A Spike in Interest Rates and the Bond Market

A spike in interest rates can have significant consequences for the bond market, often leading to high-profile busts. The bank blowups from last spring serve as a prime example. However, amidst the chaos, it is worth exploring whether there have been any success stories in the upcycle.

The Other Side of the Trade

Behind every trade, there is always someone benefiting. Consider your annoying neighbor who constantly brags about securing a 30-year fixed-rate mortgage at 2.65% in early 2021. She proudly reminds you that this rate is an all-time low, dating back to April 1971 according to St. Louis Fed data.

Undeniably, she deserves her moment of triumph. Yet, are there larger success stories beyond refinancing an $850,000 Tudor? What about colleges and universities that recently sold century bonds? While it will take approximately 90 years to truly assess their success, some of these institutions may end up faring remarkably well.

The Rise of Century Bonds

For institutions with long time horizons, century bonds, which mature over 100 years, can potentially prove advantageous. The first of these bonds in the modern era emerged from the corporate sector in 1993 when Walt Disney sold $300 million worth, humorously dubbed "Sleeping Beauties" by some due to their longevity. These bonds offered a yield of 7.55%.

Preserving Confidence for the Future

Although the outcomes of investing in century bonds are uncertain until far into the future, institutions with long-term goals may find them a compelling choice. While the allure of a 100-year maturity period may not be for everyone, those who dare to embrace it may ultimately join the ranks of successful bond investors.

Conclusion

In the world of bonds, success is not solely restricted to refinancing deals. As interest rates fluctuate, institutions like colleges and universities have ventured into century bonds, hoping to secure a promising future. Only time will tell whether these endeavors will pay off, but for now, they remain a fascinating alternative in the ever-changing landscape of the bond market.

Investing in Education: The Rise of Century Bonds

Yale, being the pioneering institution, made headlines in 1996 by selling $125 million worth of century bonds with a coupon rate of 7.375%. This move was not surprising, considering that David Swensen, the visionary responsible for Yale's endowment, was at the helm. Following in Yale's footsteps, the Massachusetts Institute of Technology entered the fray in 2011, offering $750 million of bonds with a more favorable coupon rate of 5.6%. The trend soon caught on, with Ohio State, the University of Southern California, and the California Institute of Technology all joining the century-bond club. Surprisingly, this long-term investment strategy appeals to both prestigious brainiac-driven institutions and those more focused on football prowess. Even smaller New England colleges like Bowdoin, Wesleyan, and Tufts have joined this elite group as interest rates continue to decline.

Jessica Wood, senior director and education sector lead at S&P Global, states that there are currently approximately 15 to 20 schools that have issued century bonds. She notes that the majority of these institutions tend to have higher credit ratings. For those universities, locking in an interest rate for a century can prove beneficial. However, it is important to consider the other side of the coin. Many university management teams express reluctance to issue century bonds due to the potential challenges it may pose for future administrations.

In conclusion, century bonds have emerged as an intriguing investment opportunity for educational institutions. Though some choose to embrace their long-term advantages, others shy away from potential future complications. Ultimately, the decision lies with each university's management team and their long-term financial strategies.

The University of Virginia: A Remarkable Achievement

The University of Virginia has achieved an outstanding feat in the financial market. In 2019, they successfully sold $300 million worth of Centuries at a remarkably low coupon rate of 3.23%. This makes it the lowest coupon rate among all the issues rated by S&P. Additionally, it surpasses Disney's record from 26 years ago by an impressive margin of 432 basis points.

It seems that the experts at the University of Virginia, based in Charlottesville, have truly excelled in their financial strategy. If their success continues, it might not be long before we hear echoes of celebratory chants, like "Wa-Hoo-Wa!" resounding even after 96 years.

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