Friday, February 18, 2005

Back on January 19, Brad Setser warned us to "Prepare for the 50 year Treasury bond ...", accompanied with the claim
No way any private investor would fund a project with such an uncertain long-term payoff -- at least not without a government guarantee. Imagine the prospectus. We have no clue what the world will look like in 2055, but it is safe to assume it won't look much like what we say it will look like �
Well, it looks like the French are going to put Brad's words to the test.
France on Friday announced it would became the first Group of Seven industrialised country to issue 50-year bonds. . . .

France�s decision to go ahead with the ultra long bond could sway other eurozone governments to follow suit. Germany and the UK have said they are considering whether to begin issuing ever longer-dated bonds. Currently, 30-year bonds form the outer end of the benchmark yield curve . . .

Yields on long bonds have recently fallen sharply, making this an opportune time to issue such paper.
Clearly with long bond prices so low, governments are looking to lock in these prices. But who is going to buy a 50-year bond? The FT article seems to suggest that pension funds and insurance companies will be the primary market.

Do I hear offers on a 75-year bond? How about 100? It seems the world is convinced -- or France is convinced that the world is convinced -- that inflation is gone forever. A mighty risky assumption indeed.

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