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Aug 02, 2019

 

Return of the Century Bond

After the 100-year bond for Oxford University, J.P. Morgan leads another century sale, this time for the Austrian government.

August 2, 2019

J.P. Morgan has led the sale of a 100-year bond for Austria as yields across the globe drop to record lows.

The firm acted as bookrunner on the sale of the so-called “century bond” alongside a new five-year note.

It is the second time in two years that Austria has tapped the market for ultra-long-term debt, looking to take advantage of low interest rates. The country first issued a 100-year bond in 2017, raising €3.5 billion and paying investors a coupon of 2.1%.

For this €1.25 billion re-offer, the yield has fallen to 1.17%, while the five-year note priced at -0.43% – the first-ever publicly syndicated sale to price below the European Central Bank’s deposit rate, which currently stands at -0.40%.

Century bonds are a relatively rare market phenomenon although countries including Argentina and Mexico and companies such as Walt Disney and Coca-Cola have issued 100-year notes in the past. In 2017, J.P. Morgan helped Oxford University enter the capital markets for the first time in its 800-year history with the sale of a $1 billion century bond.

Long-dated debt is attractive to institutional investors like pension funds looking for investments to match long-term liabilities and also hedge funds seeking to make gains through currency or interest rate swap trades (see box).

There was strong demand for the sale, according to Ioannis Rallis, head of the European Supranational, Sovereign and Agency DCM team. It reflects Austria’s AA+ credit rating, the historic low rate environment and lack of alternatives for investors, he said

​Why hedge funds like century bonds

Century bonds are often of great interest to the hedge fund community because of the so-called “high convexity” of the securities. “The convexity of a bond is a measure of the curvature, or degree of the curve, in the relationship between bond prices and bond yields. It shows how the duration of a bond changes as interest rates change,” explained Ioannis Rallis of the SSA team. “With a high convexity bond, the price falls less if yields go up than it increases when yields go down. That asymmetry is very interesting for some investors who can use it as a hedge if interest rates, as some expect, have further to fall.”

“The broader message, however, is one of concern about long-term rates in the eurozone. A lot of investors are frustrated with the investment landscape and don’t have many alternatives in the current environment. No one in the real-money community likes to invest money at 1% for 100 years. But if you’re a government bond investor and 30-year German Bunds yield 0.25% then it becomes an interesting proposition.”

Ioannis Rallis head of the European Supranational, Sovereign and Agency DCM team J.P. Morgan A lot of investors are frustrated with the investment landscape and don’t have many alternatives in the current environment.

Trade tensions and wider political uncertainty in the region are among the factors that have led to the declining euro rate. “There is concern about the expected impact of trade tensions on the euro area economy which has a lot of export-driven countries including Austria. That is certainly there in the background as a driver of low interest rates,” said Rallis.

J.P. Morgan has been one of the top five dealers for Austrian government debt for the last three years, having led a 10-year note in 2018, another 10-year mandate earlier in 2019 as well as the latest sale.

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