Austria sells ‘century bond’ with yield of just 1.2%

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by Nikou Asgari, Financial Times:

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Having seen blowout demand for its debut 100-year bond two years ago, Austria has returned to sell more ultra-long debt, highlighting a scramble for returns in a world of rock-bottom sovereign yields. Vienna’s €1bn extension of its so-called “century bond” was met with €5bn of demand from potential investors, while bids for a separate €3bn issue of five-year debt reached almost €23bn. The Austrian Republic, which was founded after the first world war 101 years ago, smashed records two years ago when it issued the world’s biggest century bond, at €3.5bn, which was priced at a yield to maturity of 2.1 per cent. The debt has since rallied to yield 1.16 per cent, reflecting investors’ desire to grab yield at a time when many European sovereign bond yields are in negative territory — and major central banks are dropping hints of further monetary easing.

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The yield on the new tranche of Austria’s century bond, which matures in 2117, came to 1.171 per cent, while the new five-year bonds were sold at a yield of minus 0.435 per cent. According to a banker close to the deal, that marks the first time sovereign debt has been sold at a yield less than the European Central Bank’s deposit of minus 0.4 per cent, which is applied to excess reserves. “I was really surprised that it went so well,” said the banker. “Investors all believe that rates are not going to rise.” The ECB recently joined the US Federal Reserve in signalling its readiness to cut interest rates further if economic conditions worsen. Mario Draghi, the ECB president, indicated last week the bank could relaunch its €2.6tn quantitative easing programme if the region’s inflation outlook did not improve. Austria’s debt sale also highlights that tumultuous political events, such as the recent ousting of chancellor Sebastian Kurz, have not tempered investors’ demand for the country’s bonds. Myles Bradshaw, head of global aggregate fixed income at Amundi, a €1.5tn-in-assets fund manager, said Austria’s low cost of borrowing reflects “greatly increased expectations” that the ECB will ease policy later this year, perhaps reducing its penalty rate on excess deposits further. “At least you’ll be locking into that payment for five years,” said Christoph Rieger, head of rates at Commerzbank, adding: “You can only be sure that you’ll get the minus 0.4 from the ECB for the next few weeks because it might be minus 0.5 or 0.6 [soon].”

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