family to earn back the money!

This article was first published in Investment Moats.  All content is displayed for general information purposes only and does not constitute professional financial advice.