Austria has defied market expectations with a century bond issuance that garnered significant investor interest, at rock-bottom rates. David Wigan reports.
Markus Stix
Why borrow for 10 years when you can borrow for 100 and only pay about 1% a year in interest? Anyone thinking that there is no way investors will buy that proposition should think again. The Republic of Austria made a new foray into the ultra-long segment of the yield curve in 2019, and came away with more than €4bn of orders for a bond that will not mature until the next century.
In 2017, Austria was the first eurozone country to sell a syndicated 100-year bond, and tapped it a couple of times in 2018 even as the bond rose to as high as 116% of face value in secondary markets. In mid-2019, the country’s Treasury set about planning another reopening. However, it had to contend with a challenge, which was that the price of the 2017 bond just kept on rising. In August, it was trading at around an astonishing 200% of face value, having rallied 63% since the start of the year. The gains were driven by exceptional demand in a widely negative interest rate environment. Surely, under those circumstances, Austria couldn’t do it again?
Strong signals
“At the beginning of September, the bond was trading below 1%, after rising all year, which shows we had a strong signal from the market that there was a lot of demand,” says Markus Stix, managing director of the Austrian Treasury. “There were also a few other factors at play. Pension fund liabilities were getting longer and longer, there were low rates across the curve, and people were not able to hold cash in large amounts, and sometimes not permitted to deposit with the European Central Bank [ECB]. As a result, they have to get out and buy something.”
One reason longer dated bonds are popular among investors is due to their so-called 'convexity', which means that for every basis point change in yield there is a much bigger move in price than there is for shorter dated securities. This can be painful in a sell-off but in a bull market it is good news for investors.
On top of that, Austria is among the most attractive sovereign credits in Europe. The country is out-growing the average across the eurozone, is regarded as a safe haven to political events such as trade disputes and Brexit, and boasts a highly diversified economy. The country’s debt-to-gross domestic product ratio is a conservative 70%, with 60% targeted by 2023. Debt levels have fallen as the government has gradually unwound 'bad bank' liabilities acquired following the financial crisis.
Flexible friends
Austria accounts for just 3% of total eurozone funding, a relatively light burden which gives it more flexibility in how it goes about its business. As a result, the country’s Treasury has established itself as an innovator in capital markets, issuing securities across a range of formats and platforms. It is also a leader in the development of distributed ledger technology, using the Ethereum blockchain to notarise debt auctions from October 2019.
“We have a lot of programmes and our relatively small size gives us flexibility,” says Mr Stix. “We also enjoy a high level of investor confidence.” In 2019 the average yield across all of Austria’s funding was at an all-time low of -0.12% annually.
As it planned its new 100-year tap, the team appointed Bank of America, Goldman Sachs, JPMorgan, Nomura and UniCredit as lead arrangers on the deal. The plan was to issue a €3bn five-year security with a 0% coupon and a €1bn 100-year with a 2.1% coupon. The timing was carefully chosen following a period of relative stability, after a significant rally post a dovish ECB meeting, a supportive policy-maker speech and Federal Open Market Committee press conference. With these tailwinds blowing, the banks wasted little time getting to market.
“The initial price talk on the 100-year was our 30-year plus 55 basis points area,” says Mr Stix. “We started in the morning London time and it was not long before the book was five times oversubscribed, which enabled us to move the price in to plus 48 basis points, offering an absolute yield of 1.17%.” The Treasury ended up selling €1.25bn of the bond, including a €250m retention, and paid a new issue premium of 3 basis points. The five-year, meanwhile, was the first syndicated euro government bond ever to price below the ECB deposit rate.
“We were very happy,” says Mr Stix. “We managed to attract 85 investors to the 100-year transaction, and more than 200 investors in total across both securities. I think what this shows is that expectations for the future of interest rates may have changed for good.”
