Long loved no longer
Public debt borrowers pushed out maturities further than ever last year in what was labelled a fad for ultra-long debt by some bankers, and opinion is split over whether the demand for long maturity is still alive in 2017 in the face of rising rates.
Austria brought its longest dated syndicated bond ever last year, when it raised €2bn of debt maturing in November 2086. Italy, Spain, France and Belgium sold 50-year bonds, while Belgium and Ireland placed 100-year debt privately.
“Last year really was a remarkable year for long maturity debt,” said Jean-Marc Mercier, global co-head of debt capital markets at HSBC. “It was a key moment, where interest from issuers in this part of the curve was matched by rampant demand from investors.”
But this demand has been quelled somewhat, say some quarters of the market, by rates rising sharply at the end of last year as the European Central Bank announced changes to its Public Sector Purchase Programme. If investors can get better returns without taking the maturity risk, the thinking goes, then there is no need for them to buy such long-dated debt.
“[Demand for long maturities] changed in October–November when yields went sharply up,” said Mercier. “The appetite at the moment is away from longer duration, as people are a bit more cautious and less certain the yields will remain low for a long time. It is sharply different from last year – the mood has changed.”
The yield on 10-year Bunds, for example, rose from an opening bid of –0.106% on October 3 to close at the end of November at 0.28%, according to Tradeweb. The yield on the notes hit a year low of –0.2% in July. They were at 0.35% on March 8.
Indeed, at the end of February, Germany tried to tap its July 2044 Bund via an auction for a further €1bn with poor results. Only €733m total bids were received, which made the auction a technical failure – Germany’s first in seven previous 30-year taps. The €583m fill made for a soft cover of 1.26, the lowest since March 2016, which was the sovereign’s last technical failure at this maturity.
And the European Financial Stability Facility, one of the few sub-sovereign issuers that has a need to push out so far up the curve, found the going tough when it sold a €1bn 39-year trade that only just about scraped through on €1.2bn of orders.
“It is not a hugely deep market and there is less consensus on the long end,” said Mercier at HSBC. “Meanwhile, curves have steepened a bit and new issue premiums are higher.”
The EFSF’s lacklustre first outing of the year at the very long end of its curve will worry the issuer, as the short-term debt relief measures approved at the end of January for Greece means that it will need to issue long maturity bonds more frequently.
The average weighted maturity of loans to Greece is now at 32.5 years after the January agreements, from about 28 years previously.
“The sell-off at the end of last year put issuers on the back foot and made them consider how deep the market for the long end will be,” said John Lee-Tin, head of SSA DCM for Europe, Middle East and Africa, at JP Morgan. “So we saw them return with shorter dated deals at the beginning of 2017.”
But while the ultra-long end is still a shaky prospect for issuers, maturities in the 20-year bracket appear to be back on the menu, with those able to offer a bit more yield than Germany’s stalwart debt finding good success in syndicating longer duration paper. Ireland was the first sovereign borrower to raise its head above the parapet this year, with a €4bn 20-year print – the first one in the country’s history.
“Once some confidence returned, so did longer issuance,” said Lee-Tin. “We should continue to see long maturities over the next few years, as yields are still historically low.”
Ireland had wanted only €3bn, but the €11bn book convinced the National Treasury Management Agency to add another €1bn to the deal size. At the time, the NTMA said that it hit the 20-year part of the curve because of investor enquiry.
Mercier at HSBC said: “People are happy to jump into 15 and 20-year deals. In August, the 15-year euro swap was at 0.6%. This doubled to 1.20% in December and has been around there since. This is a level that is then quite interesting because investors want to capture that carry.”
And although rates are rising, there is still a significant reward for taking on duration risk. Ireland’s 20-year notes, for example, were bid at a yield of 2.066% on March 10, some 190bp higher than the sovereign’s March 2022s, according to Tradeweb.
Furthermore, long duration debt was given a reprieve on March 9, when the European Central Bank provided a slug of stability to markets by keeping its rates and bond buying programme on hold.
“Investors are still looking for yield,” said Lee Cumbes, head of public debt at Barclays. “Certain buyers that were limited in the range of different assets they targeted last year are still largely focused on the same high-quality bonds this year.
“In principle, there is still a similar challenge in managing for historically low yields that they had six months ago.”
Debt issuance in the 15-year plus bracket, which public debt bankers still consider to be long-maturity, has been far from shabby so far this year. HSBC put it at €47bn at the end of February, compared to €98bn for all of 2013, €115bn in 2014 and €147bn last year.
One of the biggest single long-dated sovereign bonds so far this year came from France at the end of January, when it raised a whopping €7bn through a debut Green OAT that matures in June 2039 (see separate article on SRI bonds).
“It is still very early in the year to assess what the implication of rising rates has had on investor behaviour,” said Anthony Requin, chief executive of Agence France Tresor. “But we have seen that the demand for long-term bonds is comparable to what we saw last year.”
The short end of long
One change is that investors might begin to gravitate towards shorter maturity debt that is nonetheless still very long by most standards.
“As yields have risen, of course, it may be that investors can achieve certain coupon targets without stretching out to the very highest duration bonds at the ultra-long end,” said Cumbes at Barclays. “Thirty years could well suffice, rather than 50 years, for example. Having said that, there are other reasons for buying bonds than simply headline yield, so a range of different maturities remain in demand.”
One of the big reasons investors like long-duration debt other than the yield on offer is the convexity it provides; for example, where price falls are limited but price rises are exponentially larger.
France has ambitions to test out the appetite for 30-year syndicated debt this year, after the AFT announced at the tail-end of last year that it would target that part of its curve with a new OAT.
But with elections in France balancing on a knife-edge, AFT is holding off on issuance for now.
“The current electoral period in France, in which we have already entered, from a market perspective has pervasive headlines risks [and] is not necessary the best environment for issuing a new 30-year nominal OAT,” said Requin. “We need smoother markets. So, without pre-committing and without excluding anything, I consider that we’ve time to execute this deal.”
Requin pointed to France’s €4bn 2047 index-linked issue that came in September last year as proof that AFT does not need to rush to market.
“[The linker experience] was very satisfactory, both from a demand and execution standpoint, showing that markets are open throughout the year,” said Requin.
There are other sovereigns with the potential to print ultra-long-dated bonds. Austria has begun the legislative process to issue 100-year debt.
However, it is worth noting that the time it took between Austria beginning the legislative process to print 70-year paper and the corresponding trade emerging was three years.
Belgium is another potential for ultra-long-term issuance this year. The country’s debt office said in its 2017 funding plan that it was considering the possibility of placing a “new, very long-term benchmark”.
Though the debt office subsequently told Reuters that printing such debt this year “might be more difficult”, given the rises in rates.
Nonetheless, issuers are keeping a close eye on what other sovereigns are considering at the long end.
“The US admin is discussing potentially issuing 50 or even 100-year bonds – and we are looking carefully at how discussions will unfold,” said Requin at the AFT.
One thing seems almost certain: lengthening human lifespans mean that the demand for longer maturity bonds looks likely to grow organically, regardless of what rates are doing.
“As demographics get older, pension funds’ average duration liabilities should naturally grow. This means that on a long-term view, long-maturity bonds might be more in demand,” said Requin.