Austria Boldly Goes Into the 22nd Century With New Bond
(Bloomberg Gadfly) -- The Republic of Austria is showing that investor appetite for ultra-long European sovereign bonds is surprisingly robust -- something neighbors such as Germany ought to pay close attention to.
Austria is selling a benchmark-sized bond that's repayable in 100 years, a first in Europe. While Ireland and Belgium both issued private placements last year, their size of 100 million euros ($119.4 million) each means these are not actively traded. Italy and France have both raised 50-year money in decent size, leaving Germany oddly absent from the long-dated fundraising party.
In the first three years of this decade, Germany was as active in extending the maturity of its debts as its euro zone peers. In the past few years, however, its debt profile has been static at about nine years, compared with more than 10 years for Austria and almost 12 years for Belgium.
The order book for the Austrian issue has already topped 11 billion euros, exceeding the 7.8 billion euros of bids for the 70-year bond the nation sold in October, which came at an eventual size of 2.5 billion euros. The new century bond is expected to yield about 2 percent, or about 50 basis points more than the government's 30-year issue. That spread is in line with the premium on the October sale, which tightened in from initial price talk of about 60 basis points.
At first glance it might seem strange that investors would want to buy such a long-dated asset since -- unless science really takes a leap forward -- no fund manager buying this will be alive to see it repaid. But diversification is the key.
For insurers and pension funds, there is a driving need to match assets with their long-dated liabilities. A 2 percent yield is about four times better than they can currently get for lending to Austria for a decade, while all Austrian bonds with fewer than 5 years to maturity yield less than zero.
There is a catch though -- but one that explains interest from other investors. This new 100 year will be the most price-sensitive bond that exists. In any currency.
A one basis-point change in yield will move the price of this Austria 2117 issue by 43 cents, or 0.43 percent. That is because the coupon is so low for the ultra-long maturity, which makes the bond's duration -- or sensitivity to yield change -- so high.
If you wanted to make a bullish bet on European interest rates dropping again, then buying the new Austrian issue will give you the most bang for your euro. Portfolio managers look for such extra sensitivity to enhance the flexibility of their holdings.
Selling an ultra-long dated bond would provide cheap financing for Germany, though with the European Central Bank poised to taper its quantitative easing program, it may have missed the lows. Bloomberg generic prices show its 30-year funding cost is about 1.15 percent, down substantially in the past four years though up from a record low of 0.34 percent reached in July of last year.
This ultra-long trend ought to catch on. Given the evidence of abundant investor demand, locking in such low interest rates makes sense for issuers. Those in charge of borrowing for European governments should take advantage of the side-effect of the euro zone debt crisis -- at least while the ECB is still acting as a buyer of last resort for government debt.
--Gadfly's Elaine He provided assistance with charts
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Marcus Ashworth is a Bloomberg Gadfly columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.
Mark Gilbert is a Bloomberg Gadfly columnist covering asset management. He previously was a Bloomberg View columnist, and prior to that the London bureau chief for Bloomberg News. He is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”