Austria is sounding out investors for a potential 100-year sovereign bond sale as soon as Tuesday, in what would be the first "century bond" to be sold publicly by a euro zone country. A successful sale would demonstrate that demand for super-long bonds, whose prices are hyper-sensitive to interest rate changes, remains solid even as central banks start winding down their crisis-era stimulus measures, bankers said.
Austria's debt management office announced last Tuesday that it would sell five-year bonds and explore the possibility of selling 100-year debt, with a deal expected in the near future. Among euro zone countries, only Ireland and Belgium have previously sold 100-year bonds, both via private placement, where the bonds are sold directly to a small handful of investors or even just one buyer.
Austria is planning to sell its bonds through a syndication, using a group of banks - Bank of America Merrill Lynch, Erste Group, Goldman Sachs, NatWest Markets and Societe Generale - to help access a wider base of investors. That should secure a larger issue size and a strong secondary market - syndicated deals are typically at least a billion euros or more, compared with 50-100 million euros for the Irish and Belgian deals.
Last year, Austria sold 2 billion euros of 70-year bonds. "If the deal happens, it will show that these ultra-long products are still very much still on and investors are not expecting interest rates to go anywhere soon," said one of the bankers who has been appointed to manage the deal.
"Also, people are not just looking to buy and hold these bonds until maturity anymore - they are also looking at other things such as duration, and of course yield." Duration is a measure of how long it takes investors to recoup their investment in a bond through the payment of coupons and principal.
Austria's 70-year bond is currently yielding about 1.81 percent, so a yield of about 2 percent could work for a 100-year bond, he said. Many euro zone countries have taken advantage of a low-yield environment - fuelled by extraordinary stimulus measures put in place by the European Central Bank - to sell long-dated bonds in recent years.
With the ECB now expected to scale back stimulus sooner rather than later, the expectation was that this bid for higher-yielding long-dated bonds would fade. But even as central banks tighten policy, investors show little sign of retreating from the riskier debt. A second banker working on the deal said the banks are in the process of gathering feedback and won't go ahead with the deal unless there is strong demand. "But it's good conditions, and an interesting project given the convexity it brings." Convexity is a measure that effectively demonstrates how the duration of a bond is affected by any changes in interest rates.
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