By Juliet Samuel From Wall Street Journal

Island’s first sovereign bond in eighty years has become hot stuff as investors search for yield

As investment opportunities go, a bond issued by the small island of Guernsey is about as rare as they come.

The £330 million ($513 million) of debt issued in December by the offshore financial center that lies in the English Channel between France and the U.K., was its first sovereign bond in more than 80 years.

And it has become hot stuff as investors cast their nets wide in the global trawl for yield and investments that match their long-term liabilities. “I have four people who want to buy it and no one who wants to sell it,” said Bill Blain, a strategist at Mint Partners, a brokerage firm.

The bond’s popularity is a sign of how long-term global investors, like pension funds and life insurance companies, have been piling in to buy even debt sold by first-time issuers. The reason: they need to find some assets that match the decadeslong time scale of their liabilities. Their traditional source of long-term assets, government bonds, are simply not yielding enough anymore, even after a recent uptick in rates.

For such investors, a 30-year bond like Guernsey’s is “as rare as hen’s teeth now,” Mr. Blain said.

“It was attractive compared with a [U.K.] government [bond] trade,” said Eric Holt, head of fixed income at Royal London Asset Management, which invested in Guernsey debt when it was issued. His fund didn’t buy it to match liabilities, he said, but he said it would be particularly appealing to other buyers because of its duration. Long-term assets are in “limited supply,” he said.

“You tend to see a lot of demands for long-dated issues and investors [who have them] aren’t selling,” said Charlotte Weir, a managing director at Barclays PLC, who advised Guernsey on the sale of its bond. She said that the island is one of a handful of issuers outside mainstream government debt markets that can borrow over a very long time frame.

Guernsey wasn’t alone in entering debt markets for the first time in living memory last year. Jersey, another island in the English Channel, sold a 40-year bond in the summer, raising £250 million at an interest rate of 3.75%. Both islands have an AA+ credit rating assigned by Standard & Poor’s Ratings Services.

Several African countries, including Ethiopia and Kenya, entered debt markets for the first time in 2014, taking advantage of investors’ need to squeeze more yield out of their assets in an historically low interest rate environment.

In Guernsey’s case, many investors see the island’s debt as a way to get extra yield—3.375% a year—while effectively getting an asset guaranteed by the U.K. government’s balance sheet, said Mr. Blain.

That might be wishful thinking. Guernsey uses the pound sterling for its currency but is a “crown dependency” of the U.K., meaning that it is independent and as long as it keeps a democratic government and defers to London on foreign policy matters, it can expect no interference—or support—from Britain.

But while many governments, like the U.K., have jumped at the chance to maximize their borrowing at historically low rates, Guernsey’s bond issue was controversial.

“As a small community, which is highly dependent on external trade for the success of the economy, we don’t take anything for granted,” said Gavin St Pier, deputy treasury minister. “A strong fiscal conservative vein has run through our politics for a long time.”

The island has a population of fewer than 66,000 and Mr. St Pier had to win the support of a majority of 47 members of its parliament to take on the debt. Even then, his government was constrained by a legal debt ceiling of 15% of gross domestic product and a rule stating that any debt taken on must be linked to a clear revenue stream for repayment.

In this case, the debt was used to pay off higher interest bonds issued by government-owned companies, such as the island’s electricity provider.

That wasn’t enough to satisfy some Guernsey politicians, who in December unsuccessfully urged their fellow members of parliament not to join the rush to borrow.

“We have to be careful of the beguiling suggestion that today’s interest rates are so low that we would be mad not to take our share now. We all know the salesman’s line: ’Buy now… The offer closes at midnight,’” said Richard Conder, a member of the island’s parliament. “So we end up buying overpriced rubbish double glazing we really didn’t want!”

Supporters of the debt issue, like Roger Perrot, another Guernsey legislator, said that the island is different from other overspending developed nations, such as the U.K., “which has the most appalling, unhealthy appetite for deficit funding.”

But even the bond’s supporters in parliament wanted Guernsey to retain its financial quality. “We need to be cautious. We need to demonstrate restraint,” said Peter Gillson.

IMAGE: A bond issued by Guernsey, one of the Channel Islands between England and France, has become hot stuff in debt markets as investors trawl for long-term yield. PHOTO: ASSOCIATED PRESS

For more on this story go to: http://www.wsj.com/articles/guernseys-debt-draws-strong-demand-1434367951