Alphabet’s £1bn 100 year tranche, priced on Tueday, was more than just an eye-catching bit of funding. The note will affect the market's perception of the tech industry’s AI spending drive and where we may be in the economic cycle.
A century is a potent length of time for the human imagination, far longer than most lifetimes, though maybe not for much longer if some of Southern California's more hubristic tech bros are to be believed. The appearance of 100 year bonds from time to time captures the attention as comets once did in the night sky — sources of wonder but also perhaps portents of doom.
That kind of duration means a borrower has locked in financing for far longer than any realistic concern about refinancing risk; in fact whoever executed it, will almost certainly never see it mature.
It should also be borne in mind that Google, the origin of Alphabet, is only 27 years old and the average lifespan of an S&P 500 company is, according to EY, 15 years.
This illustrates that century bonds are also a signalling device highlighting moments in market cycles.
For one, the ability of any borrower to issue a bond this long signals confidence, or perhaps hubris and investor desperation.
It shows that an issuer can attract unusual market attention and has the ability to persuade investors to jump into the unknown with something hard to model accurately and in which a given move in rates will have a big effect on price compared to everything else in the portfolio.
The Aa2/AA+ rated Alphabet had no problem convincing investors on its £5.5bn multi-tranche offering on Tuesday, not to mention the Sfr3bn it priced the same day and the $20bn from Monday. Its sterling sale was the largest non-Gilt deal in the currency, attracting the largest order book on outside of UK government bonds, with combined demand of just under £30bn.
This was the signal that hyperscalers can count on bond investors' overwhelming support, for the time being. And while it may be a stretch to say they all believe Alphabet will be around in 100 years' time, they certainly believe they will be able to sell the bond later on to someone who does within a tolerable risk limit.
Turn of a century
Century bonds also tell us something about investors' opinions of their own holdings as well as the credits within them.
The bargain they strike with an issuer, of being promised repayment of capital so far into an unknowable future, suggests a yearning for yield, or trading profit — a shorter term view of the direction of interest rates.
Some investors, of course, have specific long-term investment needs, like insurance companies and the sterling market has a shortage of long-dated credit assets. Alphabet’s 100 year tranche was a rarity, though it was neither the first century bond, nor the first in the currency.
Previous century bonds tell us something about the conditions that typically drive thier issuance.
Deals from Mexico and the University of Oxford, for example, were from institutions that as well as any seem likely to stand the test of time and prove good for the money. Mexico has been an independent sovereign for more than 200 years, while students have been taught at Oxford since 1096.
Unlike Alphabet's deal, which comes as interest rates descend from a recent peak, other century bonds have arrived while interest rates were low and investors had to find new ways to meet return targets.
In euros, the trend began private placements from issuers like the French national train operator SNCF, but also Ireland and Belgium.
Austria and the German federal state of North Rhine-Westphalia (Land NRW) went public with the idea in 2017 and 2019 respectively, with the former borrowing €3.5bn for 100 years at a yield of 2.112%. To show how cheap that funding looks now, the coupon on its 10 year bond from last month was 3.5%.
These bonds symbolised investors’ desperation for yield when unnatural rates, suppressed by deliberately accomodative central bank monetary policy, forced them to seek duration.
Land NRW, the most industrialised German state, has issued four 100 year bonds, the latest of which came in 2022. That date is significant — its ability to run on cheap Russian energy vanished after the invasion of Ukraine, and of course interest rates ballooned shortly afterwards as central banks fought the resulting inflation driven by rising energy costs.
Century bonds offered investors and issuers a solution but they also arrived before the top of economic cycles.
Such bonds can signal the top of a credit cycle too. While brandishing highly unusual triple-A ratings for a bank, Rabobank issued a dollar century bond and a 50 year sterling one between July and September of 2010. But as the contagion of the global financial crisis spread, bank downgrades followed and S&P dropped Rabo down from AAA in November 2011 for the first time since 1981.
Turn of a cycle
Alphabet’s century bond comes at a pivotal time for the company and the world economy surrounding the impact of AI and the capital expenditure that hyperscalers believe they need to raise so much money for to develop it. Many believe the hyperscalers and their AI involvement represent an investment bubble.
It also comes amid seemingly unabating demand for fixed income assets. This demand has compressed credit spreads to either outright record lows, or levels not seen since before the global financial crisis of 2008.
So far, bond investors are playing along with the hyperscalers' vision of the future economy and clearly do not believe interest rates will rise any time soon.
But although the unwavering confidence in Alphabet’s debt signals that the bond bull market is here to stay, the real question is for how long?
A century is a long time and the extreme convexity of a 100 year bond means it can inflict sharp pain on those holding it should interest rates notch up even a little during the bond’s life. This could have repercussions on investors, similar to what happened in the euro market to holders of century bonds there.
Rising interest rates have inflicted sharp pain of the sort that holders of Austria’s 2.1% 2117s that have owned line since they bought it in the primary market have surely felt. Issued at a slight discount to par to yield 2.112%, the bonds were bid on Wednesday at a price of 58.60, or a yield of 3.68%, according to Tradeweb.
Credit spreads may still move tighter. And looking at the unsatisfied near-£10bn demand for the £1bn 100 year Alphabet tranche, there may still be eager buyers.
But as one senior banker scolded at the time of Austria's century bond, buying 100 year bonds is “taking short term performance over long term prudence” adding that investors were acting in the hope of a swift price rise because “they know they won’t be around to face the consequences of doing so”.
History tells us that cycles change, and sometimes not that long after the 100 year bonds begin to appear.