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A 100-Year Austrian Bond at 1.2%. What Fresh Madness Is This?

Marcus Ashworth
(Bloomberg Opinion) -- If you needed any more proof that the world of fixed income has gone mad in the rabid hunt for yield, look no further than the Republic of Austria. If you liked its 100-year debt issued two years ago with a 2.1% return, how about settling for the same maturity for 1.2% now? Yes, you read that right: A 100-year bond yielding about 1.2%.Austria is in the process of bringing a more run-of-the-mill syndicated five-year issue, although that will probably yield less than the European Central Bank’s minus 40 basis point deposit rate. So Vienna thought it would take the opportunity to test investor demand for a repeat of its 2017 100-year transaction, which truly broke the mold for euro area debt. Belgium and Ireland have plowed the 100-year path too, but only in private format. If you wanted to buy any of those 2.1% 2117 Austria bonds right now, you’d have to pay 60% more than their issue price; they’ve been a great success. They currently yield about 1.12%, so that’s where you’d expect any new 2119 offer would be pitched – if it comes. A new-issue premium would probably take it up to close to 1.2%. Appetite for this kind of paper starts to make some sort of sense when you see that the 2117 100-year issue yields nearly 50 basis points more than Austria’s benchmark 2047 30-year bond.Demand is definitely there for ultra-long, top-rated government debt as pension funds and life insurers scrabble around for any kind of safe returns. Recent changes to Dutch pension fund regulations, which take effect next year, will increase their sensitivity to rates on ultra-long bond maturities, explaining their interest in this type of stuff. German insurers have also been active buyers of very long-dated paper.The 100-year trend could catch on for other European sovereigns. Germany and France have steadfastly refused but might Spain want to test the water? Italy and Poland have previously issued 50-year debt, so for them it may just be a question of getting the timing right. With 10-year German bund yields hitting record lows of minus 33 basis points, where else can fixed-income investors go if they have to stick to high-quality government debt?And then there’s the ECB. If it has to reopen its bond-buying scheme, one simple solution would be to extend the maturity of its purchases. While it can buy 30-year paper, its asset purchase program has tended to focus on 10-year and shorter maturities. Again it is a question of taking on more duration risk or sticking with the greater credit exposure from some issuers of shorter-term debt. Pick your poison.To contact the author of this story: Marcus Ashworth at mashworth4@bloomberg.netTo contact the editor responsible for this story: James Boxell at jboxell@bloomberg.netThis column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.For more articles like this, please visit us at bloomberg.com/opinion©2019 Bloomberg L.P.

(Bloomberg Opinion) -- If you needed any more proof that the world of fixed income has gone mad in the rabid hunt for yield, look no further than the Republic of Austria. If you liked its 100-year debt issued two years ago with a 2.1% return, how about settling for the same maturity for 1.2% now? Yes, you read that right: A 100-year bond yielding about 1.2%.

Austria is in the process of bringing a more run-of-the-mill syndicated five-year issue, although that will probably yield less than the European Central Bank’s minus 40 basis point deposit rate. So Vienna thought it would take the opportunity to test investor demand for a repeat of its 2017 100-year transaction, which truly broke the mold for euro area debt. Belgium and Ireland have plowed the 100-year path too, but only in private format. 

If you wanted to buy any of those 2.1% 2117 Austria bonds right now, you’d have to pay 60% more than their issue price; they’ve been a great success. They currently yield about 1.12%, so that’s where you’d expect any new 2119 offer would be pitched – if it comes. A new-issue premium would probably take it up to close to 1.2%. 

Appetite for this kind of paper starts to make some sort of sense when you see that the 2117 100-year issue yields nearly 50 basis points more than Austria’s benchmark 2047 30-year bond.

Demand is definitely there for ultra-long, top-rated government debt as pension funds and life insurers scrabble around for any kind of safe returns. Recent changes to Dutch pension fund regulations, which take effect next year, will increase their sensitivity to rates on ultra-long bond maturities, explaining their interest in this type of stuff. German insurers have also been active buyers of very long-dated paper.

The 100-year trend could catch on for other European sovereigns. Germany and France have steadfastly refused but might Spain want to test the water? Italy and Poland have previously issued 50-year debt, so for them it may just be a question of getting the timing right. With 10-year German bund yields hitting record lows of minus 33 basis points, where else can fixed-income investors go if they have to stick to high-quality government debt?

And then there’s the ECB. If it has to reopen its bond-buying scheme, one simple solution would be to extend the maturity of its purchases. While it can buy 30-year paper, its asset purchase program has tended to focus on 10-year and shorter maturities. Again it is a question of taking on more duration risk or sticking with the greater credit exposure from some issuers of shorter-term debt. Pick your poison.

To contact the author of this story: Marcus Ashworth at mashworth4@bloomberg.net

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.

For more articles like this, please visit us at bloomberg.com/opinion

©2019 Bloomberg L.P.