The most infamous bond trade: the Austria century bond. The most infamous bond trade: the Austria century bond. The most infamous bond trade: the Austria century bond.

The most infamous bond trade: the Austria century bond.

Bonds
Althea Spinozzi

Head of Fixed Income Strategy

Summary:  Investors have high hopes for the Austria 2120 bond. As deflationary pressures accelerate and growth remains sluggish, the ECB will begin cutting rates, pushing sovereign valuations upwards. Yet, the Austria century bond is paying a 2.3% yield, offering no pick-up over 10-year German Bunds. Although this instrument will undoubtedly benefit from a rate-cutting cycle, as the shape of the yield curve normalizes and investors take profits, a bear market might form in the ultra-long duration segment. For the Austria century bond to move back close to 100, one must assume that rates would drop around Covid levels. That is a bold bet in an ever-changing world where geopolitical tensions remain high and deglobalization is underway.


As discussed in a recent article, the consensus among economists is for deflationary pressures to accelerate in the eurozone this year, causing headline and core inflation to hit the ECB’s 2% inflation by mid-year, well before the central bank’s estimates. Such a move argues for an extension of duration as central banks get ready to curb interest rates early and aggressively. However, by how much should one extend the duration of their portfolio?

Concerning duration, Europe is an exciting playground because governments issued ultra-long-term sovereign bonds (30+) when interest rates were negative. In contrast, the US Treasury has never sold bonds with more than 30-year maturity. As the ECB aggressively hiked interest rates to fight inflation, the value of these securities plummeted, reaching distressed-like values. Yet, these bonds have nothing in common with distressed instruments because the price drop is not linked to one country's repayment capabilities but rather to the bond's structure.

The Austria century bond: a double-edged sword.

While it is true that each European country’s sovereign bond has a different risk profile depending on its economic fundamentals, some, such as Austrian bonds, have a risk profile similar to that of the Bunds. Therefore, investors can benefit from an additional pick up over the German Bunds while taking minimal additional risk compared to the European benchmark.

During the COVID-19 pandemic, Austria issued an infamous 100-year bond yielding 0.9% (AT0000A2HLC4). As the ECB deposit rate went from -0.5% to 4%, the bond price went from a €139 high to €33 low in October last year. Currently, the bond is trading at €42.

What's interesting is that while the Austria century bond was issued offering a pick up over the 10-year German Bund of 135bps and 90bps over the 30-year Bund (at the time, almost the entirety of Germany's yield curve was below 0%), since 2022 the spread between these three instruments compressed. Nowadays, they are offering approximately the same return. Yet, their risk profile is entirely different. 

Austria's 100-year bond pays a 2.4% yield and has a modified duration of 46%. That means that for a 100bps increase or decrease in yield, the bond price moves by 46%. Germany’s 10-year Bunds (DE000BU2Z023) have instead a modified duration of 9% while Germany’s 30-year Bunds (DE0001102614) of 20%. Therefore, the Austria bond carries more duration risk than the other two.

The big question is: will the yield on the Austria century bond drop equally as the 10- and 30-year Bund yields once the ECB starts to cut rates? That’s a tricky question to answer because if we are assuming a steeper yield curve, then the Austria century bond should offer a considerable pick-up over bonds with shorter maturities.

Therefore, it is possible to envision two scenarios:

1- The drop in the Austria 100-year bond yield will lag the one of the 10- and 30-year Bund yields, resulting in a steeper yield curve.

2- The Austria 100-year bond yield will drop faster than the 10- and 30-year Bund yields, but it will soon enter a bear market as investors profit from this position.

The reasoning behind scenario number two is that as the ECB cuts rates aggressively amid a sluggish economy and diving inflation (as per consensus), real money might extend their portfolio duration drastically. They might look to secure the highest yield further away in the future, causing the ultra-long part of the yield curve to drop faster compared to other long-term tenors (10 to 30-year maturity).

Problems might arise when monetary policies normalize, and investors begin taking profit from their ultra-long positions. That would likely contribute to a bear market concentrated in the ultra-long part of the yield curve, which, if investors are unable to forecast timely, might result in losses.

For the Austria bond to return to €100, one must assume that rates would drop around Covid levels. In an ever-changing world where geopolitical tensions remain high and deglobalization is underway, that's a bold bet.

Source: Saxo and Bloomberg.
Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
- Full disclaimer (https://www.home.saxo/en-mena/legal/disclaimer/saxo-disclaimer)


Boulevard Plaza, Tower 1, 30th floor, office 3002
Downtown, P.O. Box 33641 Dubai, UAE

Contact Saxo

Select region

UAE
UAE

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

Saxo Bank A/S is licensed by the Danish Financial Supervisory Authority and operates in the UAE under a representative office license issued by the Central bank of the UAE.

The content and material made available on this website and the linked sites are provided by Saxo Bank A/S. It is the sole responsibility of the recipient to ascertain the terms of and comply with any local laws or regulation to which they are subject.

The UAE Representative Office of Saxo Bank A/S markets the Saxo Bank A/S trading platform and the products offered by Saxo Bank A/S.