Fear, Greed, and 100-Year Bonds

Is market getting too risky?

Photo: Victor Hanacek. Source: Pikjumbo

Market averages are hitting records. Stocks have tripled from their lows of just six years ago. Crazy things seem to be happening: burger chain IPOs are doubling out of the gate, and Brazilian oil-producer Petrobras—of Operation Car Wash infamy—just issued a 100 year bond. Think about that: 100 years ago buggy whips were a steady business, and railroads were high-tech. 100 years from now who knows what we’ll be using to power our smart cars, much less what the price of oil will be? And will anyone even remember what Petrobras was?

Are these the signs of excess and froth that herald the end of a bull market? Legendary investor Sir John Templeton said that bull markets are born in pessimism and die on euphoria. Well March of 2009 was a pretty pessimistic time. And 100-year Petrobras bonds seem euphoric. Or are they?

The Petrobras bonds were priced to yield 8.5%, 5% more than 30-year Treasuries. This implies a 50% chance of default. By contrast, in the late ‘90s retailer JC Penney issued 100 year bonds that yielded less than 1% more than long Treasuries. These were priced with a 7% chance of loss. Clearly, those bonds were overpriced. Now they yield 1% more than the new Petrobras issue.

Just because the market is high doesn’t mean it can’t go higher. In many ways, this market seems fairly valued. There are some signs of exuberance today. But I can’t say that it’s irrational. Yet.


Douglas R. Tengdin, CFA
Chief Investment Officer
Phone: 603-224-1350
Leave a comment if you have any questions—I read them all!

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