Investing isn’t so tough, the world is saying. Take my money … please!
That’s what the tone seems to be today. Forget credit risk. Forget inflation risk. Forget about geopolitical, technological, or even criminal issues. Investors are competing to lend money for 30 years or longer if they find a Aaa counterparty.
Recently the University of Virginia came to market with a taxable issue that matures in 2040. They borrowed $190 million at 4.9% to build dorms, improve labs, and expand the hospital. The bonds aren’t even obligations of the University—just secured by its revenues, along with a Federal subsidy.
Now I have the highest regard for the university President Jefferson founded. But this is nuts. The school runs a chronic operating deficit of about $250 million a year; only income from their $2.5 billion endowment and state appropriations plugs the hole. It may seem like $190 million 30-year borrowing is chump change, especially when the Feds are paying part of the interest. But 4.9%?
Let’s do a thought experiment. Long term growth is 2%, because of the “new normal.” Inflation is 2%, because that’s the Fed’s target. Short term rates should be 3%; 30-year Treasury bonds 5%. Why lend money to a school that can only pay its bills because of state aid for 30 years at the same rate?
I’ll tell you why: too much cash chasing too few investments. Today marquee names like UVA are issuing bonds. Tomorrow will we see the next sub-prime? Or will it be different next time?
Douglas R. Tengdin, CFA
Chief Investment Officer
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