Alphabet's 100-year sterling bond has fallen below 90 pence on the secondary market for the first time since it was issued. The decline highlights the brutal math of duration risk in a rising interest rate environment.
The Bond's Journey
Issued in 2020, the $1 billion bond was a landmark deal — one of the longest-dated corporate bonds ever sold. At the time, investors hungry for yield snapped it up, and the bond traded above par for much of its early life. But the tide turned as central banks began hiking rates to fight inflation.
Now, with the Bank of England's base rate at 5.25%, the bond's price has slipped below 90 pence on the pound. That means a holder who bought at par would be sitting on a loss of more than 10% of principal, not counting any currency moves.
Why Duration Hits Hard
Duration measures a bond's sensitivity to interest rate changes. For a 100-year bond, duration is extreme — roughly 30 years or more. Every percentage point rise in yields shaves roughly 30% off the bond's price. Since the Bank of England started hiking in late 2021, the cumulative effect has been brutal.
The bond's coupon, set at 2.5%, now looks puny compared with current yields on shorter-term government debt. Investors who need to sell are forced to accept deep discounts. Those who hold to maturity will still get their principal back — but that's a century away.
The drop is a stark reminder that ultra-long bonds are not for the faint of heart. They amplify losses when rates rise, and they offer little protection against inflation. For Alphabet, the debt is a tiny slice of its overall capital structure, so the company itself isn't under pressure. But for holders — pension funds, insurers, and other long-term investors — the mark-to-market losses are real.
The bond's performance also serves as a bellwether for the broader corporate bond market. If even a blue-chip name like Alphabet sees its century bond trade at a discount, it signals that investors are demanding higher compensation for locking up money for decades.
No one knows when rates will peak or how long they'll stay elevated. The bond's next coupon payment is due in a few months, but the price will keep moving with every shift in rate expectations.
