French 50-Year Bond Swings Show Duration Risk Amid Belgium Sale

  • Belgium sold securities due in 2066 via banks on Thursday
  • Ultra-long bonds face a `big risk' from duration: Danske Bank

As Belgium becomes the latest European nation to sell 50-year sovereign securities, investors don’t need to look far for a reminder of the risks inherent in ultra-long debt: Similar-maturity bonds sold by France two weeks ago have had price swings totaling almost 9 percent.

Belgium sold 3 billion euros ($3.4 billion) of bonds due in 2066 via banks on Thursday, according to the nation’s debt agency, the latest in a surge of euro-zone countries looking to lock in historically low interest rates via extra-long debt offerings.

While investor interest in 50- and 100-year debt has swelled as the European Central Bank’s bond-buying plan crushes yields on shorter-dated securities, the risk of losses increases. France’s May 2066 bonds sold via banks on April 12 at 94.683 climbed to as high as 99.383 the following week before falling to 91.01 Thursday. They were at 91.825 as of 5 p.m. in London.

With $2.4 trillion of euro-area government securities now yielding below zero, guaranteeing losses for anyone buying them now and holding to maturity, investors are taking more risk to get better returns.

While the recent decline in the French ultra-long bond may have been driven partly by dealers making room for the Belgium securities, their underperformance can lead to an outsized loss due to the increased sensitivity to a yield move -- a gauge known as duration.

Investors ‘Forced’

“Negative bond yields or low return in general are forcing investors to take more risk,” said Soeren Moerch, head of fixed-income trading at Danske Bank A/S in Copenhagen. “A lot can happen over the next 50 years. Duration is a big risk, but there are also other factors to consider. Will Belgium still be in this current shape or form in the next five decades? To issue one is excellent risk management. To buy any super-long bonds at the current level of yields may not be clever.”

Low yields on longer-dated debt has concerned investors recently as small increases in yield could lead to large losses. The effective duration of the European government market surged to an all-time high of 7.50 in April. That translates into a 7.50 percent decline in price for every one percentage-point increase in yields.

Ineligible for QE

The 50-year securities also are not eligible for the ECB’s asset-buying program, which ensures demand for its shorter-dated counterparts. Investors may also demand an additional premium for this, beyond a yield increase due to the longer maturity. France’s 50-year bonds yield 2.01 percent, in comparison 30-year bonds that are eligible yield 1.62 percent.

“There may also be a degree of realization that the 50-year sector is going to be increasingly common as an issuance point on the curve going forward, given the evidence of demand for that sector from those with long-dated liabilities, and for the convexity the sector offers,” said Peter Chatwell, head of rates strategy at Mizuho International Plc.

The Belgian deal “is a perfect example of how issuers are adapting to the new conditions of much lower and flatter yield curves, and how demand has also structurally shifted along the curve,” Chatwell said.

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