Janus Henderson: Austria's century bond

Austria issued €3.5bn of a new 100-year bond on Monday 12 September, in the biggest syndication of a century bond in Europe to date. While 100-year bonds are nothing new, such issues inevitably raise questions over who would invest in such a bond.

Despite advances in medicine, it seems unlikely that anyone who buys it now will live long enough to see it mature. Yet demand for the bond was strong, with total bids reaching €11bn. Investors locked in a yield of around 2.1% for 100 years. Making the bold assumption that coupons can be reinvested at that yield, an investor can expect eight times their money back at maturity.

So was this issue a good deal for the investor or the issuer? From Austria’s perspective, locking up funding for 100 years obviously has its appeal; especially since it only became an independent republic 62 years ago, and the bond is denominated in a currency that has only existed for less than 20 years. Moreover, 2.1% is only slightly higher than the European Central Bank (ECB)’s inflation target (close to 2% over the medium term), suggesting its borrowing rates are pretty close to a 0% real yield.

Closer analysis of the yield curve, however, suggests that investors may not have had as bad a deal as it initially seems. With negative interest rates in the eurozone, the average interest rate over the foreseeable future is likely to be significantly lower than 2.1%. In addition, with current 30-year Austrian government bond yields around 1.6%, an investor in the 100-year bond is essentially locking in this 1.6% yield for the first 30 years, and a 2.8% yield* for the following 70 years. When expressed in those terms, the extra yield on offer for the 100-year bond compared to the 30-year bond does look attractive.

Finally, for geeky bond investors, longer dated bonds have a convexity benefit, which can be highly valuable, particularly to institutional investors. In simple terms, convexity is a measure of how the duration (interest rate sensitivity) of a bond changes with changes in interest rates. A bond with a low coupon and very long duration (very convex) will rise in value significantly when interest rates fall, but will not fall so much when they rise. This would mean that a market neutral strategy** of selling a 30-year bond and buying a 100-year bond, should make money on a parallel move in the yield curve, both up and down.

This suggests that while issuers may rush to lock in low yields for as long as possible, at a time when the central bank is still supporting the market, there may be more on offer to investors than initially meets the eye.

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* Approximate calculation of the bond’s forward yield.

** Duration neutral; ie, keeping the duration of both sides of the trade the same.