Don’t Be a Rate Pig: Watch Your Maturities

Here’s a slap for the rate pigs out there.

What’s a rate pig, you say? It’s someone who looks only at the coupon or yield on a bond or another income investment. If it’s the highest they can find, they buy it and ignore maturity and the quality of the underlying fundamentals. They’re looking just for big income numbers.

Well, those of you who follow me in The Oxford Income Letter or Oxford Bond Advantage know I make a big deal about maturities, and for good reasons. The shorter a bond’s maturity, the less it will fluctuate in value when rates move against you.

And it is the fluctuations in investments – all investments, not just bonds – that drive almost all losses.

So imagine my surprise when, last year, Argentina issued a 100-year maturity bond. Then take a guess at who, of all people, bought it like crazy: the big boys, including Fidelity, BlackRock, Lazard and Invesco PowerShares.

Let’s start at the top. Argentina has defaulted on its debt six times in the last 100 years. So you bet on it for the next 100 years? Really?

One of the other reasons I never buy long-maturity bonds – no longer than seven years – is inflation. The longer you have your money out there, the bigger the bite inflation takes.

How much buying power do you think you can lose on a 100-year bond? How’s all but $59.31 of each $1,000 per bond sound?

Yes, in 100 years, $1,000 (the denomination most bonds are sold in) will be worth around $59.31.

How does this deal sound so far? Amazing, right?

But here’s where it gets really dumb. The French government, almost 300 years ago, issued a bond that would pay interest as long as an heir was still living. And guess what?

As the French say, voilà, we have a winner. Marie Verrier and her husband are direct descendants of an obscure 18th-century lawyer who bought one of these bonds. And yes, they’re still owed interest on it.

I don’t know who’s dumber: the people who bought that kind of bond or the government that issued it. The interest due, after inflation and currency and government changes that have taken place since the 1700s, is – drumroll please – about the cost of one baguette per year.

The interest due is estimated to be worth, in today’s currency, about 1.2 euros per year. I wasn’t exaggerating when I said to keep your bond maturities short.

But back to the Argentinian bond. Knowing now what you do about bonds, inflation over time and Argentina’s debt history, can someone please tell me why the big boys of the money world bought a 100-year maturity bond?

Anyone? No, me either.

Watch your money. Obviously, some of the folks being paid to do it for you aren’t doing a very good job of it.

Good investing,

Steve