By William Ehart of InvestorPlace
is quite interesting right now. With savvy investors already declaring a bubble in the bond market, what should investors make of this week's return of the 100-year bond?
Norfolk Southern Corp.
sold $250 million in 100-year bonds on Monday, reopening a $300 million, 6% debt issue the company sold in 2005. Demand was strong enough that Norfolk Southern boosted the sale from the $100 million originally planned. The bond yield is about 1 percentage point more than investors are receiving on the company's outstanding 30-year bonds and about 2.5 percentage points above 30-year Treasuries, which soared on Tuesday, driving their yield down to 3.56%.
Investors' insatiable appetite for bonds and especially Treasuries -- driven by fears of a double-dip recession -- makes the 100-year bond possible.
It's a great deal for issuing companies to lock in long-term financing. Norfolk Southern said it would use the proceeds for general corporate purposes. But buyers of the bonds have to wonder whether inflation and interest rates might not soar at some point in the next century and whether even the most solid companies will still be around for that long.
With massive global deficits, surging gold and the Federal Reserve's pedal-to-the-metal policy keeping interest rates near zero, the prospect that we may be due for a spike in inflation is very real.
It's not a decision most individual investors will have to make. The century bonds are typically gobbled up by insurance companies and pension funds looking to balance their assets with their long-term liabilities. Century bonds don't trade much on the secondary market and therefore are illiquid.
But bond and stock investors need to be aware of what this portends for the financial markets and the merits of investing in stocks or bonds now. For instance, stalwart consumer products and health-care giant Johnson & Johnson recently issued $1.1 billion in bonds, including 10-year bonds yielding 2.95%, the lowest corporate rate on record. The dividend yield on the company's common stock is 3.70%. You do the math.
So, are bonds today's dot coms?
Wharton Professor Jeremy Siegel, author of "Stocks for the Long Run", made that assertion just last week in the
Wall Street Journal
Noting that 10-year Treasury Inflation-Protected Securities now yield less than 1%, Siegel said, "This means that this bond, like its tech counterparts a decade ago, is currently selling at more than 100 times its projected payout.
"...Those who are now crowding into bonds and bond funds are courting disaster," he concluded, warning of potential capital losses.
Siegel also pointed out that Treasury yields have not been this low since 1955. For 10 years after that, their return barely kept up with inflation, he said. Over the ensuing 30 years, Treasury returns failed to keep pace with inflation.
Siegel isn't alone.
reported, based on a regulatory filing in early August, that billionaire investor
had shortened the duration of bonds held by his
holding company. Buffett has warned that deficit spending -- or "greenback emissions" -- could cause higher inflation.
's Bill Miller wrote in July, "U.S. large capitalization stocks represent a once in a lifetime opportunity in my opinion to buy the best quality companies in the world at bargain prices. The last time they were this cheap relative to bonds was 1951."
Bond king Bill Gross said in June that "bonds have seen their best days" and that stocks looks better now (though he doesn't think stock returns will be as high as investors became accustomed to in recent decades).
On the other hand, perhaps investors are correctly signaling bad times ahead for the U.S. economy. Recent data, such as existing-home sales and jobless claims, certainly paints a gloomy picture.
Further, 100-year bonds have been sold before, back in the 1990s and early 2000s. Companies that have issued them in the past include
Burlington Northern Santa Fe
But bond investors should keep in mind John Maynard Keynes' famous observation -- speaking about long-term investing -- "In the long run, we are all dead."
What does it mean that investors are lapping up bonds that won't mature until after they are long dead?
It may mean that it is time, as Prof. Siegel said, that we turn our attention to dividend-paying stocks -- rather than bonds.
Yes, for the long run.