Not long ago, I paid at an antiques store to buy an old ,000 bond that now hangs, framed, in our office in Scarsdale, N.Y.
The beautifully engraved bond was issued by the Lehigh Valley concluding Railway Company, a newly organized subsidiary of the Lehigh Valley Railroad, on Oct. 1, 1891. It recites that the hasten "acknowledges itself indebted to the bearer hereof in the sum of One Thousand Dollars in gold coin of the United States of America of the gift accepted weight and fineness, of which sum the said enterprise agrees to pay in like gold coin to the bearer" on Oct. 1, 1941.
In other words, this was a 50-year bond. It carried a coupon interest rate of 5 percent, together with that promise to repay principal, in gold coin, a half-century after it was issued.
That promise was never kept. In fact, it could not legally have been. In 1933, one of President Franklin Roosevelt's first acts was to nationalize all American gold holdings. He devalued the dollar by 75 percent and ordered all U.S. Citizens and fellowships to transfer their gold for the paper money that was declared legal tender for all debts, social and private. So, by 1941, the hasten could not have redeemed its bonds for U.S. Gold coin, but only for paper money. It did neither.
Having survived the Great Depression, the hasten apparently did not find itself in a position to retire the bonds. Britain was struggling to hang on against Hitler's Third Reich, and America was shipping Lend-Lease goods for the Allies as fast as they could be hauled and loaded. The bond was extended to 1951.
But it was not repaid in 1951, either. The railroad's key freight business, hauling anthracite coal from the Pennsylvania mines, went into a steep decline after World War Ii. Passenger aid also became unprofitable as travelers took to the new turnpikes in their equally new automobiles. Somehow, the hasten prevailed upon bondholders to grant someone else extension, to 1979.
By 1962 most of the Lehigh's operations had been folded into the Pennsylvania Railroad, which staggered into a 1968 merger with the New York Central to come to be the Penn Central. The Penn Central itself went bust in 1976, when the federal government combined it with five smaller lines to form Conrail. By that time, my bond's only value was decorative.
If you think this tale is just a bit of quaint economic history that has no relevance today, note that hasten titan Norfolk Southern Corp. Recently sold 0 million worth of 100-year bonds with a 6 percent interest rate. The enterprise had originally planned to sell only 0 million of the bonds, but investors were so eager to hand money over to the hasten for a century that it decided to growth the size of the offering.
Although they have enjoyed occasional periods of itsybitsy popularity, century bonds are rare. The last time an American enterprise offered such long-term bonds was in 2005, when Norfolk Southern sold an earlier round of 0 million in century bonds.(1)
There is a good reason why these bonds are so uncommon: A hundred years is a long time. As my old bond demonstrates, even half that span brought world-changing events that nobody could have imagined in 1891, along with two global wars, an unprecedented depression, the rise of totalitarianism and the outlawing of gold currency.
Why would anyone want to lend money for a century? And, especially, why would anyone today lend money for 100 years to a railroad, a 19th-century enterprise that will need to survive well into the 22nd century to repay the debt?
To be fair, railroads remain the most effective means of engaging bulky, heavy freight across long distances over land. Warren Buffet's 2009 decision to regain Burlington Northern Santa Fe (like Norfolk Southern, one of the country's four major transcontinental lines) for billion was, if not wise, at least not irrational. But Buffet bought an whole railroad. Norfolk Southern's bondholders are merely buying a 100-year promise.
Even if the hasten manufactures remains strong, the fates of personel railroads can rise and fall. Railroads, after all, are prisoners of their route systems. When economic growth shifts to new geographic areas, the hasten can't just pick up its tracks and corollary the customers. Betting on a definite hasten for an extended time, therefore, carries extreme risk. The largest railroads are counting on their geographic reach to diversify this risk. But, of course, even the largest North American railroads are mainly confined to one country. If economic activity moves overseas, the railroads can do itsybitsy to make up for the lost business.
In the gift low-interest-rate environment, fellowships have good reason to lock in long-term financing. They must pay a itsybitsy extra to investors compared with short-term financing, but they do not need to worry about having to refinance the debt later when rates might be less favorable. Nofolk Southern spokesman Robin Chapman explained: "We decided to reopen these 100-year bonds based on the current low interest rates and the strong appetite among buyers for them."
That "strong appetite" basically shows that bond buyers are, at present, delusional. They are chasing high yields in today's low-yield environment, heedless of all the economic, prestige and interest rate risk (these bonds' values will plunge when rates rise) they are assuming. Because those risks are not factors today, bond buyers are convincing themselves they will not arise in the future - even though, over a century's time, they genuinely will. Investors foolishly persuade themselves that a single company's 100-year promise is less risky than a diversified basket of stocks. Many of these investors are pension funds and assurance fellowships that are, absurdly, pretending that a 100-year bond aligns well with their own cash needs over the next two to seven decades.
They won't even get a pretty wall hanging to show for it. Contemporary bonds are issued in "book entry" form, existing only as bytes of data. No gorgeous engravings. No 119-year old piece of paper to remind future investors of all the things that are going to change, even if today's investors want to imagine that the 22nd century will look just like the 21st.
Source:
(1) Beacon Equity Research: Century Bond Alive and Well As Norfolk Southern Prepares to Issue the First Since 2005
A 100-Year Promise (Picture Frame Not Included)