Europe’s ultra-long debt trend builds with 50-yr Spanish bond

Bloomberg

The trend for ultra-long European bond sales is gathering pace.
Spain is the latest euro-region sovereign to sell 50-year bonds, with an issue via banks that’s likely to price on Wednesday.
It follows half-century deals last month from France and Belgium as countries take advantage of historically low interest rates to issue ultra-long debt.
Italy’s debt agency said in a statement on Tuesday that it was “evaluating” demand for a possible 50-year bond.
Investor interest in multi-decade debt has swelled as the European Central Bank’s quantitative-easing plan crushes yields on shorter-dated securities — though the risk of losses has also grown. The bond would be Spain’s first 50-year offering since September 2014.
“Debt-management offices are taking a generational opportunity to issue very, very long debt at yield levels that are way below historic averages,” said Owen Callan, a Dublin-based fixed-income strategist at Cantor Fitzgerald LP. “We had Belgium a couple of weeks ago and France do it as well. It’s just really the market, given the demand for yield out there.”
The effective duration of euro-area government debt — a measure of its volatility — surged on May 3 to a record high of 7.50, according to Bank of America Merrill Lynch data going back to 1996. That translates into a 7.50 percent decline in price for every one percentage-point increase in yields.
Front Running
The timing of the Spanish sale highlights the competition among euro-zone nations to tap investors for longer-term offerings. “It looks like Spain ‘front-ran’ Italy with a 50-year bond,” said David Schnautz, a London-based rates strategist at Commerzbank AG.
“The rule of thumb is: the further an issuer goes out the curve, the smaller its investor base. Therefore, the issuer needs to be sure that its investor base will get involved, otherwise such long deals can struggle massively.”
The yield on Spain’s 30-year bonds rose one basis point, or 0.01 percentage point, to 2.91 percent as of 11 a.m. in London, after climbing eight basis points on Tuesday. That compares with as much as 7.67 percent in 2012, during the euro debt crisis. The yield on the nation’s two-year notes was little changed at minus 0.07 percent.
Selling ultra-long bonds in a year when Spain hasn’t even had an elected government shows the power of the ECB’s QE to support debt markets.