The Daily Update - Century bonds for your grandchildren

Austria just issued a century bond, and the largest ever one at that; but it’s hard to conceptualise just how long 100 years actually spans. Just ask anyone you may know who has already experienced a life that long and they might be able to tell you about the end of the First World War and harrowing stories from the Second; recant the Great Depression or when suffragettes first got the vote. Even the formation of the First Austrian Republic (in 1918) was less than 100 years ago. But this hardly perturbed markets who snapped up the 100-year issue.

Expecting to raise at least one billion euros, Austria ended up selling €3.5bn of ultra-long dated debt after pent-up demand from investors topped €11.4bn in orders. Being 3.2x oversubscribed clearly shows the demand for yield in the investment grade sovereign space: even if the maturity is longer than the age of the country (indeed in its current state as the Second Austria Republic it is only 62 years young). Though I guess this is nothing compared to the absurdity of millennium bonds (1,000 years) such as the famous Canada Pacific issue, when one considers that no known currency has even lasted that long a test of time.

At €3.5bn, Austria’s century bond is the largest to date; not bad for a country with a population not much larger than New York City. A number of European countries have been issuing noticeably more 50-year debt recently, but 100-year issuances are still typically small and seldom; last year Belgium and Ireland only tested the market with €0.1bn issuances. Argentina managed to market $2.75bn of 2117 bonds in June this year (with $9.75bn in interest) locking in rates of 7.9% for their grandchildren. Austria however managed to price their bond to yield just 2.1%. This makes a huge difference to duration; the Argentinian century bond had a 12.8-year duration when it was issued, whereas Austria’s requires investors to assume a 44-year duration risk. So yes, some people seem to be happy with an Aa1/AA+ 44 year duration yielding just 2.1%. Presumably the majority of interest is from institutions using them to match liability durations. And such bonds are likely to remain in scarce supply after US Treasury Secretary Steven Mnuchin swatted the suggestion of US century bonds earlier this year. Although the occasional US 50-year Treasury is still a future possibility.

Of course, anyone familiar with our relative value investment process will know that neither the Argentina nor Austria century bond seemed attractive propositions to us (unless we were a government looking to borrow). Argentina is still single-B rated and an expensive market-darling with much of its forecasted improvements already priced in. Austria has a near neutral Net Foreign Asset position and is very highly rated, at just one notch below AAA. Unfortunately it is also expensive across the curve, not just at the ultra-long end where our models estimate it should offer a yield closer to 2.6-2.8% for the assumed risk (which may not seem much different but would bring the duration down by 10 years!). According to our investment process one can achieve twice the yield with less than a quarter the duration, compared to Austria’s century bond, with a diversified portfolio whilst still maintaining a high single-A average rating.