The latest evidence of the unprecedented scramble for yield and duration came yesterday when it was revealed that Austria would join the rest of the Eurozone in selling ultra-long dated debt in the form of 70 Year bonds. It didn't take long to find willing buyers, and moments ago Bloomberg reported that this latest offering priced without a hitch when Austria sold 2 billion euros of bonds due in November 2086.
The 70-year bond was priced to yield 53 bps more than that on the February 2047 security. At the same time, the Treasury in Vienna also sold 3 billion euros of notes maturing in July 2023.
Austria’s 30-year bund yields fell two basis points, or 0.02 percentage point, to 0.99%, but hardly a notable selloff. The 1.5% security due in February 2047 rose 0.592 to 113.419. The yield on bonds maturing in January 2062, the nation’s longest-dated outstanding debt, dropped two basis points to 1.17%.
The sale follows this year’s century bond offerings from Belgium and Ireland, as well as 50-year deals from France, Italy and Spain, as Europe's nations take advantage of the ECB's negative interest rate policy which has pushed interest rates to record low yields. The 100-year bond sales by Belgium and Ireland were private placements for 100 million euros each.
Quoted by Bloomberg, Martin van Vliet, a senior interest-rate strategist at ING Bank NV in Amsterdam said that “many issuers have been extending the average maturity of their funding. It makes sense for them to try and lock in low funding costs for a long time. On the demand side, there are still many buyers out there like pension funds and insurance companies that want to buy these bonds for hedging purposes.”
Meanwhile, the duration risk keeps piling up: the amount of government debt due in 10 years or more has swelled by a record $733 billion this year, having more than doubled since 2009 to about $6 trillion, data compiled by Bloomberg and Bank of America Corp. show.
The scramble for yield has also pushed bond duration to all time highs: the effective duration on Bank of America’s global government bond index climbed to an all-time high of 8.23 in 2016, from 5 when it began in 1997. The metric set a record 5.9 for U.S. obligations, 7.2 across the euro area and 8.8 in Japan.
Putting this in practical terms, a one-percentage point increase in interest rates equates to about $2.1 trillion in losses for global investors. We are confident central banks are aware of the massive MTM losses that bondholders will suffer as they attempt to push bond curves steeper.