The Austrian government’s landmark 100-year bond drew double the usual amount of investors. Markus Stix of the Austrian Treasury described the deal to David Wigan. 

Markus Stix

One-hundred years is a long time in the bond markets. Indeed, in normal circumstances neither the borrower nor the lender in the transaction would be around to see the bond repaid. To put it in perspective, it would have meant lending during the Russian revolution, and hoping to be repaid today.

None of this perturbed the government of Austria, which in September successfully sold its first 100-year bond, due 2117. It attracted twice as many investors as conventional Austrian debt, suggesting that the impossibility of being repaid in a lifetime is no deterrent to investors in today’s environment, where there is a mispricing of risk caused by central bank fixed-income purchases.

Thanks to its quantitative easing programme, the European Central Bank owns €1900bn of regional government bonds, which has drained the market of liquidity and pushed yields to record lows. The Austrian 10-year bond paid a yield of 0.61% in recent trade.

Go longer

“There is a huge desire among investors to try to earn more yield and the way you can do that is either to take a step down in credit quality or a step longer in duration,” says Markus Stix, managing director of the Austrian Treasury. “For most investors it’s probably more appetising to go longer to reach target yields and to obtain additional convexity at a marginal duration increment than to increase the risk of default.”

Austria did not jump into the world of ultra-long borrowing without doing its homework. In October 2016 it dipped its toe into the market, selling a 70-year security at a mere 53 basis points (bps) over its 30-year bond.

“The market had shown there was demand for the 70-year RAGB [Republic of Austria Government Bond] last October, and the extensive marketing work showed that there was a deep additional pocket of demand beyond that maturity,” says Mr Stix. “If you look at what people can reasonably earn from high-quality credits in the 10-year part of the curve, then from an asset liability management perspective it makes sense to go as long as possible.”

Austria’s annual issuance accounts for about 3% of the eurozone’s total. This year it plans to borrow €38bn to €41bn, of which €24bn to €26bn will be through bond issuance (and the rest via Treasury bills and loans). The country’s relatively modest issuance programme adds to its attractiveness, offering diversification value to investors. Plus, Austria’s economy is in good shape, reflected in its AA+ credit rating, and the Treasury expects growth this year to reach 2.8%, higher than the eurozone average.

Encouraging response

The positive response to the 70-year security convinced Mr Stix and his colleagues in late 2016 that Austria could go even longer on maturity. However, national law prohibited borrowing for any longer. Treasury officials approached the Ministry of Finance to discuss the situation, leading to a redrafting of the law in April to allow longer term borrowing.

“While it was clear that by going longer we would have to pay a higher coupon, it was also clear that the current situation would mean that we would be paying a considerably lower rate than we had in the past for long-term debt, and that it was an opportunity to lock that in,” says Mr Stix.

Once the amendment took effect, the Treasury moved quickly, meeting with eurozone and UK investors and speaking to dealers in June, with a focus on banks with a track record in the ultra-long segment of the market. The Treasury discussed the pros and cons of doing a 100-year bond. “The pro was that we would extend the average duration of the country’s debt, so reduce refinancing risk, but the con is that it is very difficult to do a tap of an ultra-long bond, because banks are not keen to warehouse such long-dated securities,” says Mr Stix.

After further discussion with bankers in August, it went ahead, mandating Bank of America Merrill Lynch, Erste Group Bank, Goldman Sachs International, NatWest Markets and Société Générale to market a €3.5bn 100-year security, alongside a €4bn five-year benchmark. The remaining primary dealers of the Republic of Austria were invited to participate as co-lead managers.

Impressive result

On September 12, the Republic of Austria launched its transaction, marketing a 100-year security with initial price thoughts of 60bps over its 30-year bond. In just over one hour, indications of interest began to grow and soon topped more than €6bn. Books were formally opened and guidance released at a tightened spread of 55bps to 60bps over the 30-year bond.

Two hours later, orders had reached €11bn, leading to a further price tightening of 50bps to 55bps over the benchmark. The book closed with €10.8bn of orders, and the issue was fixed at €3.5bn at a price of 50bps over the 30-year – cheaper than the 70-year deal sold last year. Some €500m was retained by the issuer.

It was the Republic of Austria’s biggest deal size and order book (208 single orders, including many smaller accounts) and deal size. “To be honest, we were absolutely amazed,” says Mr Stix. “However, we can’t promise that we will do more – it will depend on our funding needs and the steepness of the curve in future.”

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