"It Blows My Mind": 100-Year Austrian Bond With Record Duration 3x Oversubscribed

As we reported yesterday, Austria was set to make Eurozone history with the first sale of a 100 year bond direct to public markets, bypassing private syndication. It did that later in the day, when the €3.5 billion offering priced tighter than initially marketed, at RAGB 2/2047 +50, at a price 99.502 to yield a paltry 2.112% and with a negligible 2.1% cash coupon.

What is even more notable is that despite mounting fears of an imminent tapering by the ECB which many have predicted will lead to a new European bond tantrum and blow out in yields, there was tremendous end demand by investors for the offering managed by BofAML, Erste Group, GS (B&D), NatWest and SocGen, mostly fund managers from across the globe, resulting in what ended up being more than €11BN in 208 different bids for the paper, an oversubscription of more than 3x! The breakdown for the final allocation is was follows, courtesy of Bloomberg:

€3.5b 100Y tranche: Book exceeded €10.8b from 208 investors, including €1.5b of JLM interest

Allocation by geography:

  • Eurozone incl. Austria 29%
  • Germany 13%
  • France 4%
  • Spain 3%
  • Other Eurozone 9%
  • Other Europe (non-Eurozone) 55%
  • U.K. 42%
  • Switzerland 9%
  • Americas 12%
  • Middle East 4%

By investor type

  • Fund Managers 65%
  • Banks 19%
  • Central banks, official institutions 9%
  • Insurers, pension funds 7%

This unprecedented demand in light of tapering fears prompted a response from Mint's Bill Blain who today wrote that "the story of the day was Austria launching its century bond. Euro 11bln plus of investors looking for a 2% return for a 100 year investment. I have a suspicion “2% for 100 years” may be the moment that defines the very last drink-addled, drug fuelled party days of the bond bull market – but, I’ve been saying that for years already!"

The most notable feature of the issue was its record duration, as Bloomberg's Marcus Ashworth explained:

“This new 100 year will be the most price-sensitive bond that exists. In any currency. A one basis-point change in yield will move the price of this Austria 2117 issue by 43 cents, or 0.43 percent. That is because the coupon is so low for the ultra-long maturity, which makes the bond's duration -- or sensitivity to yield change -- so high.

 

If you wanted to make a bullish bet on European interest rates dropping again, then buying the new Austrian issue will give you the most bang for your euro. Portfolio managers look for such extra sensitivity to enhance the flexibility of their holdings.”

To which, Blain added that "of course, if European interest rates go the other way - perhaps because of normalisation panic - then you probably lose even more quickly as a retreat degenerates into a rout! (Mario Draghi – take note.)"

Check back in 6 months to see how much money all those who bought the bond that may have marked the peak of the bond bubble have lost (or perhaps made).

Finally, here is Nuveen's stock market permabull Bob Doll saying that the Austrian issue "blows my mind. To do a 100-year deal at 2 percent is absolutely amazing."

Comments

Iconoclast421 Wed, 09/13/2017 - 09:23 Permalink

Gotta give credit for the title.... it really is mind blowing. There is no frickin way this is a sound investment. Why not just hold shorter term insturments until rates rise and then play the proper strategy for that paradigm.  Or does the central bank truly own it all already?

Cutter Wed, 09/13/2017 - 09:38 Permalink

Who would buy this, when you can get the same yield on a 10 year treasury or 10 years elsewhere. Absolutely mind blowing.And who is the "Other Europe--non Eurozone" that took down 55 percent of the offering: Russia, Turkey? Why would they buy such an outrageously bad investment?

Pool Shark Cutter Wed, 09/13/2017 - 09:51 Permalink

Why even buy a 10-Year treasury when you can currently buy an FDIC insured 10-Year CD yielding 2.70%?In any case, a 100-year bond yielding 2.1% is likely to be a better investment than most think; given that interest rates are headed to zero for the long term.Don't believe me? Just check out a 30-year chart of government bond yields (especially Japan). Countries with high debt levels are forced to adopt ZIRP or even NIRP. Yellen raise rates????HAHAHAHAHAHAHAHAHA!!!!Go ahead Yellen, I TRIPLE DOG DARE YA!!!!

In reply to by Cutter

Cutter Pool Shark Wed, 09/13/2017 - 10:28 Permalink

Can't agree.  Your comment implies governments have total control over yields.  They don't.  The magic tricks of the Central Banks are over.  Further printing will just further reineforce the negative feedback loop they have created.  With debts so high, governments need to borrow money.  If the Central Banks are out of the picture, they will have to entice loans with yield.  Or go bankrupt.

