Century bonds and green bonds, the first 20-year U.S. Treasury issue in decades, securities for mom-and-pop investors and with growth-linked payouts – a borrowing binge is forcing governments to think creatively to get the funds they need.
Net bond issuance from the United States, euro zone and Britain is tipped at around US$4.2-trillion this year, as they expand budget spending to battle the coronavirus pandemic. That’s roughly equal to their combined debt sales in the previous four years, NatWest Markets estimates.
Much of the supply will be sucked up by central banks buying assets. But governments still need to tap the broadest range of issuance tools to find customers for the sudden pile of new debt and keep funding costs down.
This week, Italy is taking orders from retail investors for a BTP Futura and is considering another such bond this year. Thailand also marketed bonds to retail investors in May, Belgium and Finland have issued dollar bonds and Europe is moving toward a joint bond plan.
“The more issuance you have, the more opportunity there is to find different markets – as long as you can deliver to your core investor base and ensure liquidity there,” said Lee Cumbes, head of public sector debt, EMEA at Barclays.
“There is a lot more opportunity now to issue things like dollar bonds, ultralong debt such as 100-year bonds, inflation-linked bonds.”
Aside from diversifying their investor base, such initiatives reduce pressure on local banks, whose outsize government debt portfolios can be a source of risk during crises.
That’s one reason Italy aims to gradually double the amount of sovereign bonds held by small investors. Its BTP Futura includes a “loyalty premium” linked to nominal economic growth, payable to those who hold the bond to maturity.
“If your growth rate is strong, you can afford to pay bond holders more, and if growth is weak and you can’t, your interest burden falls,” said Jim Leaviss, head of fixed income at M&G Investments.
Austria’s €2-billion (US$2.2-billion) of “century bonds” last month took orders for more than nine times that amount. Unsurprising, given that anyone who bought its 100-year issue in 2017 would have doubled their money.
Long-maturity issues with relatively higher yields are attractive for pension and insurance investors facing more than US$12-trillion of negative-yielding debt worldwide.
Governments, meanwhile, can lock in long-term funding at cheap rates – Austria paid a 0.85-per-cent coupon. Century bonds could become the norm post-COVID-19, Kames Capital forecasts.
Is the next step perpetual bonds – with no maturity date and paying interest forever? That’s an option the European Union should consider, says financier George Soros, who estimates the bloc can raise a trillion euros at 0.5 per cent annually for perpetuity.
Others are tapping bits of the curve they have not recently issued – the U.S. Treasury sold 20-year bonds for the first time since 1986 in May.
THE COLOUR GREEN
Governments are also successfully tapping into the environmental zeitgeist – the Netherlands’ €1.42-billion green bond sold out within four minutes on June 23. “Although the circumstances are unfortunate that we are facing significant funding needs, it does throw up opportunities for governments to look at themed bonds, green bonds,” Dutch State Treasury Agency head Elvira Eurlings told a recent conference.
France has just pledged a €15-billion “green” funding plan. Germany’s first green bond is due in September, to be sold through a syndicate of banks.
To reach more investors and sell large-size debt quickly, Germany’s debt office this year resumed using syndications for the first time in five years, rather than rely on auctions.
Aberdeen Standard Investments fund manager Ross Hutchison expects this to become more of “a permanent feature of the issuance process.”
Finland meanwhile made greater use of private placements, where a bond is sold to a small group of private investors, in the second quarter.
“If you look at the supply against their forecast, they’ve done a little. But if you look at all their private placements, you realize they are close to 80 per cent of their total issuance,” said John Madziyire, portfolio manager, rates at the Vanguard Fixed Income Group. “Keeping tabs on stuff like this does add value.”
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