Austria issues a 100-year government bond

Discussion of the Bond portion of the Permanent Portfolio

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Lang
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Austria issues a 100-year government bond

Post by Lang » Tue Sep 12, 2017 4:59 pm

Austria has issued today 3.5bn euros worth of a 100 year government bond.

It is due to mature in 2117.
It pays interest 2.11% annually.
It has a duration of 44 years.

According to Bloomberg:
This new 100 year will be the most price-sensitive bond that exists. In any currency.
Will this become the go to bond for the bond portion of a Euro PP? The credit risk seems small, anyway (only Germany would probably be safer).

Sources:
https://www.bloomberg.com/news/articles ... trian-sale
https://www.bloomberg.com/gadfly/articl ... nd-century
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jhogue
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Re: Austria issues a 100-year government bond

Post by jhogue » Wed Sep 13, 2017 2:08 pm

See the article on the same subject in today’s Wall Street Journal, “A 100-year Bond Is a Hit.”
A few points for European investors to consider:

-This is not Austria’s first ultra-long bond offering. The article notes that Austria sold 70 year bonds in 2016, and 50 year bonds five years ago. The accompanying chart shows other countries’ interest in longer maturities.

-While this offering might look intriguing for a Euro PP, there are a couple of cautionary notes to consider. Austria does not issue the euro, so it is not entirely analogous to the US government’s control over the dollar. The other potential issue is the liquidity of these bonds for individual investors. Austria sold only 3.5 billion euros of these bonds. That is smaller than many US municipal and AAA corporate offerings, which sometimes exhibit liquidity issues. Nevertheless Euro PP investors, who have mostly confined themselves to 10 year German bunds in the recent past, might consider purchasing a fraction of their overall long bond portfolio to lengthen duration, increase volatility, and gain additional protection against the threat of long-term deflation in the eurozone.

Some points for US investors:

-The article notes that this Austrian offering was oversubscribed and that the Austrian government held 500 million euros worth of the bonds. Both suggest to me that the market believes that there is little doubt that Austria can and will maintain a sufficient reserve on hand to ensure this bond remains liquid in the euro markets.

-Secondly the Austrian ultra long bond sale offers some concrete evidence that Trump’s Treasury Secretary Mnuchin, who has advocated ultra long bonds to pay for a $1 trillion US infrastructure program, may yet get his way. A recent article argued that TBTF US banks do not like Mnuchin’s proposal for 50- and 100-year bonds because it threatens their huge ($250 billion) and profitable trade in 30-year zero-coupon STRIPS.
See:
https://www.bloomberg.com/news/articles ... s-at-banks.

Finally, there are many different ways to hold cash, gold, and stocks in the US PP. We argue about them on an almost daily basis. Other than the ETFs TLT and EDV, 30-year bonds are pretty much it for bonds—the PP asset many investors “hate to love.” Given the continuing prospect of a flattened yield curve, is anyone here thinking about the possibility of acquiring higher yielding (and more volatile) 50- or 100-year US Treasury bond – if Trump’s guy at Treasury gets his way?
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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