Fifty Years of History Is Worth Braving for European Bond Buyersby , , and
Allianz Global Investors bought French and Belgian debt
BlueBay Asset Management says yields could fall further
A lot changes in half a century. In 1966, Europe was still rebuilding after World War II and divided by a Berlin Wall that was only five years old. Spain and Portugal were under dictatorships.
But with $2.7 trillion of European bonds yielding less than zero, some of the biggest fixed-income investors are looking 50 years ahead to buy government debt they consider decent value.
Even with a yield below 2 percent, Pioneer Investment Management and BlueBay Asset Management recently bought the securities and see yields dropping even lower. Allianz Global Investors said it purchased 50-year French and Belgian bonds. While investors in the longest debt typically are pension plans and insurers, figures from Spain’s Treasury showed a greater proportion of its sale of 50-year bonds last week were snapped up by other money managers including hedge funds.
“Some of the cheapest bonds in the world at the moment are 50-year euro-zone government bonds,” said Mike Riddell, a London-based fund manager at AllianzGI, which manages about $500 billion for customers.
Governments are taking advantage of the demand to lock in record-low borrowing costs for unprecedentedly long periods. Sellers over the past two months include Spain, France and Belgium and Italy’s debt agency said it was evaluating demand for a possible 50-year sale.
Ireland, which was jostling for independence from Britain a century ago, sold a 100-year bond in March at a yield below what investors got five years ago for a 10-year bund from AAA-rated Germany.
Locking up money in securities that pay next to nothing suggests a deep concern among investors over the state of the global economy. The International Monetary Fund last month warned that a prolonged period of slow growth had left the global economy more exposed to negative shocks and raised the risk that the world will slide into stagnation.
As maturities get longer, the risk increases. The effective duration of European government bonds, a gauge that determines how much prices are likely to change when interest rates move, surged to an all-time high of 7.5 this month, according to Bank of America Merrill Lynch data. That translates into a 7.5 percent decline in price for every percentage-point increase in yields. The duration was at 7.48 on Tuesday.
Investors said they are mindful of the risk. Pioneer, which overseas more than $200 billion, is buying ultra-long bonds as part of its short-term strategy to take advantage of the gap in yields compared with debt maturing in less time, said Cosimo Marasciulo, head of government bonds at the Dublin-based asset manager. Pioneer bought the 50-year French securities a month ago, he said.
The French security maturing in 2066 yielded 1.84 percent on Wednesday, while similar-maturity Belgian bonds yielded 2 percent. The rate on 50-year Spanish bonds was 3.34 percent. The French bonds have a yield premium of about 37 basis points over their 30-year counterparts. In Belgium, the spread was 39 basis points.
For BlueBay’s Mark Dowding, it’s far too early to be worried about rising bond yields as inflation remains benign. Another upside for ultra-long bonds is that demand may pick up in the future if governments increase issuance, raising a chance they will go into fixed-income benchmarks, he said.
“We think that yields can continue to grind lower,” said Dowding, a partner and money manager at the company. “In a world where euro-zone investors are really facing the fact that there is very little yield to be had in many assets, there is that appetite for more ‘yieldy’ assets you can get from longer-duration issues.”