Three years ago, taking advantage of an unprecedented collapse in global interest rates Austria issued €6BN in 100 year bonds with a 2.1% coupon due 2117, with the resulting issue becoming one of the best performing “serious” assets in subsequent years returning as much as 140% in early March of 2020, before stabilizing around a price of 190 cents on the dollar amid a frenzied chase of any kind of duration in a world that is rapidly sinking into a deflationary singularity.
Today, Austria went for round two, issuing another €2BN in 100Y bonds, only this time with the stunning yield of just 0.88%. That’s right: in the deflationary wasteland that is the “New Abnormal”, investors are willing to lock in a paltry return below 1% for 100 years, and they are doing so in droves: with over €17.7BN in demand for the bond, the issue was 8x oversubscribed, with demand especially strong from pension funds and insurance companies looking for ultra-long assets to match their future liabilities.
As Bloomberg’s Marcus Ashworth notes, today’s latest ultra-long issuance is “the clearest example of how the European Central Bank’s 1.35 trillion-euro pandemic bond-buying — alongside a similarly sized injection of liquidity into the banking system — is encouraging greater risk taking…. The risk for investors is that the bond doesn’t pay out for 100 years and they’re hardly getting a handsome coupon.”
Of course, investors are not buying the bond for the coupon – or even the potential capital appreciation – they are buying it because parking the cash in a bank means paying the ECB -0.5% every year, a percentage that will only grow. This way at least it won’t cost them money to park their cash with Europe’s second most safe country (AA+).
Where Bloomberg is correct, however, is its take that today’s sale is just be the start of a wave of European sovereign issues as governments raise a lot more debt to finance their pandemic economic responses.
What would have seemed like crazily low yields three years ago are just run-of-the-mill now as rates are driven lower by the gush of money flooding Europe’s finance system. While Italy has suffered the most from Covid-19 in the euro zone, its 10-year bond yields have still fallen by nearly 100 basis points over the past two months.
Austria is not alone: in the past, Ireland and Belgium also issued 100-year debt but in private placements, while France and Italy both sold 50-year maturities although they will surely now follow Vienna’s lead. And, as Ashworth asks, “with Germany also recently raising its largest amount of 30-year debt, at a negative yield, might Europe’s most powerful country finally be tempted to follow its southern neighbor and elongate its bond-maturity profile?”
Meanwhile, as the duration of bonds keeps getting longer, so does the demand due to the extremely high convexity of ultra-low coupon issues: the prices of bonds with very low coupons rise more sharply when yields fall than they decline when yields rise, meaning the price outperforms when interest rates drop.
Which begs the question: when will central banks do away with any pretense that these bonds will ever be repaid, and who will be the first European nation to issue perpetual bonds – known by some as “equity” – which will then be promptly monetized by central banks who, after having nationalized the private bond market, will take over sovereign states next.
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