ANALYSIS-Ultra-long bond bandwagon to roll on in 2018 as ECB effect lingers

* Euro zone governments eye more 50-year-plus bond sales in 2018

* Duration of government bond index close to 10 years

* Demand from asset managers and hedge funds still strong

* Fast policy tightening could imperil this sector

By Abhinav Ramnarayan and Melissa Song Loong

LONDON, Dec 7 (Reuters/IFR) - Euro zone countries aim to tap persistent demand for extremely long-dated government bonds by borrowing more at these extraordinary maturities through 2018 as ECB bond buying drives yield-seeking investors further out along the time horizon.

The spate of long-dated bond issuance has pushed the average maturity of global government bonds to 9.8 years currently. It marks a huge shift for the multi-trillion dollar market, where the average maturity on JP Morgan’s global government bond index stood at 8.5 years in 2011, and an all-time low of 6.8 years in 1996.

Bankers and government officials said euro zone sovereign borrowers will sell bonds with maturities of 50 years and more in 2018, confounding expectations that such bonds would prove unpopular or even dangerous as central banks around the world wind down post-crisis stimulus measures.

“The demand for ultra-long bonds is still very much there, from a wide range of accounts – some looking for the yield pick-up and others looking to extend their portfolios,” said Maric Post, deputy director, treasury and capital markets at the Belgian Debt Agency.

He said Belgium will continue to look for opportunities to sell more of its bonds maturing in 2057 and 2066.

Other borrowers such as Austria -- which in 2017 became the first euro zone country to sell 100-year bonds in a public syndication -- and the European Stability Mechanism bailout fund also said they were open to selling more of these bonds.

Prior to the beginning of the programme in April 2015, only a couple of euro zone countries had conducted syndicated bond sales of debt longer than 30 years.

With yields dropping sharply on the back of ECB purchases, investors were forced to buy longer-dated debt for returns.


This provided an ideal platform for countries looking to manage a huge spike in debt during the euro zone debt crises of 2010-2012.

In 2016, France, Belgium, Italy and Spain issued 50-year bonds and Austria issued a 70-year bond before topping that this year.

Overall, euro zone governments sold a whopping 15.9 billion euros of ultra-long bonds with tenors of 35 years and more in 2016 and have sold another 6.65 billion euros this year so far through syndication alone.

The concern now is how these bonds will perform as central banks in the United States and Europe continue to wind down extraordinary stimulus put in place in the aftermath of financial crises either side of the Atlantic.

“The question when investing in these bonds is: What is the velocity of change in the ECB and the Fed stance?” said Louis Gargour, chief investment officer at LNG Capital, a London-based hedge fund.

“If the market is accurately predicting that, then you can invest in these bonds and pick up the extra yield. But if investors have underestimated the speed of change, these bonds will lose you money,” he said.

Longer-dated bonds typically have a higher “duration” - a calculation used to determine how long it takes to recoup your original investment via annual coupons - which makes their prices far more sensitive to an interest rate hike.

And yet, many analysts still expect the very largest central banks to expand balance sheets on aggregate next year, said Lee Cumbes, head of public sector origination at Barclays.

“The sector will become increasingly sustainable as we build out a more populated euro curve. In the UK, there has been a developed long-end market of 30-, 40- and 50-year bonds for a reasonably long time now,” he said.


The ability to sell long-dated bonds has benefited the whole euro zone, even the one country that was locked out of the bond market for several years until this July - Greece.

ESM, the fund through which the latest Greek bailout was administered, used market conditions to issue long-dated bonds as part of its short-term measures for the country.

“We increased our funding plan in June this year because the market digested long-dated issuance better than expected,” said Siegfried Ruhl, ESM’s head of funding. “The longer-dated bonds were used to reduce the interest rate risk for Greece.”

He believes there is still a need for duration, especially for insurance companies because of regulatory requirements.