(The author is editor-at-large for finance and markets at Reuters News. Any views expressed here are his own)
By Mike Dolan
LONDON, July 1 (Reuters) – Investors who snapped up Austria’s first “century bond” three years ago would have so far doubled their money, outpacing the racy Nasdaq composite with a total return of 101% in dollar terms.
With 97 years to go to maturity, will it be possible for the debt equivalent of a Galapagos tortoise to see such gains again?
Some investors clearly think so and with interest rates and yields already near zero in most major economies, appetite for this rare AA+ rated bond was no one-off.
Last week, Austria received orders of almost 10 times more than it needed for a brand new 100-year bond, paying an annual coupon of just 0.85%, which was less than half the previous one.
In price terms, Austria’s 100-year bond from 2017 has matched the stargazing NYFANG+TM index, which includes the FAANGs of Facebook, Apple, Amazon, Netflix and Google-parent Alphabet.
If the coronavirus crisis means many more years of low inflation, higher government debt and extensive central bank bond buying, combined with a digital revolution that subdues prices yet further, then these ultra-long bonds may make sense.
“Investors’ appetite for ultra-long-term debt highlights the challenge of finding yield against the backdrop of a lower-for-(much) longer interest rate environment and central bank asset purchases,” UBS Global Wealth Management’s Chief Investment Officer Mark Haefele told clients last week.
Haefele described the 2117 Austrian bond as a “blockbuster” and reckons other euro zone countries may increasingly go ultra long to finance the post-pandemic recovery.
Although Ireland and Belgium have sold century bonds in recent years, these were private placements. And while Argentina and Mexico have also taken the 100-year route, it has proved disastrous for some as Buenos Aires restructures its debts.
And in the corporate universe, Disney and Coca-Cola have also made the most of their brands to go long.
Other ultra-long bonds such as France’s 50-year government benchmark have similarly performed like growth stocks lately as high ‘duration’ – the sensitivity of the price to underlying interest rate moves – has seen it gain more than 50% in 3 years as European benchmark yields slid back below zero.
OF CONVEXITY AND CONSOLS
Apart from the scarcity value of such long duration, a world of near zero or negative interest rates on top-rated sovereign debt means 0.85% represents significant yield for many pension and insurance funds with long-term liabilities.
Although the yield on the 30-year German bund is negative and the French 50-year yield is just 0.63%, bond investors that need to build up ‘duration’ for portfolios snap these issues up.
Technical characteristics of ultra-long bonds, such as high ‘convexity’ of their price-yield relationship, means they appeal to funds seeking to hedge against downward interest rate shocks.
A bond with high convexity effectively means its price rises more when yields fall than it falls when interest rates rise.
And so even though high duration bonds are inherently more volatile, the convexity argument is important for investors such as pension funds, whose pension liabilities typically rise when discount rates fall and vice versa.
The ability for highly indebted countries to lock in new borrowing at such cheap rates for so long is clearly compelling.
And if century debt is possible and attractive, then why not perpetual bonds with no maturity?
Billionaire financier George Soros last month urged the European Union to finance the pandemic recovery plan by selling perpetuals, or “consols” – akin to bonds sold by Britain and the United States to finance wars in the past.
With legal adjustments to allow it tax-raising powers, the EU could raise a trillion euros for roughly 0.5% a year in perpetuity – a yield equating to just 5 billion a year – or less that 3% of the current 2020 EU budget, Soros said.
Although a move toward mutual debt raising is likely as part of the EU’s 750 billion Recovery Fund plans due to be agreed in July, it looks unlikely perpetuals are yet part of that.
However in 2014, Britain did move to pay off part of some of the 4% consols it raised to finance World War One.
So maybe century bonds are the way to go after all.
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