Our low interest rate environment may offer opportunity for long term bond investors, or does it? In a recent Bloomberg article regarding recent and large bond offerings, I couldn’t help but notice the mammoth size sale recently sold to fund VISA and their acquisition of VISA Europe. In the scheme of thing, it seems like an ordinary business move, and it probably is.
What caught my eye was the long term interest rate offered for those wishing to commit to a 30 year bond hold. The sales pitch was quite simple, VISA is offering more interest than similar bonds being offered by the US Treasury. VISA offered 4.3% for 30 years which is a premium over Treasuries of 1.32%.
Sounds good to me, you? Actually I think it is a frightening issue when you consider the relationship to bonds and general interest rates. For the past 8 years, we have had very low interest rates available, now as of December, the Federal Reserve is finally loosing up the rates and allowing a ¼% increase in the discount rate. If that is a clear indication of where we are heading then any person holding long term bonds would see their valuation decrease if for some reason they sold their bonds prior to maturity.
Remember that there is a relationship between enforce bond value with general interest rates. When general interest rates increase, the value of a bond will decrease and vice versa. If you could look into the future over the next 30 years would you not think interest rates might increase?
Why do people commit for such a long term when there are so many other possibilities. One that I favor is a 5 year multi-year guarantee annuity. It is not considered a long term investment and the interest rate is fixed and guaranteed. While annuity products vary from state to state and company to company, generally today, 3.5% interest can be found with just a little looking.
If you could earn 3.5% for a full 5 years, why would you ever commit to 30 years for 4.3%? It is a mystery to me.
The VISA bond offering wasn’t even the biggest this past year, AT&T raised $17.5 billion, Actavis PLC raised $21.2 billion and AbbVie raised $16.6 billion. Just think about that volume of money committed for long term.
Here is a quote from the Bloomberg article: “Visa bonds are prime candidates for long-term buy and hold portfolios.”
I am sure a bond guru would be able to calm my fears, but not really. It is not a reason of risk from bond default; I have no concerns that VISA and the others can meet any obligation for which they are committed. It is the longevity of it that I find disturbing when so many solid and risk free options are available….such as annuities.
Here is a link to the Bloomberg article if you are interested: http://bloomberg.finanza.repubblica.it/Notizie/Article?documentKey=1376-NYZQD16K50Y801-5R8SU97BE4NGG3K3B20G34E1RE