Ultra-long bonds are sexy, but not for everyone
The long-end offers something for both issuers and investors, but only if the stars align
Despite key central banks signalling that interest rates will continue to trend upward amid inverted yield curves, some yield-hungry investors are chasing long-dated paper.
Most of the duration trades this year were met with enthusiasm from the buy-side. Triple-A rated Germany's €4bn 30 year deal was the most recent to come to market, with the issuer having to allocate the notes to a whopping €41bn final book.
Off the back of the sovereign success, the German State of North Rhine-Westphalia (Land NRW) last week brought an even longer 50 year bond to the market. It too managed to attract demand that three times covered its €2bn size, proving an ample demand for duration. As well as Germany, the likes of Italy, France and the European Union have all tapped into the longer end this year.
Land NRW's 104bp spread over mid-swaps and 3.411% yield — one of the highest for a euro bond this year — proved attractive to investors. But the pricing was equally appealing to the issuer: thanks to the inversion in the swap curve and the flatness of Land NRW’s own curve it was able to fund its 50 year cheaper than it would have done with short-to-medium tenors.
Ultra long bonds of 50 years or longer have always been a rare product, and have been inaccessible to most of the SSA community. But the clear level of demand and the competitive funding cost may tempt more — think certain sovereigns or French agencies — to join the party.
But for the time being at least, the ultra long end will likely be reserved to a very selective group of issuers.
Unbudging inflation and a tight labour market means higher rates are here to stay. While some investors are open to add duration to their books, more are both risk and maturity-averse and prefer to sticking to the shorter end. And while the appetite for duration is fragile, and with the current economic uncertainty and rate volatility, it is unlikely to be either deep or sustainable.
But, the stars will have to align for the ultra longs to work. It will have to come from the right name, preferably one with a proven track record like Land NRW, which is almost unbeatable in issuing on this part of the curve having previously brought three other deals in the 40 to 60 year segment plus three century bonds since 2017.
If the trend continues, issuers and their lead banks must be prepared to do more heavy lifting than usual. None can afford to have an ill-timed trade in a market where finding the right window — one that is clear of any market-moving data, meetings, speeches or geographic events, while at the same time free of heavy competing supply — for issuing more vanilla and less controversial product, has already proven increasingly challenging.
That is all before even considering pricing, which in a market where investors are refusing to budge when demanding decent compensation, even in the shorter end, means the tug-of-war between the buy and sell side will only intensify further out on the curve.
Issuers other than Land NRW will be able to find success at the ultra long end if they are able to tick all the right boxes. But for now shorter can indeed be sweeter, and catering to where demand is at its deepest can hold the key to a transaction’s success.