A flurry of irrational issues have come into the bond markets during the recent few years.

A few days back, Austria managed to sell its existing 2117-Maturity century bonds (by reopening its 2 year old issues to new investors; so effectively a 98-year maturity bonds) through syndicates of investment banks at a yield close to 1.17%. The issue was a huge success and was oversubscribed by 4.5 times of its issue size. It is interesting to know that it was merely 2 years ago, when it had sold EUR 3.5bn of 100-year bonds.

As of today, Austria 10Y Govt bond yield is around -0.025%. Its 10Y-2Y spread is merely 62.4 basis points. Belgium and ireland have already sold century bonds in the past but that was through private placements and for a lesser issue size (around EUR 50-100 millions).

So, what does all these recent developments augur for global bond markets:

1. Investors are willing to embrace the “duration risk” : Century bonds , by itself, has a larger “duration risk” vis-a-vis other shorter maturity bonds (e.g. 30-Y, 10-Y,
etc.) available in the market. Also, citing recent comments by Mario Draghi on further ECB stimulus amid weaker inflation, investors see less likelihood of the impact of
“Duration risk” on the century bonds in the future.

2. Demand for any issues fetching +ve yield :  There is hardly any issues left in Eurozone markets which are fetching a +ve yield. century bonds that Austria had sold 2 years back was priced to yield 2.112% (around 55-60 basis points premium over its outstanding 30Y bonds). The new issue of 98-Y maturity yields 1.17% (around 45-50 basis point premium over its current 30-Y yield). Interestingly, 30-Y Eurozone Central Govt bond yields around 1.39% . It means 98-Y Austria bonds yields less than 30-Y Eurozone Central Govt bond even though it has more duration risk(at least theoretically) vis-a-vis 30-Y Eurozone Central Govt bond.

3. Century bonds score over Perpetual bonds: These issuers could have tapped the markets with traditional route of “perpetual bond” issues. Though, “Perpetual bonds” gives an advantage to issuers by having – no obligation to redeem the capital, but still Austria opted for the century bonds. This could be because of tax advantage
associated with Century bonds for its investors(e.g. Pension Funds). Perpetual bonds investment are treated as equities.

4. What is in store for future: Besides Austria, Ireland and Belgium have already issued century bonds in the recent past. Italy, France and Spain has issued 50-Y bonds. Japan has issued 40-Y bonds. Mexico has done 3 issues of century bonds (though in Foreign Currencies denomination and in smaller chunks). UK has issued 40-Y to 50-Y bonds seven times. So, in this low yield and flattening yield curve environment across Eurozone and US, such issues are going to remain in vogue for considerable period of time. Who knows,  FED too may join this bandwagon of longer maturity bonds issuers.

5. Moral Hazard for Policy makers: It may become attractive to Govt. agencies (high leveraged countries)  to issue perpetual bonds, because it would not show up as debt on their balance sheet. These High leveraged countries will also be encouraged to issue Century bonds (and other longer maturity bonds) to raise the capital at relatively lesser funding cost. This way, the policy makers would have lesser incentives to fix the economy , increase the consumption and thus the inflation.