Argentinas Century-Long Bond

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What's going on?

Argentina is planning to borrow US dollars from investors for 100 years! (tweet this)

What does this mean?

Many countries, particularly those in emerging markets, borrow money in both their own currency (e.g. pesos) and in developed-market currencies, like the US dollar (they do so by issuing bonds that must be paid back after a set number of years in this case, 100 years). Any country borrowing in a currency that it does not control could fail to re-pay the bond (whereas, if necessary, the Argentine government can create money in its own currency to pay its debt). This introduces a big risk for investors, for which they are typically compensated with a relatively high interest rate. Argentinas 100-year bonds, for example, offer investors about 8% per year in interest, which is much more than standard US government bonds.

Why should I care?

For markets: Emerging market debt is a very popular investment right now.

Argentina has defaulted on its debt (i.e. failed to pay it back) seven times in the past 200 years. The fact that there is demand from investors for a 100-year bond from Argentina, a serial defaulter, shows how willing investors are to lend money to countries in emerging markets. With interest rates so low in developed markets, more and more investment has moved to emerging markets and, in response, those governments are issuing more bonds.


The bigger picture: The United States might follow Argentinas lead

Currently, there is no US government bond that lasts more than 30 years. However, officials from the Trump Administration are discussing issuing an American 100-year bond. They argue that locking in todays low interest rates is a good thing for Americas finances (in other words, America might as well borrow for a long time given the low interest rates on offer today). Whether it actually happens is another question (The UK, by the way, already has a 100-year bond). The natural buyers of such a bond include long-term investors like your pension fund.

Originally posted as part of the Finimize daily email.

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