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Some thoughts on a 100 year bond… From a country that perpetually defaults

How did Argentina pull off a 100-year bond sale?

The sale of a 100-year bond by any entity should raise some eyebrows. After all, we can’t even accurately forecast five years from now. But as this article points out, it is obvious this is a pure investment play by big asset managers. They need yield and price appreciation to show clients they are doing a great job. This 100-year bond solves both of these problems.

The probability of another default in the next five years is a left tail risk. Thus, investors will get an almost 8% coupon per year and a high probability of significant price appreciation. There are at least two reasons for this: 1) Argentina yields are meaningfully higher than other Latin American countries (so they will come down) and 2) as Argentina improves its fiscal mess, the credit quality will increase and yields will come down. Both of those trends will give investors significant capital gains on the bonds. After five years, let’s say, they can sell these bonds after collecting about 8% per year and a significant capital gain on their original investment. Long story short, nobody will hold these bonds for 100 years. They will bounce around from firm to firm based on how asset managers view emerging markets. For the time being, most asset managers believe emerging markets are the place to invest. I for one believe there is far too much corruption in the emerging countries to make a compelling investment thesis. Not to mention, the trend of immigration is from emerging countries to developed nations (which indicates to me that the citizens of these countries have lost all hope). Until this is resolved (if ever?), the emerging nations will be problematic for investors.

Categories: Uncategorized

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