Investors ordered more than 11 billion euros for Austria’s first century bond, which will have a yield of about 2.1 percent. That’s less than the current yield earned on Treasuries coming due in just 10 years.
The extraordinary demand reflects investor disquiet over persistent deflationary pressures and tepid forecasts for global economic growth that are curbing the longest-term rates for sovereign debt. The “quite peculiar” bond market reflects expectations of a subdued investor response to when the European Central Bank decides to rein in its super accommodative monetary policy, according to Kim Liu, senior fixed-income strategist at ABN Amro Group NV.
“Why would you invest in such long-dated bonds if you would expect that we are entering a period of higher yields?” Liu said in e-mailed comments. “Most likely, investors expect that while central banks are exiting their loose policy stance, we will still see low yields in the coming years.”
After more than 2 trillion euros ($2.4 trillion) of bond purchases, alongside negative interest rates and free loans to banks, the ECB has defeated the threat of deflation and helped put the euro-zone economy on track for its fastest economic growth in a decade. Those liquidity injections helped depress bond yields to record lows.
And although market rates have started to rise as ECB policy makers begin debate on when and how they might pare back their stimulus measures, investors are yet to be convinced borrowing costs will climb significantly. The latest survey of fund managers by Bank of America Merrill Lynch showed investors are cutting their expectations for “much higher” bond yields, according to Chief Investment Strategist Michael Hartnett.
“Many institutional investors have been forced into higher duration assets in order to enhance yield and meet their liabilities, and this recent issuance is symptomatic of that,” said Nicholas Wall, portfolio manager at Old Mutual Global Investors. “The market prices in too little growth and inflation for the euro zone, and therefore we didn’t want to add such a long-duration bond to our portfolios.”