‘100-year government bonds could become the norm post-Covid-19’

Major developed nations including the UK could start issuing 100-year bonds to help pay for their spiralling coronavirus debt piles, Sandra Holdsworth of Kames Capital says.

In a somewhat unprecedented move, Austria last week issued a 100-year government bond paying an annual coupon of just 0.85%.

Despite the low yield on offer, the issue was oversubscribed more than eight times over, an indicator of investors’ appetite for high-quality, income generating assets in the current low rate environment.

Holdsworth, Head of Rates at Kames Capital, believes other developed nations could follow suit as they struggle to find ways to pay for the financial support they have given their respective economies throughout the Covid-19 pandemic.

“With interest rates so low and demand so high it wouldn’t be surprising if other debt offices looked to issue ultra-long dated, or even perpetual, bonds to fund their countries ever expanding budget deficits,” she says.

“Looking at this ultra-long area of the market 2020 has already seen more issuance in the 100-year maturity area than all of 2019.”

It is rare to see a developed nation issue such long-dated debt in peacetime, Holdsworth says. Typically, 100-year bonds are associated with emerging market countries such as Argentina and Mexico.

However, now that countries such as Austria, Ireland and Belgium have taken the lead in issuing longer dated debt, others could follow, she says.

“Looking forward we expect further issuance from high quality sovereigns with an increased likelihood of the use of perpetual bonds by debt offices,” Holdsworth says.

“These instruments have been used in the past predominantly when a country enters a war. In the UK, the 1914 War Loan is a famous example, first issued in 1914 with the aim of raising £350m. 

“Unlike the recent deal from Austria, investors only subscribed for around a third of the amount issued.  Fairly recently it was discovered that the shortfall was made up secretly by the Bank of England.  

“A 100 years later central banks are still buying domestic government bonds this time less secretly under the auspices of monetary policy but to the same effect, financing the deficit.”