In reply to by Pool Shark

Pool Shark Cutter Wed, 09/13/2017 - 11:16 Permalink

Don't believe me?Then explain how Japan with a >250% debt to GDP ratio is able to borrow at 0% interest rates. (I know the answer, and I suspect you do too).The US has barely crossed the 100% debt/GDP threshold and has the world's reserve currency, AND can borrow in its own currency!Interest rates are destined to go lower (and stay lower) for a long time.We are probably 10 to 15 years behind Japan. Pull up a JGB Yield Chart going back to 1989. You see a picture of where US rates are headed... 

In reply to by Cutter

NEOSERF Wed, 09/13/2017 - 09:44 Permalink

Waiting for the 50 year mortgages and 10 year auto loans...good times when banks hoover all your money and leave you with no equity in anything.

Manipuflation Wed, 09/13/2017 - 10:25 Permalink

Am I missing something?  Why would anyone buy a bond like that?  The question is who is buying that bond?  Do any of you have any 100 year bonds?  My guess is that you don't and neither do I.  You know why we don't have those?  Because we are not that fucking dumb. 

Anon2017 Manipuflation Wed, 09/13/2017 - 11:49 Permalink

Many financial institutions don't pay their bond buyers very well. The buyer (perhaps 5 years out of college) just has to do about as well as his target index. Under the worst case scenerio, the insurance company may become insolvent and the buyer will lose his job. If the US financial system collapses in a few years and takes the Euro down with it, it won't matter that some fool at XYZ Insurance Company bought 100 year Austrian bonds. 

In reply to by Manipuflation

LotUnsold Manipuflation Wed, 09/13/2017 - 12:43 Permalink

There are plenty of perpetual bonds out there.  If you expect interest rates to fall high duration bonds is what you want in your portfolio.  This is a very good investment and the coming discussion around it, as people begin to understand what it is, will pave the way for many similar issues.  If George Obsorne kenew his arse from his elbow Britain would have had one 5 years ago.  Why shouldn't you finance the country on the lowest possible interest rate for as long as you can?

In reply to by Manipuflation

Flounder Wed, 09/13/2017 - 10:27 Permalink

History doesn't matter to them when most of the people trading this were between 8 and 13 yrs old during the internet bubble and 15 and 20 during the subprime financial crisis and tarp.

Manipuflation Wed, 09/13/2017 - 10:32 Permalink

What if I issue a one million year bond at 2% yield.  I promise to pay out on maturity, one million years from now, but you won't be able to find what is left of my bones at maturity.  Meanwhile, when I was alive I would have spent all of your money on fast cars, hookers and really good drugs.  We will call it the "Dumbfuck Bond".

LotUnsold Wed, 09/13/2017 - 12:05 Permalink

Of course it was over-subscribed.  It was a giveaway.  I am disappointed that more people on ZH don't understand this and instead are stupidly worrying about getting their $100 back in 100 years time.  Repaying the money has pretty much nothing to do with it, it's the cashflows along the way and they are a whopping 40% higher than you'd get on a comparable 30 year bond.  It's a no-brainer.

LotUnsold bluskyes Wed, 09/13/2017 - 17:12 Permalink

But you are only paying 12.5c in the dollar for the principal at this yield.  It's not about the principal it's about the series of cashflows because the principal is only an eighth of what you are buying.  If inflation averages 2.1% then you will get back your dollar but it will have the spending power of 12.5 cents.  Meanwhile you are getting 40% more every year than you would on a 30 yr equivalent bond while also having a very useful instrument.

In reply to by bluskyes

PGR88 Wed, 09/13/2017 - 12:47 Permalink

These banks are not stupidThey know that the ECB will buy these bonds from them.  They'll earn their fees, plus 50 basis points.  Easy money.

LotUnsold PGR88 Wed, 09/13/2017 - 14:44 Permalink

Exactly, PGR88.   The quid pro quo for being able to hand in toilet paper at the lending window is that you spend the money you are given on sovereign issues.  After taking the capital gains on offer from a) normalising the yield of this bond and b) squeezing the last they can from falling interest rates, you can be sure these will be top of the list for handing in at some point in the future (and buying back at 20c on the dollar, later still).

In reply to by PGR88

oncemore Wed, 09/13/2017 - 12:55 Permalink

70% of newborn in Vienna, are moslems.This is unofficial statistics from austrian nurse in one hospital, where my baby was born 9 months ago (Geburtenabteilung Wilhelminenspital).Official statistics does not exist, it would be antimoslem.....Sharia forbids to pay interests.Mustafa, the financeminister, will obey sharia, I am sure.