Austria 70-Year Bond Hands Out Duration Lesson in First Week

  • Nation’s longest bund plunges amid global-debt selloff
  • Security has duration of 43 following 2 billion-euro sale

Austria’s 70-year bond is providing traders with a perfect illustration of the perils of high duration.

The nation sold 2 billion euros ($2.2 billion) of the bunds this week, taking advantage of historically low borrowing costs. While that looked like a boon for the government, it left investors subject to extraordinary price swings. A buyer of 10 million euros of the securities saw a paper loss of more than 500,000 euros by the end of Thursday, according to data compiled by Bloomberg.

Even as bonds across the world slid, the Austrian security handed traders a bigger-than-average paper loss. Its relatively low coupon and long maturity help produce a high duration factor, meaning it’s price is more volatile. Investors have accepted higher duration as they pay unprecedented prices for longer debt, spurred on by accommodative policies from central banks that crushed yields on shorter-dated securities.

That’s troubling because the higher the duration gauge goes, the steeper the losses will be when yields rise. The duration on Bank of America’s Global Government Bond Index climbed to an all-time high of about 8.5 in July, from about 5 when the benchmark began in 1997.

Austria’s 70-year bonds have a duration of 43, according to data compiled by Bloomberg. Many buyers may have hedged themselves using other debt or swaps.

Faster-than-expected economic growth in the U.K. spurred selling by traders on Thursday as they reassessed how long ultra-easy policy may continue under the Bank of England and the European Central Bank, headed by Mario Draghi. Austria’s sale gave it membership to a small global club of ultra-long borrowers, including France, whose half-century security rose more than 3 percent in its first week after an April sale.

“They could have issued this mid-year and we could be talking about this bond being an incredible success,” said Matthew Cairns, a rates strategist at Rabobank International in London. “But the market is still looking for Mr. Draghi to do something come December, and that, from where the majority of the market sits, is likely to be an extension of the program beyond March 2017” to acquire sovereign debt.

The yield on the 70-year bunds jumped to 1.677 percent as of the 5 p.m. close in London on Thursday, compared with the 1.53 percent yield at which they were sold on Oct. 25. The 1.5 percent security due in November 2086 fell to 92.732 from a sale price of 98.717, according to broker data compiled by Bloomberg. The bonds were little changed on Friday.

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