The Cost of Being Long Duration

• In September 2017, Austria became among the earliest nations to issue a 100-year bond, which was heavily oversubscribed as the seek for yield was extremely elevated back then.
• As the Austrian CPI inflation was standing at 2.4% at the time of the issuance, investors return on the 2.1%-coupon century bond was negative in ‘real terms’.
• The strong deceleration in the global economy in 2018 and 2019 and the plunge in LT bond yields due to the Covid19 shock in March 2020 led to extraordinary gains on the bond in the first 2.5 years, with the price surging from 100 to over 240 during that period.
• As a reminder, the interest rate risk tends to rise significantly for bonds with ultra-long maturity; a term knows as ‘long duration’.
• Therefore, with DM central banks preparing to hike rates amid surging inflation, ULT bond prices such as Austria 2117 have fallen sharply in recent months.
• The chart below shows that the century bond is down nearly 30% since December 2021, and selling pressure on the front end of the curve could continue to weigh on ULT bonds this year.

Source: Bloomberg