Skip to main content
About HEC About HEC Faculty & Research Faculty & Research Master’s programs Master’s programs MBA Programs MBA Programs PhD Program PhD Program Executive Education Executive Education Summer School Summer School HEC Online HEC Online About HEC Overview Overview Who
We Are Who
We Are
Egalité des chances Egalité des chances HEC Talents HEC Talents International International Campus
Life Campus
Sustainability Sustainability Diversity
& Inclusion Diversity
& Inclusion
Stories Stories The HEC
Foundation The HEC
Coronavirus Coronavirus
Faculty & Research Overview Overview Faculty Directory Faculty Directory Departments Departments Centers Centers Chairs Chairs Knowledge Knowledge Master’s programs Master in
Management Master in
Master in
International Finance Master in
International Finance
Masters Specialized
Ecole Polytechnique
-HEC programs Ecole Polytechnique
-HEC programs
programs Dual-Degree
students Visiting
Certificates Certificates Student
Life Student
MBA Programs MBA MBA Executive MBA Executive MBA TRIUM EMBA TRIUM EMBA PhD Program Overview Overview HEC Difference HEC Difference Program details Program details Research areas Research areas HEC Community HEC Community Placement Placement Job Market Job Market Admissions Admissions Financing Financing Executive Education Executive Masters Executive Masters Executive Certificates Executive Certificates Executive short programs Executive short programs Online Online Companies Companies Executive MBA Executive MBA Infinity Pass Infinity Pass Summer School Youth Programs Youth Programs Summer programs Summer programs HEC Online Overview Overview Degree Program Degree Program Executive certificates Executive certificates MOOCs MOOCs Summer Programs Summer Programs


Should the EU Issue Perpetual Bonds?

Published on:
Updated on:
February 28th, 2022
6 minutes

The idea of issuing perpetual debt to combat the Covid crisis has recently been floated by prominent public figures such as hedge fund manager George Soros (The EU Should Issue Perpetual Bonds), economist Luis Garicano and former Belgian Prime Minister Guy Verhofstadt (Toward a European Reconstruction Fund). A perpetual bond is a bond that pays an annual coupon forever and whose principal is never repaid. Conceptually, a perpetual bond is a coupon-paying bond with an infinite maturity.

EU bonds - Polonio Video on Adobe Stock

©Polonio Video on Adobe Stock

The main argument for issuing perpetual bonds is that the EU should take advantage of the low-yield environment to lock in low interest rates by borrowing with infinite maturity. A related argument is that perpetual bonds don't need to be refinanced. When a government issues a bond, it usually repays the principal at maturity by issuing a new bond. This is called debt roll-over. Rolling over a bond is subject to refinancing risk if creditors become worried about the solvency of the government and are reluctant to lend again at maturity, as happened during the 2011 European sovereign debt crisis. Perpetual bonds are not subject to roll-over risk because they never need to be rolled over.


How do we know the interest rate on a perpetual bond is low if perpetual bonds don't exist (yet)?


Perpetual bonds seems like a great idea. But wait a minute...

Perpetual bonds seems like a great idea – cheap financing and no roll-over risk. But wait a minute, how do we know the interest rate on a perpetual bond is low if perpetual bonds don't exist (yet)? Let's look up the euro yield curve on the European Central Bank (ECB) website:


EU bonds graphic

What should be the yield of a perpetual bond?

We need to remember the definition of the yield from the Financial Markets course: the yield is the average interest rate across all coupon maturities weighted by the present value of each coupon. It is impossible to do this calculation for a perpetual bond, because we do not observe interest rates until infinite maturity. The above yield curve stops at 30 years because there exist few bonds with maturity longer than 30 years. We can try to extrapolate the yield curve up to maturities of 40 years and perhaps 50 years, but it is virtually impossible to know what the yield curve looks like beyond 50 years.

Since a perpetual bond derives a large fraction of its value from coupons paid beyond 50 years, the yield curve tells us little about what the yield of a perpetual bond will be. If it turns out the yield is in fact 2%, a perpetual bond will be a costly source of financing compared to issuing 10-year bonds which currently trade at interest rates below 0%.

Proponents of perpetual bonds have a response to this objection: the European Central Bank can purchase perpetual bonds to keep the yield low. This is true but one must bear in mind it implies the central bank would effectively be financing the government through money creation, since central banks purchase government debt by creating money. This may or may not be a problem – see this series of posts on money creation – but it changes the nature of the proposal: the question of whether to issue perpetual bonds becomes a question on how to best finance governments with central bank money.


Learn more in Johan Hombert’s blog, The Financial Markets Blog.

Related content on Finance

business people scrutinizing a document in a meeting room_vignette

Do Employee Shareholders Care about their Employers' ESG Performance?

By Maxime Bonelli, François Derrien

debt - vignette

How Governments’ Heavy Reliance on Bank Debt Affects Firms

stock market vignette

Future of Finance: How Are New Technologies Reshaping the Sector?

By Thierry Foucault

stock market vignette

Activist Short Sellers vs. Financial Analysts: Competitive Claims of Expertise

By Hervé Stolowy, Luc Paugam

Ukraine/Russia: The Energy Factor
Jean-Michel Gauthier HEC
Jean-Michel Gauthier
Energy & Finance Professor
Subscribe button for Knowledhe@HEC newsletter

Newsletter knowledge

A monthly brief in your email box and 3 issues of the book per year.

follow us

Insights @HECParis School of #Management

Follow Us

Support Research

Our articles are produced thanks to our reader's support