Euro zone countries issue long bonds to avoid shocks, but at a price
A push by some euro zone countries to issue debt that won't need repaying for many decades may come at a price - but for borrowers who lived through the bloc's 2010-2012 crisis, it's probably a price worth paying.
France, Belgium and Spain have all sold 50-year bonds this year, locking in record low borrowing rates, and Italy is considering following suit. Ireland and Belgium have even sold 100-year bonds, albeit in relatively small sizes.
Some bankers warn there is a point at which the economics of such transactions may not make sense. They calculate that Italy could save on interest payments if it instead issued 30-year bonds, and returned to the market three decades hence to raise funds for the final 20 years.
But borrowers are also seeking insulation against any future repayment crunch like the euro zone crisis, when some struggled to refinance maturing debt at an affordable price. For them the extra basis points they have to pay on long-term debt is effectively an insurance policy against "rollover risk".
So far there's been no shortage of buyers, as short-term debt yields have evaporated and turned negative in many cases due to the European Central Bank's ever easier policies and bond purchases to stimulate the euro zone economy. Big institutional investors such as pension and insurance funds have scrambled for long-dated bonds to get some kind of return on their fixed income investments.
In a recent analysis, Deutsche Bank said Italy could pay 2.65 percent annual interest on a 50-year bond, provided it does not have to pay a premium that markets sometimes demand for debut issues.
But, crunching numbers on the alternative, Deutsche reckoned that selling a 30-year bond at 2.2 percent today and then a 20-year bond in 30 years' time would be likely to work out cheaper for the Italian taxpayer.
The great unknown is how high yields on Italian 20-year bonds will be three decades' time. Deutsche calculated they would have to be significantly more than double today's levels of around 1.75 percent even to match the amount of cash the Italian Treasury would pay in coupons over the life of a 50-year bond.
"These numbers imply that if Italy sold a 30-year bond now, and then in 30 years' time they sold a 20-year bond at a yield of less than 4.5 percent, they would still make a saving compared to if they issued a 50-year bond now," Deutsche Bank research analyst Abhishek Singhania told Reuters.
"In short, looking purely at the economics of it, doing a 50-year bond right now comes at a cost."
However, the risk is that the era of cheap debt will be a very distant memory in 2046. Yields on 20-year Italian bonds were last at 4.5 percent only three years ago, and hit 8.2 percent during the crisis in 2011.
Under its quantitative easing programme, the ECB is buying bonds with maturities of between two and 30 years, depressing their yields. But for bonds outside the scope of its asset purchases, yields tend to increase dramatically past the 30-year point in the euro zone.
Two of Italy's primary dealers agreed that the cost of issuing a 50-year bond is quite high. One suggested that debt management officials at the treasury, led by Director General Maria Cannata, are grappling with this very issue at the moment.
"I think Ms Cannata is still considering whether or not it is worth it," the dealer said.
The Italian debt management office did not respond to requests for comment.
In addition to an Italian 50-year issue, Commerzbank analysts expect Spain and Belgium to sell 15-year bonds and France to revive plans for a 30-year inflation-linked bond, either through auctions or syndications.
But there is a danger that issuing long-dated bonds will test the market's appetite for risk at a time when a number of euro zone countries face political or economic uncertainty.
Italy is due to hold a referendum on constitutional reform sometime between Nov. 15 and Dec. 5, and Prime Minister Matteo Renzi has staked his future on winning it.
On top of that Spain is lurching towards its third election in a year following several failed attempts to form a government. Neighbouring Portugal faces a possible downgrading of its credit rating by DBRS, the only remaining agency to give it investment grade status.
If this happens, Portuguese debt will no longer be eligible for the ECB's quantitative easing programme. Long-dated bonds are more sensitive to shifts in sentiment than shorter-dated debt, and, because of their relative illiquidity, appetite for them tends to fade during times of uncertainty.
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