"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."