Austria has sold another “century bond” three years after its first, seizing on the ultra-low borrowing costs available in the market after unprecedented stimulus efforts from the European Central Bank.
The central European country, which has one of the highest credit ratings in the EU, raised €2bn on Wednesday from the sale of the bond, which matures in July 2120. The government held back €500m of the total.
The sale underlines how investors have turned to extremely long-dated bonds in search of income, irrespective of how the political landscape may change over that time. Vienna’s latest bond will offer a yield of 0.88 per cent, compared with the more than 2 per cent on a similar bond back in 2017. That bond was extended last year.
As the world’s central banks unleash aggressive measures to boost their economies, yields on shorter-term debt are being squeezed, with the safest bonds trading below zero. German 10-year debt, which serves as a European benchmark, has a yield of minus 0.43 per cent. Yields fall when prices rise.
Austria has been one of the pioneers of ultra-long bonds in Europe, offering a 70-year bond in 2016 and then scaling up to the first century bond the following year. The yield on the latter has since dropped to 0.85 per cent as its price has risen.
“Even though the bond has a very long maturity, its maturity profile would fit institutional investors like pension funds and insurance companies,” said Mohit Kumar, head of interest rate strategy at Jefferies.
“One of the attractions of the new 100-year Austrian government bond is certainly central bank escapism,” said Wolfgang Bauer, manager of the M&G Absolute Return Bond Fund, alluding to the ECB’s shorter-dated bond purchases. The weighted average maturity of public-sector bonds bought under the ECB’s Pandemic Emergency Purchase Programme, a relief effort begun in March, was 6.3 years at the end of last month.
Mr Bauer noted, however, that moving out to the far end of the yield curve carries risks, as swings in prices can be severe. Austria’s existing century bond rallied about 50 per cent at the start of the year before dropping more than 30 per cent in just two weeks.
“The newly issued 100-year bond will have an even higher duration due to its lower coupon rate, which will make it even more susceptible to rates moves,” he said. “From a risk/reward perspective, at an outright yield of 0.88 per cent, I do not think investors are getting particularly generously compensated for the expected price volatility.”
The banks mandated to handle the bond — Barclays, BofA Securities, Deutsche Bank, JPMorgan, NatWest Markets and UniCredit — had orders of up to €17.7bn. The Austrian Treasury declined to comment on the transaction.
Austria managed to lock in the low borrowing cost despite scaling up the amount of funding it requires from capital markets this year. It is now predicting it will need to issue €60bn worth of bonds in 2020, nearly double last year’s total of €31bn. Before the Covid-19 crisis, it had been expecting a similar level of issuance this year.
But the country is not as indebted as some of its peers. Austria’s debts are equivalent to 74 per cent of its gross domestic product, according to 2019 data from the EU, lower than the EU average of 79 per cent.