Long Bonds Are Enthralling Traders From the U.S. to France

(Bloomberg) -- In a world awash with money, long-dated debt is where all the action is for bond traders these days.

In Europe, investors looking to escape a sea of negative yields are snapping up some of the longest-maturity debt on offer in an attempt to park their money in assets that still provide some sort of return. In the U.S., they’re selling long bonds amid a looming torrent of government spending, as they assess the likelihood of the first-ever Treasury beyond 30 years.

On both sides of the Atlantic, the lengthiest debt is the focus of a debate over whether trillions of dollars of stimulus will trigger a resurgence in inflation. While those buying long-dated bonds expect central banks will prop up the market for longer with low rates and quantitative easing, investors betting on steeper yield curves expect a pick-up in prices to erode assets maturing further in the future.

The bottom line for Richard Kelly, head of global strategy at Toronto-Dominion Bank, is that the stimulus is inflating asset prices, though not necessarily the economy. France on Wednesday saw record demand for a sale of bonds not maturing until 2072, with yield-hungry asset managers, insurers and pension funds taking almost 80% of the sale.

“We have too much cash chasing too few assets,” said Kelly. “So the strong demand for duration is just part of that overall chase.”

The pivot into longer-dated debt isn’t all voluntary. Over $17 trillion of investment-grade bonds now come with a negative yield attached, which means an investor holding one until maturity is likely to make a loss. Europe is the heartland of the phenomenon, with the entirety of Germany’s debt market in sub-zero territory, and French securities out to 16 years in the red.

What Bloomberg Intelligence says

With the European Central Bank suppressing volatility and controlling rates, the reach for yield, carry and convexity can build. Longer-dated bonds are more sensitive to yield changes and have higher convexity, which can make them more desirable.

-- Tanvir Sandhu, chief global derivatives strategist

While negative yields haven’t reached the U.S. yet, Federal Reserve policy has pushed the rates on the world’s largest debt market to record lows. Janet Yellen, President-elect Joe Biden’s nomination for Treasury secretary, said that she would be “very pleased” to look at issuing long term debt, when asked about creating 50-year Treasuries.

One of the most recent additions to the Treasury’s arsenal was the department’s decision 12 months ago to start selling 20-year debt again. On Wednesday, it sold an extra $24 billion of bonds at that tenor. And although it yielded more than at the prior sale, the rate of 1.657% remains low for long-term debt by historical standards.

Extending the Treasury curve beyond three decades may still be a way off, but it would give the new government an opportunity to lock in low borrowing costs for decades at a time when it is ramping up debt levels.

Century Bonds

And with the coronavirus still raging, there is currently no let-up in other governments doing the same. Germany sold 30-year bonds Wednesday, while Japan is offering 40-year debt next week, though it may not stretch to a half century. ING Groep NV expects more European issuers to sell 50-year debt.

The best performing euro-area government bonds last year were those due in more than two decades, providing a 15% return, according to Bloomberg Barclays indexes. That compares with 11% for bonds with a maturity of more than 10 years.Amid the deluge of supply, however, the long-end of the curve has lagged since the end of December, posting a 1.3% loss, making it the worst performing sector. At the very end sits the likes of Austria’s 2117 bonds, which returned 44% last year.

In Japan, investors have been boosting purchases of super-long bonds on the back of a steepening yield curve. Yield premiums that longer-dated debt offer over shorter-tenor notes have been widening since March amid heavy issuance and on concern that the Bank of Japan will slow purchases further.

“Anything that has the slightest yield is great news,” said Piet Christiansen, chief analyst at Danske Bank A/S. “The fact that investors are seeking longer duration in a hunt for yield just shows that markets can’t get enough.”

(Adds investor breakdown of France’s bond sale in fourth paragraph, and Japanese demand for super-long bonds in 14th paragraph.)