A flurry of irrational issues has come into the bond markets during the recent few years.
A few days back, Austria managed to sell its existing 2117-Maturity century bonds by reopening its 2-year-old issues to new investors; so effectively 98-year maturity bonds through syndicates of investment banks at a yield close to 1.17%. The issue was a huge success and was overbought by 4.5 times its issue size. It is interesting to know that it was merely two years ago when it had sold EUR 3.5bn of 100-year bonds.
As of today, Austria 10-Year Government bond yield is around -0.025%. Its 10-Year-2-Year spread is merely 62.4 basis points. Belgium and Ireland have already sold century bonds in the past but that was through private placements and for a lesser issue size (around EUR 50-100 million).
So, what do all these recent developments mean for global bond markets:
1. Investors Embrace “Duration Risk”
Century bonds, alone, have a larger “duration risk” vis-a-vis other shorter maturity bonds (e.g. 30-Year, 10-Year, etc.) available in the market. Also, citing recent comments by Mario Draghi on further ECB stimulus amid weaker inflation, investors see less likelihood of the impact of “Duration risk” on the century bonds in the future.
2. Demand Issues Fetching +ve Yield
There is hardly any issues left in Eurozone markets which are fetching a +ve yield. century bonds that Austria had sold two years ago was priced to yield 2.112%, around 55-60 basis points premium over its outstanding 30-Year bonds. The new issue of 98-Year maturity yields 1.17%, around 45-50 basis point premium over its current 30-Year yield. Interestingly, 30-Year Eurozone Central Government bond yields around 1.39 %. It means 98-Year Austria bonds yields less than 30-Year Eurozone Central Government bond even though it has more duration risk at least theoretically vis-a-vis 30-Year Eurozone Central Government bond.
3. Century Bonds Beat Perpetual Bonds
These issuers could have tapped the markets with the traditional route of “perpetual bond” issues. Though “Perpetual bonds” gives an advantage to issuers by having – no obligation to redeem the capital, but still Austria opted for the century bonds. This could be because of the tax advantage associated with Century bonds for its investors(e.g. Pension Funds). Perpetual bonds investment are treated as equities.
4. What The Future Holds
Besides Austria, Ireland and Belgium have already issued century bonds in the recent past. Italy, France and Spain has issued 50-Year bonds. Japan has issued 40-Year bonds. Mexico has done 3 issues of century bonds (though in Foreign Currencies denomination and in smaller chunks). The UK has issued 40-Year to 50-Year bonds seven times. So, in this low yield and flattening yield curve environment across Eurozone and US, such issues are going to remain in vogue for a considerable period of time. Who knows, FED too may join this bandwagon of longer maturity bonds issuers.
5. Moral Hazard For Policymakers
It may become attractive to government agencies (high leveraged countries) to issue perpetual bonds because it would not show up as debt on their balance sheet. These High leveraged countries will also be encouraged to issue Century bonds (and other longer maturity bonds) to raise the capital at relatively lesser funding cost. This way, the policymakers would have lesser incentives to fix the economy, increase the consumption and thus the inflation.