When Austria introduced a fresh batch of 100-year bonds in the summer of 2020, investors were enticed by the attractive 0.85% coupon. This resulted in an overwhelming demand of around €16 billion worth of orders for these ‘century bonds’.
However, the yield on the same bond, set to mature in 2120, has now reached nearly 3% with its price plummeting below €33, according to Tradingview. This substantial 67% decline serves as a reminder of the potential risks associated with duration risk, or the sensitivity of an asset to changes in interest rates. In simple terms, the longer the maturity of a bond, the higher the duration risk.
The decision to issue a 100-year bond during a period when central banks were maintaining artificially low interest rates has proven to be especially risky. Yet, despite these risks, duration risk can also present lucrative opportunities. Initially, investors reaped substantial rewards as the fallout from the COVID-19 pandemic wreaked havoc on economies across Europe. By December 2020, yields on the Austrian 2120 bond had fallen below 0.4%, causing its price to double, reaching €200.
However, the landscape has dramatically changed since then. The yield on the U.S. 10-year Treasury bond, which was previously below 1%, has now soared to 4.7%. Similarly, the German equivalent, which was once near negative 0.6%, has risen to just shy of 3%. This shift is a result of central banks like the Federal Reserve and ECB reversing their ultra-loose monetary policies in response to resurgent inflation.
Consequently, century bonds have suffered significant losses. Peter Boockvar, chief investment officer at Bleakley Financial Group LLC, perfectly summarized the situation when he stated, “Duration bites right now and there is no better example than this bond… This is not a meme stock and not a high flying tech stock, but a sovereign bond with an AA+ credit rating.”